Category: inBriefs

Free zones in the UAE – an overview

Strategically located between Europe, Africa and Asia, the United Arab Emirates (the “UAE”) has become a hub for trade and commerce throughout the world. In order to further encourage foreign investment, more than 20 free zones have been established across Dubai and focus on a wide range of business sectors, ranging from manufacturing to technology. Free zones offer a number of advantages to foreign businesses, including zero taxation, repatriation of profits and 100% foreign ownership. It is important to note that each free zone has its own bureaucracy along with unique regulations and costs. We are often asked by our clients which free zone they should incorporate in, and the following provides a brief overview of several free zones located in Dubai, and identifies a number of factors a potential investor may wish to consider when making their choice. The factors that drive the selection of a free zone tend to relate to the nature of the business to be carried on, cost of formation, administrative ease or difficulty, and location.

 

Established in 1985, Jebel Ali (“JAFZA”) is the oldest free zone in the UAE. JAFZA has one of the world’s largest shipping container ports, and is home to many industrial and trading companies utilizing the port. JAFZA recently revised its capital requirements for onshore companies and instead of requiring minimum capital deposits ranging from AED 500,000 – AED 1,000,000, JAFZA will determine the required capital on a case-by-case basis. Generally the minimum capital requirement is equal to the first year operating expenses as estimated by the JAFZA sales team. Office space is required for the formation of an onshore company and the lease or purchase thereof is often one of the largest expenses associated with the establishment of the company.

 

JAFZA is currently in the process of opening a new business complex named JAFZA One, which will provide companies seeking to incorporate in JAFZA with so-called “virtual office” options, which are far more affordable. JAFZA also allows for the formation of offshore companies, which have no physical presence in the UAE and accordingly do not lease space, but instead require the appointment of a Registered Agent. A Registered Agent provides a mailing address for service in the UAE and may also provide minimal administrative functions for the offshore company, and has no ownership or management interest. The minimum capital requirement for offshore companies is AED 1 and only one class of shares is permitted. Offshore companies can open current accounts with certain banks in the UAE, but cannot carry on active businesses and as such cannot sponsor UAE residency visas. JAFZA offshore companies are typically used by non-nationals as holding companies.

 

The Dubai International Financial Centre (the “DIFC”) is a financial services free zone based on common law principles. Established in Dubai’s financial district in 2004, the DIFC was created to attract international financial firms with the objective of elevating Dubai’s position as a global hub with access to the emerging markets of the Middle East, Africa and South Asia.

 

Formation, licensing and other fees are generally higher in the DIFC but it provides a level of regulation and international credibility not found in other free zones. The Dubai Financial Services Authority (the “DFSA”) regulates financial services companies to a standard comparable to western financial regulators, and all DIFC entities are subject to privacy and data protection regulations in line with international standards. The DIFC also offers its own judicial system based on common law, and apart from hearing matters specifically related to DIFC companies, the DIFC Courts can also hear civil or commercial actions from outside the DIFC (including outside the UAE) if the parties have contractually agreed. Given the relatively high cost and administrative effort of establishing a DIFC entity, this free zone is generally chosen for specific business purposes rather than simply achieving 100 percent foreign ownership. Dubai Silicon Oasis (“DSO”) is a free zone focusing on technology-based industries, with specific incentives aimed at entrepreneurs and start-ups. While being located outside of the city centre, DSO provides access to a strong network of technology-focused venture capitalists as well as providing incubation inducements. Formation and licensing fees are competitive at DSO and office space is required with a minimum annual rent of AED 85,000.

 

The Dubai Airport Free Zone (“DAFZA”) offers a strategic advantage to freight and logistics companies as it is attached to Terminal 2 of the Dubai International Airport. DAFZA offers a variety of options for space, ranging from part-time desks to insulated industrial units. Formation and licensing fees are slightly higher than other free zones, but the required minimum share capital is competitive at AED 1,000. DAFZA’s administration is relatively easy to deal with.

