Tag: Real Estate

Dubai Decree No.22/2022 – On the Approval of the Privileges of the Property Investment Funds in the Emirate of Dubai

What’s happened?

On 22 July 2022 Dubai Decree No. 22/2022 (the Decree) came into force with the purpose of encouraging further investment in the Dubai real estate market via the provision of various incentives and privileges aimed towards real estate investment funds.

 

In this inBrief, we look at the various privileges that will now be afforded to property investment funds in order to attract further investment into Dubai’s already booming real estate market, as well as giving a brief overview of other key articles contained in the Dubai Decree.

 

Previous Position

Traditionally, property investment funds were afforded the same property rights as those that were granted to any other investment entity or foreign investor.

 

However, property investment funds were not commonly utilised as an investment vehicle in Dubai as any change in the fund’s shareholding attracted the standard Dubai Land Department transfer fee. Due to the everchanging nature of many property investment fund’s shareholding this was seen by investors as an onerous burden.

 

Further, as property investment funds are permitted to be established only under the Abu Dhabi Global Market’s (ADGM) REIT framework (the ADGM Fund Rules), the Dubai International Financial Centre’s Investment Trust Law framework (the DIFC Investment Trust and REITS Rules Instrument), and the Emirates Securities and Commodities Authority’s framework (Administrative Decision 6/R.T of 2019 Concerning Real Estate Investment Fund Controls), property investment funds were not seen as a cost-effective investment method due to the various restrictive regulations that applied to them.

 

Privileges

However, now a registered property investment fund will be able to avail of the following privileges:

 

  • property investment funds will have the right to own property, or the right of usufruct or rental for a duration that does not exceed (99) years in not only where UAE non-nationals are allowed to purchase, but, also in areas where ownership is typically not allowed to UAE non-nationals in the specific areas identified by the newly established Committee of Property Investment Funds;
  • the Decree explicitly states that no Dubai Land Department registration fees shall be imposed upon the property investment fund on the disposition of shares by the shareholders of the property investment fund. This, as noted above, was one of the main factors in discouraging investors from utilising property investment funds as a method for investment; and
  • Dubai Land Department registration fees applied for property purchased by the property investment fund have been reduced from the standard 4 percent of the market value of the property to 2 percent. Similarly, the applicable fee to register a usufruct right or long-term lease has also been reduced to a fee of 2 percent of the market value of the property.

 

Other Key Articles

Article 4: Establishment of the Register

The Dubai Land Department shall establish a register for the purposes of registration of property investment funds that meet the required criteria outlined below.

 

Article 5: Conditions and Procedures of Registration in the Register

In order for a property investment fund to be added to the register and thereby avail of the privileges set out above, the following criteria must be met:

 

  1. the property investment fund must be licensed by the relevant competent authority and hold a valid license;
  2. the value of the real estate assets owned by the property investment fund at the time of submission of its registration application must not be less than AED 180,000,000;
  3. the Property Investment Fund, upon submitting the application of registration in the Register, must not be suspended from trading its shares in the financial markets of the Emirate; and
  4. the relevant registration fee of AED 10,000 must be paid to the Dubai Land Department.

 

Article 6: Writing off from the Register

A property investment fund can be removed from the register upon the occurrence of a number of circumstances:

  1. it no longer meets the criteria specified in the Decree;
  2. it has been adjudged bankrupt;
  3. upon its dissolution and subsequent liquidation of its assets; and
  4. upon the restriction of its activities by virtue of a final judgement.

 

Article 7: Duration of entitlement to the privileges

A registered property investment fund is entitled to avail of the new privileges from its date of registration in the above-mentioned register until the date it is removed from same.

 

Article 9: Committee of Property Investment Funds

The responsibility for the identification of areas where ownership is not permitted to be held by UAE non-nationals and where property investment funds may now have the right of absolute ownership or usufruct or a long-term lease (the term of which does not exceed 99 years) will fall to the newly established Committee of Property Investment Funds (the Committee). In determining which such areas are suitable for investment and therefore available to property investment funds, the Committee shall consider:

  1. the market value of the real estate to be owned by the property investment fund shall not be less than AED 50,000,000;
  2. the real estate shall have an investment return according to the standards of the Dubai Land Department;
  3. the Provisions of Dubai Decree NO. 4/2010 (in the event that the property is, or forms part of, granted land); and
  4. any other considerations as determined by the Director General of the Dubai Land Department.

 

It should also be noted that property investment funds are required to obtain preliminary approval from the Committee in advance of disposing of its interest in any property acquired in the areas identified by the Committee.

 

Article 12: Privileges of property investment funds operating in the DIFC

Whilst this Decree applies equally to all property investment funds licensed to operate in Dubai (including those licensed in free zones or special development zones), the extent of the privileges that shall apply to those licensed in the DIFC will be at the discretion of the chairman of the DIFC.

 

Future

The two key changes ushered in by this Decree (the permitting of ownership of selected real estate within areas where it is typically prohibited for non-UAE nationals to own property and the removal of the Dubai Land Department registration fee upon a change of a property investment fund’s shareholding) are a significant development and an indication that property investment funds may now begin to have a greater impact on Dubai’s real estate market.

 

We anticipate that the changes that have now been introduced will relieve a number of burdens that would generally apply to property investment funds and encourage investors to re-evaluate property investment funds as a viable investment vehicle.

