Real Estate, Construction and Hotels & Leisure Focus
Andrew Thomson Partner, Head of Real Estate
For those of us who have lived and breathed the Dubai real estate market for the last fifteen years it has (to put it politely) been an interesting and varied period. From the lows of 2008/9 to the now booming real estate sector of 2022 much has changed, and with very few exceptions, these changes have been for the better.
As the Dubai market has grown and matured in the past two decades so has the legal regime serving it. From the flurry of legislation in the mid 2000s, the establishment of RERA, the introduction of strata / jointly owned property (and its partial reform) it would seem fair to say the regulators here have been both innovative and active in their support of a sometimes very challenging (but essential) sector of the local economy.
All that being said, having spoken extensively to industry players we thought it may be useful to look ahead at what we expect from the local regulators in the next few years and also discuss what stakeholders in the market are looking for based on our experience of our clients.
Probably the most widely anticipated development expected by almost all individuals and businesses we spoke with was a fundamental reform of the 2007/8 law concerning the rights and obligations of landlords and tenants.
Whilst the law as it stands is probably one of the most frequently referenced in day-to-day life in the Emirate of Dubai it is still poorly understood by both landlords and tenants alike. One point of particular contention is the blanket security of tenure enjoyed by tenants (subject always to the limited statutory exceptions allowed under the existing law). Further, the law as it stands is applied equally to both commercial and residential markets which arguably leads (in the commercial market at least) to restrictions on landlords amending the tenant mix of their properties.
As such it is expected by the industry (particularly following on from the 2020 leasing reform in the DIFC) that any future legislation (which we believe is imminent) will both differentiate on the basis of market sector i.e. commercial vs residential and as a rule have time limited security of tenure providing more flexibility.
Other areas which are expected to see reform would likely include the effective creation of a concept of a temporary licence (which may be terminated at will) and penalties for non-registration of Ejari.
Possibly most controversially there have been ongoing suggestions, both in relation to a new leasing law and standalone legislation, that rents may be fixed for a period of time after a tenant first enters a property. This issue was less pressing whilst rents were largely dropping but in a rising market such a reform could be popular (certainly with tenants).
Possibly one of the most confusing (for the investor) but vital areas of legal regulation relates to the use of the common areas of those multi-owned mixed use buildings which make up the vast bulk of what is now known as ‘New Dubai’ i.e. jointly owned property / strata law’.
Originally introduced in 2007, the underlying law was fundamentally reformed in 2019 with the passing of Law No.6 of 2019. Gone (or so it seemed) were the Owners Associations implementing, in a very direct way, votes from the owners within the relevant building. In came the ‘Owners Committees’ with a maximum of 9 members appointed by RERA and whose role is in now limited to an advisory capacity only, with the management of the common areas of the building passed to professional management companies approved by RERA. Many owners and developers were happy to see officious and underqualified ‘OAs’ being abolished. The industry additionally recognised the benefits to an investor (vs owner occupier) focussed market with title holders having little involvement in the day to day running of their buildings, and the responsibility, rightly so, lying with the professional management companies.
Whilst there were some very obvious benefits from the changes the reform left a number of questions to answer. One of the principle issues is the existing law states that for all projects (other than major projects and hotel projects) RERA shall issue the building management statement (formerly known as the jointly owned property declaration) to govern the management and maintenance of the common areas of the building, however as yet this document is still not available to the market. This creates uncertainty for developers when they drafting the constitutional documents for their developments.
Further, the law broadly split projects into three types, namely Category 1: Major Projects, Category 2: Hotel Projects and Category 3: All other Real Property Projects. The various classifications have implications on who, and how, each type of project may be managed from handover. However, as it stands the relevant regulations which are to describe the criteria of each category of project ,and where one category starts and another one stops, have not been published. This has obvious implications for the planning for future management of projects.
One further area which market players have indicated a need for clarification is in fact the status of the Owners Committees themselves and their relative power to direct management of the common areas of the buildings which they nominally serve. Additionally, on a related point, it is still unclear what constitutes an ‘incompetent’ management company which triggers their removal by RERA under the law, and what role can an Owners Committee have in the process of removal of such an ‘incompetent’ manager.
One of the most regularly asked questions by both developers and banks is what is the legal status of the rights granted by registration in the Interim Real Estate Register (Oqood) when a mortgage has been registered over project land and that mortgage is in the process of being called up.
The question can be distilled into the following: does the registration of an off-plan sale and purchase agreement in Oqood create a burden on the project title thus preventing the auction and sale of that land where a lender sues for default under that mortgage?
The answer is still (after more than a decade after the introduction of the Oqood system) unclear. In our experience (and in the experience of our clients) the status of the off-plan purchasers is dealt with on a case-by-case basis. As such there is no one size fits all approach which banks can rely on when seeking redress for debts due.
Taking the above into account it is expected that clarifications to the relevant law will be published. It has been suggested that one possible solution to the issue would be to effectively rank the various registered parties (lending banks and off plan purchasers) with a proportionate pay out based on an as yet to be defined criteria. On that basis there is merit in having the mortgage banks for the purposes of the development finance being the same as those lending on off plan sales to the customers of the developer i.e. effectively being lenders of choice for developer and purchaser.
After considering the rollercoaster of the last decade (and more) in the real estate sector in Dubai in our view the legislative regime is now in a far better place to withstand the inevitable shocks which periodically affect the region in the years to come. That does not mean the industry will stand still and we look forward with interest to possible reforms ahead.
For further information, please contact Andrew Thomson.
Published in July 2022