 

Dubai Multi-Commodities Centre (“DMCC”) was created in 2002 to enhance commodity trade flow through the emirate. Dubai is among the top three trading hubs in the world for gold, tea and diamonds. DMCC is popular in part because it is centrally located in a popular district of Dubai with relatively attractive office premises available. DMCC is an attractive free zone for numerous industries in addition to commodities traders, including recruitment, information technology and advertising. Formation, licensing and office rental fees are higher than average, owing to DMCC’s desirable location.

 

Dubai World Central (“DWC”) is one of the newest free zones in the UAE and formation and licensing fees are competitive. Located between JAFZA and Al Maktoum International Airport (removed from the conventional Dubai city limits), DWC focuses on the aviation industry, including related logistics, commercial and residential projects and light industry in general, although other business categories are welcome as well. It is too soon to tell whether DWC will be a popular free zone, as it is undergoing constant administrative change and unpredictability of service while it matures.

 

Free zones are not unique to Dubai, and other emirates including Abu Dhabi, Ras Al Khaimah and Sharjah offer attractive options for foreign businesses. These free zones offer some competitive advantages compared to Dubai’s free zones, such as lower licensing fees and office rental costs. It should be noted that setting up a company in these emirates can create logistical hurdles. A company registered in a free zone outside of Dubai cannot lease space, sponsor Dubai visas or operate in Dubai. When the primary purpose of incorporation is attaining a UAE residency visa, forming a company in these free zones may be the most expeditious option.

 

While the UAE’s free zones offer many attractive features for investors, it is important to be aware that free zone companies are not permitted to carry on business outside of the physical boundaries of the relevant free zone. For businesses that intend to service or supply the Dubai market, a free zone company may not be an appropriate vehicle depending on the nature of the business, so it is critical to consider this carefully prior to incorporation. ■

UAE Competition Law – All bark and no bite?

Federal Law No. 4 of 2012 on the regulation of competition (the “Competition Law”) introduced a regime for the regulation of anti-competitive behavior in the UAE which previously did not exist. If implemented strictly its effects would be very significant on UAE business. The Competition Law came into force on 23 February 2013 and introduces merger/acquisition clearance requirements, prohibitions against anti-competitive agreements and activities which constitute abuse of a dominant position, as well as some anti-competitive trade practices. The six month transition period allowing entities to become compliant with the Competition Law expired on 23 August 2013.

 

To date, the Competition Law has not been enforced in practice even moderately. One reason for this is that the Competition Law left key details to be set out in regulations that were to follow. The anticipated regulations have recently been issued but, disappointingly, they do not provide the clarity that was needed. Nonetheless, compliance with the Competition Law is (ostensibly) mandatory as it is a current, valid UAE law. With the recent issuance of the regulations it is foreseeable that this law could start to enjoy some level of enforcement. It is worth noting that, while the newly issued regulations do not provide a great deal of clarity on some key points under the Competition Law, they do set out a mechanism for making complaints against parties allegedly in breach of the Competition Law and the Ministry of Economy’s duty to investigate once a complaint is accepted.

 

Scope of Application

 

The Competition Law applies to all entities undertaking commercial activities in the UAE and to entities operating outside the UAE but whose activities affect competition inside the UAE.

 

Certain types of entities and industry sectors are expressly exempted. These include:

 

  • federal and local government entities and entities owned or controlled by federal or emirate governments;

 

  • small and medium size entities (not defined in the Competition Law or the regulations); and

 

  • entities operating in telecoms; financial services; pharmaceutical production and distribution; cultural activities; oil and gas; postal services including express delivery; electricity and water production and distribution; sewage and waste disposal; transportation and railway.

 

Prohibitions

 

The Competition Law requires that entities seek merger clearance from the UAE Ministry of Economy if they are contemplating a transaction that:

 

  • will result in the acquisition of a direct or indirect, total or partial interest or benefit in assets, equity, and/or obligations of another entity to which the Competition Law applies;

 

  • will create or promote a dominant position; and/or

 

  • may affect the level of competition in the relevant market.