 

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If you require more detailed information, please do not hesitate to contact us. ■

POD inBrief: Real Estate in the UAE

 

This episode of Afridi & Angell’s POD inBrief focuses on real estate in the UAE, recent performance, trends, and indicators for the upcoming months.

 

Shahram Safai, partner at Afridi & Angell and head of the real estate team led the discussion. He represents real estate stakeholders including developers, owners, architects, engineers, contractors and government entities in all stages of the real estate and construction process. In addition to real estate, Shahram represents clients on general corporate matters, private equity, venture capital and doing business in the region.

 

Listen to “Afridi & Angell’s POD inBrief _ Real Estate in the UAE” on Spreaker.

 

Overview:

 

  • Summary of real estate performance since 2018/2019
  • Current trends in recent real estate transactions
  • Discussion of the upward trends in real estate activity and the high demand for luxury housing and if these trends are here to stay
  • Evaluation of the impact of Dubai Expo 2020 on the economy and real estate in particular
  • Words of advice to investors and end-users looking to buy real estate in the UAE

Booming Market: Real Estate Ownership Rules for Foreigners in Dubai and Abu Dhabi

The real estate market in Dubai has been making significant improvements in 2021 after the successful handling of the COVID-19 pandemic by the UAE. March 2021 had the highest number of transactions in 16 months as well as the highest number of secondary/ready properties transacted for foreigners in a single month since June 2015. This boom in sales resulted in record increases (23 per cent annual increase between April to June for luxury villas). Such developments in real estate activity will most likely translate into positive activity in Abu Dhabi as well.

With the above in mind and such renewed interest, in this inBrief we compare the foreign ownership laws for real estate in Dubai and Abu Dhabi:

 

Where Can Foreigners Buy Property in Dubai, Abu Dhabi

 

Foreign investors should familiarise themselves with the two foreign ownership systems that operate in Abu Dhabi and Dubai so that they can make an informed decision when purchasing a property.

 

Dubai: The general rule regarding nationality requirements to acquire real estate interests in Dubai is set out in Article 7 of 2006 which states that: “non-UAE nationals may, in certain areas determined by the rules, be granted the following rights: (a) freehold ownership of Real Property without time restrictions; and (b) usufruct or leasehold over Real Property for a period not exceeding ninety-nine (99) years.”

 

The designated areas for foreign ownership of real estate interests are determined by the ruler of the Emirate of Dubai by way of decrees and regulations issued from time to time.

 

For foreigners, the most attractive designated areas have traditionally been Emirates Hills, The World Islands, Dubai Marina, Palm Jumeriah, Burj Khalifa, Downtown and Business Bay.

 

However, due to the current global economic climate, foreign investors have now been looking to Dubai’s affordable housing sector which has seen strong returns in communities such as Jumeriah Village Triangle, Jumeriah Village Circle and International City.

 

Foreigners must make specific inquiries with the Dubai Land Department as to whether foreign ownership is permitted for areas which are not listed above as the list of designated areas is subject to change as previously alluded to.

 

Furthermore, foreigners should be aware that currently the Dubai Land Department (DLD) does not allow foreign companies to own real estate directly in designated areas; instead it requires foreign companies to own real estate by establishing subsidiary companies in the free zones of: (a) Jebel Ali Free Zone; (b) the Dubai Multi Commodities Centre; or (c) The Abu Dhabi Global Market (ADGM; which we note is a recent development pursuant to a memorandum of understanding dated 10 October 2018 between the DLD, ADGM, and the International Financial Centre in Abu Dhabi).

 

As of April 16, 2019, the right to own real estate on a freehold basis in the investment areas has been granted to foreigners in Abu Dhabi, according to Law 13 of 2019. The law states, “Non-Nationals, whether natural or legal persons, may own and acquire all original and secondary rights in rem of the real estate existing within the investment areas, and they may conduct any disposition thereof.”

 

A right of ownership, known as freehold, is considered an original right in rem, while the right to grant a mortgage pledge or lien over that freehold property is classified as secondary rights in rem.

 

In a move to modernize its real estate laws, on 16 April 2019 Abu Dhabi announced that foreigners are now permitted to own freehold title to real estate within the “investment areas” in Abu Dhabi. Prior to this, foreigners were only able to buy real estate through long term leases of up to 99 years or rights of Musataha or usufruct.

 

It is expected that this change in the law will contribute to the increasing demand in real estate in Abu Dhabi and level the playing field with Dubai in terms of its foreign ownership rules.

 

The ten most popular investment areas where foreigners can now buy freehold property are: Al Reem Island; Yas Island; Saadiyat Island; Al Reef; Al Raha Beach; Al Shamkha; Masdar City; Nurai Island; Al Falah City; and Al Maryah Island.

 

What are the transfer fees payable by foreigners – Dubai vs Abu Dhabi

 

Dubai: A transfer fee of 4 per cent of the value of the sale contract is payable to the Dubai Land Department to register a transfer of property in Dubai. The fee is the same regardless of whether it is a foreign individual or a company making the purchase.

However, after the registration of the transfer, any change in the shareholding (at any level up to the ultimate beneficial owner) of the foreign company purchaser is considered a transfer of the real estate requiring payment of a further transfer fee at the Dubai Land Department.

