Dubai Court of Cassation Judgment 76 of 2022
Khaled Gamaleldeen Senior Counsel, Litigation
Mahmoud ElTantawy Senior Associate, Litigation
In a recent decision, the Dubai Court of Cassation (Dubai Court of Cassation judgment No. 76-2022) considered a dispute arising from the purchase of a unit in a luxury serviced hotel apartment and the breach by the developer of its obligation under the underlying sale and purchase agreement (SPA). The purchaser argued that the developer failed to deliver the unit to the buyer and did not apply to the Dubai Tourism and Commerce Marketing (DTCM) department for a tourist hotel apartment licence. In the absence of a tourism licence for the building containing the unit in question, it could not be used as a hotel apartment. As a result, the developer was in breach of the contract for having failed to render performance in a manner consistent with the requirements of good faith by failing to deliver to the buyer, the unit in question, in the condition and in accordance with the specifications agreed upon between the parties, i.e., as a hotel unit, leading the court to terminate the SPA.
This article examines the reasoning of the court in ordering the termination of the SPA for a hotel unit.
Decree No. 17 of 2013 on the Licensing and Classification of Hotel Establishments in the Emirate of Dubai (Decree) provides that no hotel establishment may operate in the Emirate unless it is licensed and classified by the DTCM and all conditions prescribed by the legislation in force are met. Article 5(b) of the Decree provides that:
In accordance with the procedures adopted by the DTCM in this regard, an entity wishing to conduct the activity in the Emirate will be given the initial approvals, granted a license, classified in the appropriate category, and issued with a no objection certificate in order to be allowed to receive guests (Article 5(a).
A hotel establishment wishing to conduct the activity must meet all actual operational requirements and apply to the DTCM for a license (Article 5(b))
After granting a license to the hotel establishment, an inspection and on-site audit of the hotel establishment will be performed for the purposes of classifying it in accordance with the standards adopted by the DTCM in this regard (Article 5(c))
No hotel establishment may conduct the activity unless it meets all operational requirements adopted by the DTCM and obtains a no objection certificate in order to be allowed to receive guests (Article 5(d))
After it obtains a license, the hotel establishment will be recorded in the approved register maintained by the DTCM for this purpose, which records all essential information related to the name, facilities, address, name of owner and manager of the hotel establishment and any other information the DTCM deems required (Article 5(e).
A buyer filed an action before the court of first instance against the developers (which comprised three companies) seeking judgment to terminate an SPA she concluded with the sellers for the unit. The buyer requested the return of the amount already paid and fair compensation for tying up her money for a period exceeding seven years, which had denied her an opportunity to invest.
The buyer submitted, in her statement of claim, that she had purchased the unit in question from the defendants pursuant to the SPA which provided that the unit would be a luxury serviced hotel apartment, that the hotel would be managed and operated by the first defendant. When the handover date arrived, the sellers refused to hand over the unit to the buyer in spite of the latter having expressed her readiness to pay the balance of the purchase price. The sellers further refused to provide the buyer with a title deed for the luxury serviced hotel apartment, with approvals, permits, and licenses for the building based on the hotel classification, and permits and licenses for the operator named in the SPA, which would have signalled operational readiness.
The defendants filed a counterclaim against the buyer seeking judgment against her for the balance of the purchase price of the unit and the agreed late payment penalty, with interest. The defendants submitted that the buyer had refused to take over the unit in question, despite receiving notice, and had refused to pay the balance of the purchase price.
The court of first instance appointed an expert and, after receiving his report, dismissed the buyer’s claim and ordered her to pay the balance of the purchase price, with interest.
Both parties appealed the first instance decision. The buyer appealed, asking the Court of Appeal to overturn the first instance judgment and award her requests for relief. The developers also appealed the decision. On considering the appeal, the Court of Appeal overruled the first instance judgment, ordered the termination of the SPA and ordered the developer to return the amount already paid by the buyer and pay interest as well as compensation for damages. The developer’s counterclaim was dismissed.
The developers appealed the judgment of the Court of Appeal. They argued, among other things, that SPA indicated that the unit was to be a luxury-serviced apartment and nowhere did its terms state that it is a hotel apartment within a hotel operation or that the buyer is required to provide hotel services. Therefore, the rules and provisions relating to hotel apartments do not apply to the unit.
The Court of Cassation dismissed this argument and the developers’ cassation petition.
While the SPA provided that the permitted use was “luxury-serviced apartment”, the relevant building completion certificate from Dubai Municipality stated, as did the expert in his report, that the permitted use was “hotel apartments.” The Court of Appeal concluded that the unit in question was a luxury- serviced hotel apartment with no DTCM licensed and classified operator with a tourism license present to operate the building as hotel apartments. In the absence of a tourism license for the building containing the unit in question, the unit could not be used as a hotel apartment according to the requirements of the Decree.
As a result, the developer was in breach of contract for having failed to perform in accordance with the requirements of good faith by handing over the unit in the condition and in accordance with the specifications agreed upon between the parties, i.e. as a hotel unit. The buyer would not have entered into the SPA if compliance with the specifications couldn’t be complied with. Cause for termination of the SPA was therefore established.
The Court of Cassation found the court of appeal’s reasoning to be a correct application of the law and accordingly dismissed the cassation petition.
This ruling establishes an important principle, namely that it is not sufficient for the developer to simply construct the building to hotel specifications. The developer must also meet all the other operational requirements of Decree No. 17 of 2013 on the Licensing and Classification of Hotel Establishments in the Emirate of Dubai. An initial approval to construct a hotel establishment does not dispense with the need to satisfy the other requirements relating to operation and carrying on the business and to secure, from the DTCM, a license, classification, and no objection certificate in order to be allowed to receive guests. The court in this case held that a developer must secure from the DTCM, a license, classification, and a no objection certificate in order to be allowed to receive guests in the event the developer sells hotel units and agrees to the presence of a hotel operator. Otherwise, depending on all the circumstances, the developer may be in breach of contract and risk the termination of the SPA by court order. It is important to note that notwithstanding this decision, the courts will look at each dispute on a case-by-case basis and carefully consider the terms of each contract.
For further information, please contact Khaled Gamaleldeen and Mahmoud ElTantawy.
Published in June 2022