In addition, the Competition Law prohibits entities from entering into agreements or arrangements (these terms should be construed very broadly) the aim, object or effect of which is to restrict competition. This includes, amongst other things, agreements or arrangements which directly or indirectly fix purchase or selling prices, grant exclusivity with respect to products or geography or other market division (other than through registered commercial agencies), and agreements or arrangements which involve collusion in bids and tenders. These restrictions would impact many distribution agreements in the UAE.

 

The Competition Law provides for potentially far-reaching penalties in the event of violation. These penalties include:

 

  • fines of between AED 500,000 and AED 5 million for entering into restrictive agreements or abusing market dominance; and

 

  • fines of between 2% to 5% of the infringing entity’s annual revenue derived from the sale of the relevant goods and services in the UAE for a failure to notify a transaction which is required to be notified pursuant to the Competition Law.

 

In addition, an entity violating the provisions of the Competition Law exposes itself to possible criminal sanctions.

 

Exemptions

 

The Competition Law allows for entities to seek an exemption to the Competition Law from the UAE Ministry of Economy. The procedure for seeking such an exemption is set out in the regulations to the Competition Law. It involves a written application seeking an exemption for a transaction. The entity seeking the exemption must provide copies of its constitutive documents and financial statements (for the last two financial years). In addition, it must submit an economic rationale for the transaction and its reasons for requesting the exemption. All documents submitted must be in Arabic, but may be accompanied by an English translation. The Ministry of Economy must respond to such a request within 90 days, but may extend this period by a further 45 days. In the event that no response is received within this time frame, approval is deemed to have been given.

 

Implications

 

Compliance with the Competition Law is now mandatory. Accordingly, businesses must consider the effect of the Competition law on their business. It remains to be seen how the UAE Ministry of Economy will interpret or enforce the Competition Law or the implementing regulations. As a minimum, the Competition Law and its potential effects need to be considered by any business operating commercially in the UAE or which intend to acquire a UAE business. ■

The DIFC in focus

DIFC Rent Cap

 

A new Dubai Decree on rental increases issued at the end of last year has significant implications for the current practice of landlords in the DIFC. Previously, there was no rent cap law in the DIFC. Now, Decree No. 43 of 2013 on Determining the Increase in the Real Estate Rentals in the Emirate of Dubai also determines the extent to which rents may be increased in the free zones, and expressly refers to its applicability in the DIFC. As a whole, the Decree applies to landlords in all of Dubai.

 

 

The Decree provides a mechanism for calculating the maximum rent increase permitted, if at all, upon renewing a lease. The calculation is determined by reference to the average rental value in the area where the property is located and the percentage to which the rent pre-renewal falls short of that. Article 1 of the Decree sets out the maximum increase in rent allowed depending on the difference between the rental amount and the average rent paid in the area. No rent increase is permitted where the rental amount is up to 10 percent less than the average rental in the same area.

 

 

The Decree also stipulates that the average rent is determined by the RERA rent index for which the Rental Increase Calculator is available online. The Rental Increase Calculator allows a landlord or tenant to enter the current annual rent paid for the type of property in a particular area and calculate the permitted rent increase. The Rental Increase Calculator has just this month been adjusted for rental prices and now also includes properties in the DIFC.

 

 

Further, it should be noted that the Rental Disputes Settlement Centre of the Dubai Land Department will handle all rental disputes arising between landlords and tenants in the Emirate of Dubai (including the free zones). However, this does not apply in respect of rental disputes arising inside free zones that have courts competent to settle rental disputes arising within their boundaries. Therefore, the DIFC Courts would have jurisdiction over any rental dispute in the DIFC. Moreover, in this regard the DIFC Small Claims Tribunal (Resolution of Rental Disputes) Order No.2 of 2014 issued this month directs and expressly provides that the Small Claims Tribunal will hear and determine all rental disputes where the amount of the claim does not exceed AED 500,000.