Abu Dhabi: A transfer fee of between 1 per cent to 4 per cent of the property value is payable to register a transfer of property in Abu Dhabi. Currently, the Municipality is applying a rate of 2 per cent of the property value (or if higher the property value as assessed by the Municipality). The fee is the same regardless of whether it is a foreign individual or a company purchasing. Post-acquisition, the transfer fee process varies in the different investment areas in Abu Dhabi in respect of how changes in shareholders’ equity of a foreign company are dealt with, and specific inquiries for each investment area must be made.

 

What permanent residency and long term visas are available to foreign real estate investors – Dubai vs Abu Dhabi

 

In both Dubai and Abu Dhabi, a 5 year residency visa may be applied for by the investors in real estate in the UAE if the following conditions are met pursuant to Cabinet Decision 56 of 2018:

 

  • The investor must have invested in one or more properties in the UAE with a total value of no less than AED 5 million;
  • The amount invested must not be derived from the proceeds of a loan. Consequently, it will not be possible for there to be a mortgage over the property if this visa is to be applied for;
  • The property must be owned by the investor for at least 3 years from the date of issuance of the residency visa;
  • The investor must be financially liable for any claims or civil judgements which reduce his/her financial solvency below AED 10 million; and
  • The investor must have a comprehensive health insurance policy covering him/herself and any family members.

 

In both Dubai and Abu Dhabi, a 10 year residency system called the “Golden Card” is available to the following categories of foreigners in the UAE (and their spouse and children): (1) investors; (2) entrepreneurs; (3) specialised talents; (4) researchers; and (5) outstanding students. Amidst the pandemic, Dubai and Abu Dhabi have seen this visa expand and in particular authorities are encouraging frontline workers such as doctors to apply. The UAE Government Communications Office reported that, since 21 May 2019, the “Golden Card” system has granted a “Golden Card” to 6,800 qualified individuals with approximately AED 100 billion in combined total investments in the first round of applications.

In light of the pandemic, authorities have developed other visa options, such as retirement and remote working, which adhere to work flexibilities. This makes it an idealistic time to secure residency in Dubai and Abu Dhabi.

 

Conclusion:

The new announcement in Abu Dhabi permitting foreign freehold ownership in the designated investment areas, along with the introduction of the 10 year residency and other long-term visa schemes in the UAE, will serve to increase investor confidence and attract more foreign investment into the UAE. Dubai and Abu Dhabi remain attractive markets for domestic and international investors alike with globally high rental yields and relatively low prices.  The UAE’s successful handling of the COVID-19 pandemic has added to such attraction. The UAE continues to attract entrepreneurial companies and people from across the world. There is much to be positive about regarding the Dubai and Abu Dhabi property markets in 2021 and 2022. ■

Implementing Regulation to the new Movable Security Registration Law

Since the issuance of Federal Law No. 4 of 2020 on Guaranteeing Rights Related to Movables (the Mortgage Law) the business community, particularly banks and financial institutions, have been eagerly awaiting the publication of the implementing regulations to the Mortgage Law, which would provide details on a number of key issues including the specific procedure for registering security on the new register; rules applicable to taking security over intangible assets; accessing information from the new security register; and the treatment of the existing security (particularly security that had been registered under the previous movables security registration regime). The implementing regulations were published in the Official Gazette as Cabinet Decision No. 29 of 2021 on the Implementing Regulations for Federal Law No. 4 of 2020 on Securing Rights Over Movable Property (the Regulations) on 21 March 2021 and came into effect the following day.

 

Whilst the Regulations do not address the creation of the security register or appointment of the registrar, (both of these issues will be clarified following the publication of the cabinet decision which will create the registry and identify the registrar), they do introduce the following key developments to the security registration regime.

 

How to make a registration

 

The registration process is relatively straightforward. Firstly, the applicant needs to establish an account with the registrar (only possible following the appointment of the registrar). The online registration must include the following information:

 

  1. details of the (i) security provider including its name, nationality/registration number (as applicable), identity card or passport number (in case of natural person) or license (in case of a legal person) and (ii) secured party including the name, address and email address (together, the Identification Information);
  2. description of the security assets including the specific type and class of assets and confirmation of whether the assets are existing or future assets; and
  3. description of the secured obligations, whether it is a specific amount, subject to an upper limit and/or refers to all obligations owed to the secured party.

 

In contrast to the earlier registration procedure under Federal Law No. 20 of 2016 (the Old Mortgage Law), it is no longer necessary to submit a completed security agreement between the secured party and the security provider, at the time of the registration application.

 

The registration fees range from AED 50 to AED 200 per registration, depending on the type of security registration. The register shall issue an electronic confirmation upon the completion of the registration.

 

Liability for registration

 

The Regulations provide that whilst the registrar can reject a registration application, if it does not contain the mandatory information therein, the registrar shall not review the contents of the registration or the accuracy or completeness of any information in the registration. These provisions are accompanied by a general move towards placing a high degree of responsibility for the registration, on the applicant.