 

Revised Procedural Rules of the DIFC Courts

 

Following a two-month consultation period, the 2014 edition of the Rules of the DIFC Courts have now been published. The Rules governing the Courts’ procedures have been revised to incorporate several important changes including provision for a cost-free trial for pro bono litigants under Part 38, whereby the Pro Bono Panel may decide, subject to certain criteria, to grant such litigants a trial without the risk of legal costs being awarded against them if they lose, and changes to Part 28 which governs the production of documents.

 

With respect to the revised Part 28, the intention is to bring the provisions more in line with the International Bar Association’s disclosure rules. Importantly, the revised part provides for co-operation between the parties where the volume of documents to be searched is likely to be extensive requiring the parties, where possible, to exchange preliminary production requests in draft form before standard production of documents takes place. Any such exchange should not limit the parties’ rights to submit further requests to produce documents thereafter. Also of significance is that the grounds for excluding documents from production have been extended to include considerations of procedural economy.

 

Memorandum signed between DIFC Courts and Federal Court of Australia

 

Further to the memoranda signed between the DIFC Courts and the UK Commercial Court in January 2013, and the Supreme Court of New South Wales in September 2013, in March this year the DIFC Courts have signed a similar memorandum with the Federal Court of Australia addressing the reciprocal enforcement of money judgments.

 

As with previous such memoranda signed by the DIFC Courts the intention is to assist investors and those interested in doing business from the relevant jurisdiction in the region, and encourage and develop closer trade and investment relations between that jurisdiction and Dubai by increasing confidence and certainty in the legal system.

 

Amendments to the DIFC Arbitration Law

 

DIFC Amendment Law No.6 of 2013 (the Arbitration Amendment Law) enacted in December 2013 amends the DIFC Arbitration Law No. 1 of 2008 and gives the DIFC Courts the power to stay court proceedings in favour of arbitration with a seat outside of the DIFC. The amendment seeks to clarify the law and bring it in line with the New York Convention, to which the UAE is a signatory. The amendment was necessary to effect the obligation under Article II(3) of the New York Covention which requires that a court of a Contracting State, if seized in a matter in respect of which there is a valid arbitration agreement between the parties, shall refer the matter to arbitration.

 

Previously, Article 13(1) of the DIFC Arbitration Law No.1 of 2008 was held in the case of Injazat Capital Limited v Denton Wilde Sapte (2012) only to empower the DIFC Courts to stay arbitration proceedings where an arbitration agreement stipulated the DIFC as its seat. The judgment acknowledged that it “would thwart the promotion of the DIFC as a jurisdiction supportive of arbitration.” The amendment to the law has been welcomed as one that resolves this issue by expressly providing that the DIFC Courts’ power to stay proceedings under Article 13(1) also applies where the seat of arbitration is not the DIFC. ■

Mandatory classification requirements for engineers and contractors in Abu Dhabi

Background

 

Companies licensed to conduct engineering or contracting activities in Abu Dhabi must be classified by the Contractors and Consultants Classification and Engineers Registration Office at the Abu Dhabi Department of Municipal Affairs.

 

The applicable regulations setting out the classification requirements are not new and date back to 2009 but implementation has been delayed until 2014. Regulation No. 1 of 2009 on Classification of Engineering Consultancy Offices in the Emirate of Abu Dhabi, and its subsequent implementing instructions set out the classification requirements for engineering consultancies. Regulation No. 2 of 2009 on Contractor Classification in the Emirate of Abu Dhabi, and its subsequent implementing instructions set out the classification requirements for contracting companies.

 

Who is subject to those classification requirements and how can they be met?

 

The classification requirement will be imposed on existing engineering companies the next time the company’s Abu Dhabi professional license comes up for renewal. Classification is now a condition precedent to renewal of the license. Companies established in the future will have one year from the date of initial licensing to meet the classification requirement.

 

While contracting companies have been able to have commercial licenses issued and/or renewed since November 2013, there is a catch: until contracting companies are classified, their commercial licenses will include the contracting activities for which they wish to be licensed for, but will include a caveat that the contracting companies may not carry out such activities until they have been classified. Once classified, the Office will instruct the licensing authority to remove the caveat.

 

Classification is not a routine or automatic approval. Nor is it simply additional bureaucracy and paperwork. Classification entails a substantive review by a panel of experts of a company’s capabilities and qualifications and a company that does not meet the specified criteria will not be classified.

 

The requirements are onerous and will vary from case to case. For example, a local engineering consultancy seeking classification in the Special Category (which is the highest category for engineers and permits a company to perform contracts with a value of over 70 million dirhams) must meet, among others, the following criteria:

 

  • The value of the capital and assets owned by the company should not be less than AED 4 million.

 

  • The company is required to employ five specialized and registered engineers with at least one engineer having a minimum experience of 15 years, two engineers having a minimum experience of 12 years and the other two engineers having a minimum experience of 10 years each. This applies to each Special Category of engineering type the company requires to undertake, i.e., for civil engineering, it will be required to employ five civil engineers meeting the foregoing minimum experience; for mechanical engineering, it will be required to employ five mechanical engineers meeting the foregoing minimum experience; and so forth.

 

  • The cumulative value of the previously executed projects must not be less than AED 480 million, provided that the value of each project submitted is not less than AED 60 million.

 

  • The company must hold an ISO 9001 certificate.

 

Conclusion

 

All companies conducting activities involving engineering or contracting should immediately investigate whether the licensed activities currently on the company’s trade license require classification. The same applies to persons planning to set up new companies doing business in these sectors.

 

Unless the concerned authorities have a change of heart and grant further extensions to implementing the requirements (which is not currently expected), classification cannot be avoided except where a company is willing to remove all activities requiring classification from its license, which in turn will limit the scope of the company’s permitted business activities.

 

If a company is not already classified, it should begin investigating the specific requirements it will have to meet well in advance of its next licensed renewal date. ■

Unified real estate contracts

The Dubai Land Department (“DLD”) recently announced the introduction of mandatory unified real estate contracts (the “Contracts”) to be used in property sale and purchase transactions. The Contracts become effective from May 1, 2014. The Contracts have been introduced to facilitate the sale and purchase process and are intended to protect the three main parties to any sale and purchase contract, namely the buyer, the seller and the broker.

 

The Contracts

 

There are currently three models of Contract: (i) a contract between seller and buyer, (ii) a contract between seller and broker and (iii) a contract between buyer and broker. The Contracts are available on the DLD’s smart property website EMART:

www.emart.gov.ae/UploadedFiles/Downloads/Docs/English/All_contracts.pdf.

 

The Contracts enable the parties to quickly populate the main terms of the sale and purchase transaction such as the parties, the property, the price and the completion date. It is intended that the Contracts will become valid when completed and documented at the DLD.

 

Is a Separate MOU Required?

 

Whilst the Contracts document the main terms of the sale and purchase transaction, they do not go into any greater detail. Moreover, contractual agreement on material issues such as warranties and representations, apportionments, deposits, dispute resolution, confidentiality and jurisdiction (which are ordinarily expected in any sale and purchase contract) is lacking. Given the absence of these material clauses which are intended to protect the parties to any sale and purchase agreement, the Contracts should be augmented (using a schedule, an attachment or incorporation by reference) by continuing the current practice of the parties entering into a separate sale and purchase contract (“SPA”) or Memorandum of Understanding (“MOU”).