 

In particular, the registration only becomes effective once it has been entered into the register database in a manner that allows the declaration to appear when searching the register. Merely completing the registration exercise does not guarantee enforceability. The registration may be unenforceable if (i) there is an error in entering any of the Identification Information, which leads to an inability to retrieve the information in the registration when conducting a search of the register database or, (ii) any other information in the registration which reasonably misleads anyone conducting a search of the register database. Whilst the Mortgage Law and Regulations do not provide any guidance on what constitutes “reasonably misleads”, we believe that this will include instances where information used to conduct searches in the database, as identified in the Regulations (see below), has been entered incorrectly. Given that any errors in the application could render the registration ineffective, applicants would be well advised to seek professional advice when completing registrations.

 

Accessing information from the register database

 

A person can search the register database by entering the registration number or the Identification Information. A person may also print a search report containing information regarding the registration, including its time of creation, details of the parties on the registration, description of the secured assets, validity period and any other data requested by the registrar.

 

Security over intangibles

 

The Mortgage Law provided that the creation of a security interest, its enforcement and priority relating to intangible assets shall be subject to the law of domicile (as identified in the Regulations) of the security provider. The Regulations provide that domicile shall be determined by looking to the country in which the security provider’s workplace is located or the country in which its head office is located (if it has operations in more than one country). Caution should be exercised in determining the domicile of a security provider, particularly when dealing with overseas companies / branches, or UAE companies which only have overseas operations.

 

Taking the secured assets without the Court’s assistance

 

A secured party may seize and dispose of secured assets, without the need to seek a specific court order, by sending a notice to exercise its right to seize and dispose of the assets to the security provider, the underlying obligor, other parties with a security interest in the relevant assets and other interested parties. The Regulations provide that such notice should also include details of the assets that will be seized and disposed, the method of execution, and the time and place of the disposal.

 

The prospect of being able to take quick unilateral action to seize and enforce a security interest may seem appealing, particularly considering the time and effort required to secure a court order. However, this will entail the secured party assuming responsibility for disposing of the assets, settling its debts (less, any reasonable execution expenses) and those of other secured parties, in order of priority. Any one of these obligations could expose the secured party to potential legal action by the security provider, underlying obligor and other secured parties, e.g., claims that the assets were sold at an undervalue or the proceeds were not correctly distributed amongst other secured parties. In any event, exercising this option will require the co-operation of other parties (e.g., third parties with possession of the secured assets) failing which the secured party will have no option but to enforce through the courts.

 

In relation to secured bank account, if the secured party is also the account bank, then it can exercise its security interest over the secured account, without a court order. This can also be achieved under the customary set-off provisions in most account opening documents. In the case where the secured account is held with a third party bank the security provider, secured party, account bank can enter into a side agreement to establish control and management over the secured account, in favour of the secured party. We note that such provisions are already customary in most account pledge agreements, involving third party account banks.

 

Existing security under the Old Mortgage Law

 

The Mortgage Law repealed the Old Mortgage Law in its entirety. Furthermore, all circulars, resolutions and regulations relating to the Old Mortgage remain valid (to the extent they are consistent with the Mortgage Law), until replaced by the Regulations and new resolutions and circulars. Consequently, it was not clear how a secured party, with a registration on the existing register, would exercise its rights to request the courts to seize and dispose of secured assets, when the very law providing such rights had been repealed.

 

The Regulations have confirmed that any existing registration under the Old Mortgage Law, shall remain effective against third parties, until it is terminated in accordance with the provisions of the Mortgage Law. Whilst this implies that any existing registrations will be effective against third parties it does not address enforcement against the security provider (e.g., how would the security party enforce its right to seize and dispose of secured assets that are in the possession of the security provider?). There is also little to no guidance on how to enforce an existing registration, under the Old Mortgage Law, before the courts (e.g., would you use the enforcement procedure under the Old Mortgage Law or the Mortgage Law?). The situation is further complicated by the fact that the Old Mortgage Law was, itself, in its infancy and remined largely untested before the local courts.

 

In light of the above and given the relatively modest fees for registering existing security interest(s) in the new register (i.e., AED 50 per registration), secured parties would be urged to register all eligible existing security interests in the new register.

 

The Mortgage Law provides a period of 6 months following the issuance of the Regulations to register existing security interests in the new security register. It remains to be seen whether the new register will be established and operational before this deadline. ■

Does VAT apply to bare land that is leased to a tenant who will develop it?

The supply of undeveloped (bare) land is exempt from value added tax (VAT) pursuant to Article 46 (3) of UAE Law No 8 of 2017.

 

Bare land (as opposed to covered land) is defined as ‘land that is not covered by completed, partially completed buildings or civil engineering works’ pursuant to Article 44 of Cabinet Decision 52 of 2017. Accordingly, the supply (in this case, a lease) of land that does not have completed or partially completed buildings or civil engineering works is exempt from VAT, and hence no VAT is payable.

 

Note that land means ‘any area on the surface of the earth which may include trees, plants or other natural objects in, under or on top of it’ (UAE Federal Tax Authority VAT Guide, Real Estate, VATGRE1, April 2020).

 

Land will not be considered to be bare land where it is covered by civil engineering works which are complete, or partially complete. Land will be considered to be bare land where there are civil engineering works which run underneath the land, but which do not break the ground surface of the land and to which land carries no right of access. Examples of civil engineering works include roads, bridges, and pipes used forming water or power services. Also, where land has been fenced to allow construction to commence and temporary movable structures were placed on the land then the fencing and movable structures will not change the classification of the land from bare land to covered land.