 

Conclusion

 

Given the mandatory requirement for the Contracts, parties to a real estate transaction should ensure that the Contracts are properly completed and validated at the DLD. The introduction of the Contracts should not, however, displace the need for the further protection that is offered in the form of an SPA or MOU. The Contracts and the form of SPA or MOU should be linked together to enable the parties to the transaction to not only comply with the requirements of the DLD but also to ensure the contractual protection and certainty that an SPA or MOU affords. ■

New Dubai rent Settlement Disputes Center

His Highness Sheikh Mohammed Bin Rashid Al Maktoum, UAE Vice President, Prime Minister and Ruler of Dubai, recently issued Decree 26 of 2013 concerning the formation of the Dubai Rent Dispute Settlement Center (“the Center”).

 

The Decree comes at a time of increasing economic activity and rising rents. The main aim of the Decree is to implement a judicial system specialized in dealing with rental disputes quickly and simply.

 

Rental Disputes

 

The Center shall deal with and hear disputes related to all landlord-tenant disputes including in free zones (but not including: free zones with committees or courts that deal with rental disputes; finance lease contract disputes; or 99 year lease disputes). The Center is to be chaired by His Excellency Judge Abdul-Qader Mousa and staffed by lawyers and administrative staff.

 

Reconciliation

 

A Reconciliation Department shall attempt to amicably settle rental disputes within 15 days from the date of the parties’ appearance before the Reconciliation Department.

 

First Instance and Appeal Departments

 

If reconciliation is not successful, a rental dispute shall be determined by the First Instance Department which shall consist of committees each consisting of a chairman (who must be a judge or legal expert), and two members with sufficient experience and competence in law and real estate.

 

All members of a committee must be in attendance for a valid meeting and a decision by at least a majority (2/3) of the committee members is required. A committee shall decide a rental dispute within 30 days from the date of the file being referred to it.

 

Decisions of the First Instance Department may be appealed to the Appeal Department so long as the amount of the rental dispute is more than or equal to AED 100,000. Disputes regarding amounts of less than AED 100,000 generally cannot be appealed except in specific circumstances. An appeal must be filed within 15 days of the day following the issuance of the First Instance Department’s decision.

 

Execution

 

All final decisions of the Center shall be executed by the Execution Department that is affiliated with the Center, which can be the Execution Department of the Dubai Courts.

 

Cost and Charges

 

The costs and charges of the Center shall be determined by resolution of the Chairman of the Executive Council of the Emirate of Dubai. Until such resolution, the costs and charges of the Rent Committee of the Dubai Municipality shall apply.

 

The Center Replacing the Rent Committee

 

The Center shall hear and decide all claims that are presently before the Rent Committee unless such claims are set for judgment. The Rent Committee shall cease to exist and all employees of the Rent Committee shall be transferred to the Land Department. ■

 

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Afridi & Angell – Our Real Estate Services

 

Afridi & Angell is one of the most prominent law firms in the region, having been established almost 40 years ago. The firm provides comprehensive legal advice in corporate, commercial, real estate and banking law as well as dispute resolution. The firm’s real estate lawyers provide catered strategic advice, and innovative legal solutions and services for the sale, purchase, leasing and development of real estate (including jointly owned property (strata) matters), as well as any related litigation and arbitration.

 

For more information, feel free to contact us. We welcome the opportunity to be of service.

 

Shahram Safai is a partner in the Dubai office of Afridi & Angell. He practices real estate, corporate and venture capital law. He is active in lobbying for and providing constructive feedback to government organizations regarding regional laws and regulations pertaining to real estate, investments and corporate governance. Shahram is qualified as a solicitor in England and Wales and is a member of the California State Bar. 

 

The content, comments and opinions included in this document are intended solely for information purposes. They should not be regarded or relied upon as legal advice.

The UAE Direct Debit system

Background

 

The implementation of a system for effecting payments by direct debit in the UAE is the latest effort by the UAE Central Bank to modernize and streamline the system for individuals and companies to meet their financial obligations. It is widely anticipated that the UAE Direct Debit System (DDS) will lead to a more efficient and secure system for payments.