 

However, even if land that is leased to a tenant is bare to begin with, the classification of such land can change if the tenant develops the land. Accordingly, after the tenant commences construction such that the land has civil engineering works or a partially completed building, then the land is no longer bare land.

 

This subsequent change in nature of the land will not immediately affect the VAT treatment of the land, however if any further supply of the land is made by the landlord (for example entering into a new lease agreement, or if the supply is treated as being made periodically under Article 26 of VAT Decree Law No (8) of 2017), then this subsequent supply of the land would be subject to VAT at the standard rate as it would no longer be a supply of bare land. ■

COVID-19 and Commercial Leases in the UAE

The Covid-19 pandemic has swept the globe like a tsunami and it continues to impact countries and their economies worldwide. The UAE is no exception. Businesses have come under increased cost pressure as revenues decline. Such cost pressure primarily involves real estate leasing costs.

 

In this inBrief, we look at the impact Covid-19 has had on commercial leases.

 

Rent Deferment 

 

From a real estate perspective, the authorities in the UAE have introduced a series of initiatives to support commercial tenants in response to Covid-19.

 

During March and April, the Government of Dubai temporarily suspended all eviction judgements and cheque dishonour complaints/actions in the Emirate.

 

In Abu Dhabi, Administrative Resolution 92 of 2020 was passed which grants tenants in the restaurant, tourism and recreational sectors a refund of 20 per cent of the rent value collected during 1 April 2020 to 30 September 2020.

 

The Dubai Free Zones Council announced a major relief package at the end of March for companies operating in the free zones of the Dubai Silicon Oasis Authority, the Dubai Airport Free Zone Authority, Jebel Ali Free Zone, the Dubai World Trade Centre, the Dubai International Financial Centre, the Dubai Development Authority, Dubai South, Meydan City Corporation and the Dubai Multi Commodities Centre (DMCC). Measures included an up to six months’ rent postponement period and easy installment plans.

 

In the DMCC, tenants benefitted from a waiver of rent for two months for commercial tenants impacted by the Dubai Economy Directive requiring them to temporarily close; a three months’ suspension of rent for Flexi Desk and DMCC Business Centre tenant renewals or a monthly/quarterly instalment plan with no discount; and a waiver of outdoor area rents for JLT retail tenants where DMCC is the building owner/landlord.

 

From April to June, retail tenants in DIFC’s Gate Avenue, Gate Village and Gate District were not required to pay basic rent.  The DIFC also allowed deferred rental payments with respect to all properties owned by DIFC Investments for a period of up to six months.

 

Sharjah Asset Management, the investment arm of the Sharjah Government, waived commercial rents for all tenants of Haraj and Jubil markets for three months from March.

 

Suspension / Termination by Force Majeure 

 

Apart from government initiatives to support commercial tenants, a force majeure clause is often found in a lease and typically excuses one or both parties from performance of their obligations under the lease following the occurrence of a force majeure event. A force majeure event is generally defined as an event beyond a party’s control (i.e. an act of god). Often the clause will provide that, if the force majeure event continues for a period of time, then either party shall have the right to terminate the lease.

 

If a lease does contain such a force majeure clause and it defines a “pandemic” or “epidemic” as an event of force majeure, then the tenant is likely to be protected contractually either by a suspension of the tenant’s obligation to pay the rent or a right to terminate.

 

UAE Law

 

However, if the lease does not contain such a force majeure provision, then the tenant will have to rely on its rights under UAE law.

 

Under the UAE Civil Code, a tenant may apply to the court to terminate a lease in circumstances of “force majeure” or an “exceptional event”.

 

UAE law requires performance of the lease to be impossible in a force majeure event and courts require force majeure to be unforeseeable. Both of these are arguable and may be hard to satisfy in order to fall under the protection of force majeure under Article 273 of the Civil Code.

 

However, if the event does not qualify as a force majeure event under UAE law, then it can be argued that it is ‘an exceptional event’ (Article 249 & 794 of the Civil Code). The law requires an exceptional event to be unforeseeable and that performance of the contractual obligations to be so onerous so as to threaten grave loss.   This must be proven factually.

 

There have been three high profile court cases reported in the media recently where tenants were permitted to terminate their leases on the basis of the above Articles of the Civil Code and using the Covid-19 pandemic as a reason. Nevertheless, the application of these Articles is still subject to the discretion  of  the  judge  and the facts and the law must be properly presented and argued.

 

 

Conclusion

 

The Covid-19 pandemic will lead to continued uncertainty in the real estate market in the UAE and worldwide.

 

We expect that some businesses will continue to seek to negotiate or terminate their commercial leases during this pandemic on the basis of “force majeure” or “exceptional event”. ■

Understanding rent to own schemes in Dubai

In the midst of the Covid-19 pandemic, Dubai continues to be a buyer-friendly property market. With property values remaining depressed and an oversupply of stock, it has been increasingly common for developers to offer incentives to potential buyers such as post-handover payment plans, DLD registration fee rebates, service charge freezes, and rent to own schemes.

 

In this inBrief, we discuss rent to own scheme and how buyers can protect themselves when entering into such schemes.

 

Rent to Own Scheme

 

Under a rent to own arrangement, the purchaser is permitted to occupy the property under a tenancy agreement with an option to purchase the property from the seller at the end of the term. If the purchaser chooses not to purchase the property, then the contract terminates at the end of the term just as a normal tenancy agreement would, subject to the purchaser forfeiting a prescribed amount (known as the option fee) and the rent paid. Given the risk of forfeiture, the purchaser should ensure that it carefully negotiates these amounts in the tenancy agreement.

 

During the rental term, the purchaser pays rent to the seller, and a portion of this rent is allocated toward payment of the purchase price with the balance being payable at the time the purchaser exercises the option to purchase the property.

 

The advantage of a rent to own scheme is that during the rental period the purchaser can save money to pay the balance of the purchase price or to arrange a mortgage. In addition, the purchaser does not have to pay the seller an initial large upfront deposit, as is the case in most deferred sales arrangements/post-handover payment plans. The purchaser will also have the benefit of the protections afforded to tenants under law just as in a normal tenancy agreement.

 

Buyer’s Protection – Dubai Land Department (DLD) Registration

 

The law requires all dispositions (i.e. sale, lease and mortgage) of real property in Dubai to be registered with the relevant authorities to be valid. If a disposition is not registered, then the law deems the disposition to be invalid and therefore unenforceable. A rent to own arrangement is a disposition of real property which is required to be registered under law.

 

The DLD maintains the registration system for such rent to own arrangements and it requires the following fees to be paid by the seller and the purchaser before registration will be accepted:

 

Fees to be paid by the seller (unless the contract requires the purchaser to pay these):

 

  • 2 per cent of the sale value;

 

  • AED10 knowledge fees; and

 

  • AED10 innovation fees.

 

Fees to be paid by the purchaser:

 

  • 2 per cent of the sale value and 0.25 per cent of the rental value

 

  • AED250 title deed issuance fee

 

  • AED100 fee for issuance of land map (AED250 if a villa or apartment)

 

  • AED40 knowledge fee at the rate of AED10 per fee

 

  • AED40 innovation fee at the rate of AED10 per fee

 

In addition, the Real Estate Registration Trustee will also charge the following fees:

 

  • if the sale value exceeds or is equal to AED500,000, then a fee of AED4,000 is payable; and

 

  • if the sale value is less than AED500,000, then a fee of AED2,000 is payable.

 

Conclusion

 

The Covid-19 pandemic has resulted in continued uncertainty in the real estate market in the UAE and worldwide. As a result, we expect that developers will continue to offer rent to own schemes in order to provide an affordable alternative to purchasing. ■

 

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If you require more detailed information, please do not hesitate to contact Shahram Safai. 

Underperforming real estate: Can REIT (funds) assist developers in the UAE?

During these unprecedented times, developers all over the world are actively looking for solutions to deal with underperforming real estate.

 

For developers in the United Arab Emirates (UAE), real estate investment funds (otherwise known as REITs) may offer a solution to the problem.

 

A REIT is a public or private investment fund which is established to invest a certain percentage (as stipulated by law) of its assets in real estate.

 

REITS are permitted onshore in the UAE under the Emirates Securities and Commodities Authority’s framework and in the freezones of the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC).

 

In this InBrief we consider the main advantages of a REIT to a developer through:

 

a)     the developer establishing a REIT; or

 

b)    the developer entering into a joint venture with a REIT.

 

We will also highlight some of the key aspects of the law governing REITs in the UAE onshore and in the freezones of the DIFC and ADGM.

 

Option #1 – Developer establishes a REIT directly

 

For a developer, the main advantage of establishing a REIT is that the REIT will provide a source of funding to the developer which can in turn be used to develop other projects.

 

The developer achieves this by transferring its existing real estate assets into the REIT and then sells shares in the REIT to investors through initial offerings and follow on offers.

 

The developer is permitted to keep a certain percentage of the shares in the REIT – as such it does not have to sell the whole of its real estate assets to raise funds.

 

In addition, the developer will benefit from the appointment of professional experts to manage the assets of the REIT which in turn should improve the quality of the assets in the REIT.

 

Option #2 – Developer joint ventures with a REIT

 

In the UAE, it has been increasingly common to see developers joint venturing with local UAE land owners as a means of developing real estate. However, an alternative to this more traditional joint venture structure is for a developer to joint venture with a REIT.

 

From a developer’s perspective, a REIT is an advantageous joint venture partner as the REIT must strictly comply with the regulatory requirements in the UAE, and a REIT uses property management teams to professionally manage the real estate assets. Together, these provide for strong governance and enhanced transparency which in turn reduces the risk to a developer when considering a joint venture arrangement with a REIT. Such strong governance and enhanced transparency is also attractive to potential third party investors.

 

There are two main types of joint venture arrangements that a developer can enter into with a REIT.

 

The first is a joint venture between the REIT and the developer which has the purpose of constructing a project using funds obtained by the REIT. Under this model, the REIT secures funding through a public offering and then releases some of these funds in phases to fund the development costs of the joint venture partnership between the REIT and the developer to construct the project. Any unused funds from the public offering are usually invested by the REIT in conservative projects (i.e. ownership, leasing, management).

 

The second model is a sale and leaseback between a REIT and a developer. Here, the REIT purchases the underlying land to be developed from the developer and then leases the land back to the developer to construct the project. The developer gets the benefit of the sale proceeds which can be used to fund the construction of the project and the REIT gets the benefit of the income from the annual rental payments under the lease back.