 

The UAE Central Bank has published an extensive set of rules to assist financial institutions, corporates and individuals in understanding how the DDS can help them with their day-to-day operations and what they must do to ensure that they are compliant with the applicable rules.

 

The implementation of the DDS will change the landscape for electronic payments in the UAE. It offers corporates and individuals the ability to make automated recurring payments electronically which will have consequences for the manner in which financial institutions offer their products and collect payments from customers. It is important to understand the full impact of these changes before they come into effect.

 

Set out below are some of the key features of the new system as well as an overview of the three main parties who will be involved in the DDS.

 

Parties Involved in the DDS

 

In addition to the customer or payer who will use the DDS to pay recurring bills/payments, three parties will be involved in completing the cycle of payment.

 

  1. The Originator – A financial institution or corporate entity (referred to under the DDS as the “Originator”) may use the DDS to collect payments from its customers by direct debit. An Originator must also meet specific regulatory thresholds set by the UAE Central Bank and is required to provide a broad indemnity to other users of the DDS.

 

  1. The Sponsoring Bank – Each Originator is required to appoint a sponsor (referred to under the DDS as the “Sponsoring Bank”) in order to use the DDS. The Sponsoring Bank will provide the Originator with access to the DDS and will assist in the processing of direct debit payments. The Sponsoring Bank shall, in summary, act as a conduit for payment requests from Originators and payments flowing from customers of the Originator (or Payers as referred to under the DDS) to the Originator. The Sponsoring Bank shall be responsible for collecting payments due to the Originator. The Originator remains, subject to some limitations, at liberty to appoint more than one Sponsoring Bank. The Sponsoring Bank may also be an Originator.

 

  1. The Paying Bank – Each Payer who wishes to make payment to an Originator will require a bank account with a so called “Paying Bank” that is registered with the DDS. The Paying Bank shall be responsible for effecting the required payment from the Payer’s account to the relevant Originator’s Sponsoring Bank.

 

Dispute Resolution

 

It is noteworthy to mention that that the DDS will provide a dedicated mechanism for dispute resolution. This process involves communication between the parties involved and allows for final approach to the UAE courts if a resolution is not achieved.

 

Implications of the DDS on your business

 

Since all commercial banks in the UAE are obliged to undertake the roles of a Sponsoring Bank and a Paying Bank in the DDS, the DDS has the potential to change the way in which financial institutions in the UAE operate their businesses and will consequently impact a broad spectrum of businesses and individuals. It is also mandatory for all financial institutions in the UAE providing credit facilities (such as personal loans, car loans and mortgages) to act as an Originator.

 

In Conclusion

 

Afridi & Angell has developed specialist knowledge of the rules that apply in relation to entities participating in the DDS and is able to offer market leading advice and assistance in the preparation of the required documents in order to enable participation in the DDS. ■

 

For advice in connection with the DDS, its implementation and the consequences it may have for your business and operations, please contact Amjad Ali Khan or Danielle Lobo, or get in touch with your usual contact at Afridi & Angell for further assistance.

Liquidating Dubai’s cancelled real estate projects

His Highness, Sheikh Mohammed Bin Rashid Al Maktoum, UAE Vice Presient, Prime Minister and Ruler of Dubai, recently issued Decree No. 21 of 2013 concerning the formation of a special judicial committee (the “Committee”) for the liquidation of cancelled real estate projects in the Emirate of Dubai and the settlement of relevant dues.

 

The Decree comes at a time of government activity to better protect the rights of investors and is one of a number or proposed changes to Dubai real estate law.

 

The main aim of the special Committee is to consolidate the process for investors to seek compensation against developers for cancelled real estate projects. It aims to further facilitate quicker proceedings, particularly since legal proceedings have not only been lengthy but also expensive.