 

The Law

 

In the UAE, there are three options for establishing a REIT: firstly, UAE onshore under the Emirates Securities and Commodities Authority’s framework;  secondly in the ADGM; and thirdly in the DIFC.

 

For REIT’s that are established onshore in the UAE (including onshore Dubai), the Emirates Securities and Commodities Authority’s framework is applicable. This is set out primarily in Administrative Decision 6/R.T of 2019 Concerning Real Estate.

 

Investment Fund Controls, and supplemented by Law 4 of 2000 on Emirates Securities and Commodities Authority and Cabinet Resolution 13 of 2000 Concerning the Regulations of the Functioning of the Emirates Securities and Commodities Authority. Under this framework, a REIT must be a public or private investment fund established to invest at least 75 per cent of its assets in real estate assets for construction, development or re-outfitting in preparation for sale, management, leasing or disposal. A REIT may establish or own real estate services companies, provided that its investment in the ownership of such companies and their subsidiaries does not exceed 20 per cent of the REIT’s total assets.

 

Under the ADGM framework, the Financial Services Regulatory Authority Fund Rules must be complied with. Under these rules, the REIT must be a public property fund which is primarily aimed at investments in income-generating real property; and must distribute at least 80 per cent of its audited annual net income to its unitholders.

 

To establish a REIT in the DIFC, the DIFC Investment Trust and REITS Rules Instrument 2006 must be complied with. These requirements include the following: an investment company or investment trust must be used as the fund vehicle; the REIT must be a public fund that is listed and traded on an authorised market institution; the REIT must be close ended; the REIT must distribute 80 per cent of its audited annual net income to unitholders; the REIT must not borrow beyond 70 per cent of net asset value; and the REIT may only invest up to 30 per cent of its total assets in property under development.

 

Conclusion

 

The Covid-19 pandemic will lead to continued uncertainty in the real estate market in the UAE and worldwide. Developers should be more aware than ever about the advantages of a REIT as an alternative source of funding. ■

The New DIFC Leasing Law

On 11 January 2020 a new leasing law was introduced in the Dubai International Financial Centre, Law 1 of 2020 (the New Law); and on 14 January 2020 the associated regulations were issued (the Regulations).

 

The New Law and Regulations are an important development for the DIFC. We expect that they will have a positive impact on the real estate market. The New Law is more comprehensive than the previous law (Law 10 of 2018) and brings the DIFC into alignment with the detailed onshore Dubai leasing law set out in Law 26 of 2007 (as amended by Law 33 of 2008); Decree 43 of 2013; and Decree 26 of 2013.

 

In this InBrief we look at the major changes that will impact landlords and tenants in the DIFC under the New Law.

 

Application of the New Law

 

The Regulations have now clarified that the New Law applies to all leases in the DIFC which were entered into prior to the date of commencement of the New Law, except where provisions in the New Law requires compliance with time and notice periods which are incapable of being applied to such leases (Regulation 4.1). In addition, it is important to note that the New Law does not apply to the following two types of leases:

 

1. A lease of premises which are used primarily for serviced apartments or hotel inventory leased as part of a hotel; or

 

2. A lease which is entered into by the parties to a Mortgage of the Leased Premises in accordance with the terms of the Mortgage.

 

A Lease has been defined in the New Law as “a lease under which a person lets premises, which includes a sublease and any form of agreement (howsoever described) that gives a legal right of exclusive possession of premises to the occupant for a specific or ascertainable term in exchange for another consideration.”

 

As such, the New Law applies to all residential, retail and commercial leases in the DIFC.

 

Tenant’s rights

 

The New Law gives tenants of residential premises greater rights by introducing:

 

  1. a new security deposit scheme;
  2. a requirement for entry condition reports; and
  3. rules governing rent increases.

 

The new security deposit scheme

 

The key elements of the new security deposit scheme, which is only applicable to residential leases, are as follows:

 

1. If a landlord of residential premises chooses to charge the tenant a security deposit, then the security deposit must not exceed 10% of the rent.

 

2. A security deposit may only be used to compensate the landlord after a residential lease has ended for the following purposes:

 

a. non-payment of rent;

b. damage to the residential premises, excluding fair wear and tear; or

c. damages for breach of contract, inclusive of direct, indirect and consequential losses.

 

3. A landlord who receives a security deposit must pay it to the DIFC Registrar of Real Property within 30 days.

 

4. The Registrar must hold all security deposits in an escrow account.

 

5. On the expiry or earlier termination of a residential lease:

a. if the landlord and the tenant agree on the amount of the security deposit to be refunded to the tenant, then they must sign and lodge a release form with the Registrar;

b. but, if the landlord and the tenant disagree on the amount of the security deposit to be refunded, then either party may notify the Registrar of the existence of the dispute, and the dispute will be resolved by the Court.

 

6. The Registrar will only pay out an amount of the security deposit in accordance with:

a. a release form signed by the landlord and the tenant agreeing on the amount of the security deposit to be refunded; or

b. a order of the Court.

 

The New Law defines a “Court” as the DIFC court or any specific tribunal created for dealing with disputes under the New Law. Under the previous law, the DIFC Small Claims Tribunal had exclusive jurisdiction over tenancy disputes in the DIFC where the claim amount did not exceed AED 500,000. We assume that this tribunal will continue this role under the New Law, including resolving disputes arising under the new security deposit scheme. However, we expect that a further regulation will be made by the Board of Directors of the DIFCA under the New Law to clarify this issue.

 

Rent Increases

 

For residential leases, a landlord is now required to give a tenant written notice of a proposed rent increase at least 90 days prior to the expiry of the residential lease. If the landlord fails to give this notice, then the rent increase will be invalid.

 

Conclusion

 

Given that Dubai is expecting an increase in rental unit demand as a result of its new long term visa initiatives, dropping rents and Expo 2020, the New Law is a welcome development which may stimulate the property market by attracting more businesses and individuals to rent in the DIFC.

 

If you require more detailed information, please do not hesitate to contact Afridi & Angell. ■

 

 

Off-Plan Construction Delays: Options for Resolution in Dubai

By and large the Dubai offplan real estate market is well regulated and developers complete construction by the “anticipated completion date” as set out in the Sale and Purchase Agreement, albeit often subject to the contractual right to extend such date for a further 12 months. In addition, purchasers can take comfort that the Real Estate Registration Agency (RERA) actively monitors the progress of construction works for each off-plan project in Dubai, and in most cases a copy of RERA’s audit report can be obtained from the Dubai Land Department’s website.

 

However,  amid  a  sluggish  real  estate  market  and  global  economy,  there  have  been  instances  of construction delays of some off-plan projects as developers face cash flow issues.

 

It is important that purchasers are aware of their rights in order to address these challenges in the event that they find themselves facing such delays.

 

In this inBrief we discuss the ramifications under law of such delays, and what a purchaser can do in the event a dispute.

 

The Law

 

A purchaser may apply to court to terminate the contractual relationship between the purchaser and the developer in the circumstances set out in Article 20 of Executive Council Resolution 6 of 2010. In the context of construction delays, the relevant circumstances are as follows: “any other cases that may require termination of the agreement in accordance with general principles of law.”

 

In addition, the Article 246 of the Civil Code requires that: “(1) The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. (2) The contract shall not be restricted to an obligation upon the contracting party to do that which is expressly contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the disposition.”

 

Practically,  a  purchaser  should  attempt  to  resolve such  dispute  with a  developer  amicably  by lodging a complaint with RERA, failing which the purchaser can consider bringing court or arbitration proceedings (as the case may be) to enforce its rights.

 

Dispute resolution: Court, Arbitration

 

RERA:  In the event a purchaser experiences construction delays, a complaint can be lodged with RERA. It is important to make RERA aware of any construction delays as, pursuant to Article 23 of Executive Council Resolution 6 of 2010, RERA has the power to cancel a project in cases of serious delay, including: “if it is proven to RERA that the developer has no intention of implementing the project” or “if the developer fails to implement the project due to gross negligence”.

 

Where a project is cancelled by RERA, the developer must refund all payments received from the purchaser pursuant to the procedures and provisions stipulated in Law 8 of 2007.

 

Arbitration:  In the event of construction delays and if filing a complaint with RERA does not render results then the purchaser should look to the dispute resolution mechanism in the SPA, which is most commonly arbitration.

 

However,  a  purchaser  will  need  to  seek  legal  advice  as  to  the  strength  of  its  arbitration  claim, particularly as the SPA will often permit the developer to extend the “anticipated completion date” for a further 12 months, or excuse certain construction delays as events of force majeure.

 

Arbitration is beneficial as it is usually faster than court; it is private; and specialist arbitrators can be used to accurately determine a matter. In Dubai the most popular arbitration venues are before the Dubai Chamber of Commerce  and  Industry  (DIAC)  or  the  Dubai  International  Financial  Centre/London  Court  of International Arbitration (DIFC/LCIA) Centre.

 

Court:  If there is no arbitration clause contained in the SPA, then the purchaser must file its case with the Dubai courts. Again, a purchaser will need to seek legal advice as to the strength of the claim.

 

Proceedings are started by filing a claim in the relevant court office on payment of the required court fee. On application by the claimant, payment of court fees can be deferred in exceptional cases. The court fee depends on the value of the claim, and in Dubai has a maximum cap of AED 40,000. This fee is payable either on an application for provisional relief, or on filing the main lawsuit.

 

The claim must meet procedural requirements, include the names and addresses of the parties to the action, and include details of the claim. Documents in support of the claim are usually annexed to the claim and must be translated into Arabic. The court issues a summons with a hearing date endorsed on it for service on the defendant, with a copy of the claim and any supporting documents filed by the claimant.

 

Once an answer has been filed, the trial is adjourned for the claimant to respond. Further adjournments are given so that memoranda can be filed by the parties. Once the court believes that the case has been sufficiently pleaded, it reserves the matter for judgment. The entire proceeding is based on written submissions supported by documentary evidence. The court usually appoints an expert to assist it and usually accepts the expert’s report.

 

Conclusion

 

Further instances of construction delays with respect to some off-plan projects are likely to occur as developers face increasing cash flow issues amid a sluggish real estate market and global economy. Purchasers should be more aware than ever of their legal rights, potential remedies and developers’ responsibilities. ■