 

Formation and Powers of the Committee

 

The Committee shall consist of one or more panels, provided that the members of each panel consist of at least three judges from the Dubai Courts, including the Chairman. The Committee has the power to:

 

  • consider and decide any issues, demands and claims that may arise between developers and purchaser relating to cancelled real estate projects;

 

  • liquidate real estate projects cancelled under a final resolution issued by the Dubai government’s Real Estate Regulatory Agency (“RERA”) in accordance with RERA’s powers under Law 13 of 2008;

 

  • settle any debts with respect to such cancelled projects, after deduction of liquidation expenses; and

 

  • consider all executive proceedings, complaints and grievances relating to cancelled real estate projects.

 

In exercising its powers, the Committee may seek the assistance of experts and legal consultants, in particular those from the Dubai Land Department. The Committee may appoint auditors (at the cost of the developer) to audit the financial position of the cancelled real estate project. Decisions of the Committee are final and binding and may not be appealed.

 

Court Cases Referred to Committee

 

One of the most ground breaking provisions of the Decree is that all courts in the Emirate of Dubai (including in the Dubai International Financial Centre) shall no longer consider any case or claim relating to cancelled real estate projects – all such claims must now be considered by the Committee. In addition, the courts are required to refer any current cases before them to the Committee. Cases or demands brought before the Committee shall eb exempt from court fees.

 

A Step in the Right Direction?

 

The Committee was established in an attempt to unravel the many cancelled real estate projects that exist in Dubai after the real estate crash of 2008. Moreover, the Committee would appear to give those unfortunate investors who have long since written off their investments a fast tracked and cost effective forum to recover, at least, some of their losses.

 

However, the Decree and establishment of the Committee raises some questions and practical issues.

 

Any prospect of recovery for investors relies upon there being sufficient assets to liquidate. One of the most valuable assets of any developer of a cancelled real estate project is the land on which the real estate project is constructed. However, in many cases the developer does not own the land until completion of the project. In such instances, the prospect of liquidating just the under-construction building to repay hundreds of off-plan investors who have invested hundreds of thousands of dirhams seems unrealistic.

 

Also, investors expect the Committee to repay them from funds in the escrow account, the bank account set up to specifically protect the investors in the event of failed construction. The reality is somewhat leak with escrow accounts. Many escrow accounts are fully depleted due to land payments, marketing costs and early development and construction works. In circumstances where the two main assets of any cancelled project (i.e., the land and funds in the escrow account) available for liquidation by the Committee are insufficient to repay an investor, the chance of an investor recovering his or her investment is unlikely.

 

The Decree specifically relates to “cancelled” projects rather than “on hold” projects. Investors seeking recovery of their money from developers in projects deemed “on hold” by RERA will still have to pursue developers through court action or arbitration, thereby protracting the process and increasing costs.

 

Going Forward

 

The Committee will need to deal with over two hundred cancelled real estate projects in Dubai as well as thousands of cases relating to cancelled real estate projects currently going through the Dubai courts. How quickly and effectively the Committee deals with such cases will go a long way in re-establishing confidence in a market which is still partially suffering from the wounds of the 2008 crash.

 

The Decree is a clear signal to international property investors that RERA is taking practical steps to deal with rogue developers of days gone by; introduce transparency and protection for investors; and in turn, propel Dubai from a market of short term speculators to a more established and stable real estate market.

 

Afridi & Angell – Our Real Estate Services

 

Afridi & Angell’s real estate lawyers provide strategic advice and legal services with respect to the sale, purchase, and development of real estate (including jointly owned property (i.e., strata) matters)), as well as any related litigation and arbitration. We offer innovative solutions to both developers and investors in relation to cancelled projects. Under the newly issued Decree No. 21 of 2013, we can liaise with and facilitate representation before the new Committee, the Dubai Land Department and RERA.

 

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For more information, feel free to contact any one of our lawyers. We welcome the opportunity to be of service.

 

Shahram Safai, partner – ssafai@afridi-angell.com

 

The content, comments and opinions included in this document are intended solely for information purposes. They should not be regarded or relied upon as legal advice.