More buyers get lawyers to read the fine print

Article from Emirates Business 24-7

Article from Emirates Business 24-7

Property owners are concerned over growing disputes and investment security.

The number of property dispute cases filed in Q1 2009 increased by 55 per cent compared to Q4 2008. (EB FILE)

Increasing real estate disputes and concerns over security of a property investment are prompting buyers to seek legal advice prior to making a transaction, according to agents.

“Clients have serious concerns over the security of their real estate investments. Further, increase in number of real estate disputes is a result of many prospective buyers seeking legal advice prior to making a transaction,” said Mohanad Alwadiya, Managing Director, Harbor Real Estate.

“This was not the case in previous years which also contributed greatly to the problems that clients were facing as proper due diligence was not conducted prior to the sale and purchase of property,” he said.

Speaking to Emirates Business in a round table, Shilpa Guruswamy, Head of Legal and Sales Coordination, Asteco Property Management; Charles Neil, CEO, Landmark Advisory & Landmark Properties and Liz O’Connor, Director – Residential Sales & Leasing, Better Homes, said they were ensuring all correct steps were followed within their companies and ensuring all documentations were in place before a transaction is completed.

Do you have a law firm that advises you on the authenticity of your real estate transactions?

Guruswamy: Yes, we have a legal department, which oversees our transaction details and is also responsible for the compliance and risk mitigation process.

Neil: We have law firms to draw up all our documentation which protects the rights of our clients. Our accounts are audited by one of the four big auditors in order to ensure there is a clear distinction between our funds and our clients’ funds.

Real estate agencies, however, should be careful using companies claiming to be trust companies as they are not regulated, and if they have doubts they should use a reputed company of lawyers instead.

O’Connor: Yes, we do have a lawyer on board who manages our legal procedures and contractual obligations on transactions. Through our in-house lawyer as well as our managers, we ensure that all correct steps are followed and documentation is in place before a transaction is completed.

Alwadiya: In 2009, we joined forces with Prestige Legal Consultants, an international law company, to provide counselling and representation to all our clients in all legal matters concerning real estate in Dubai.

This partnership was started to keep in line with our vision to evolve our services from traditional real estate brokerage of merely bringing buyers and sellers together to world-class end-to-end real estate services. The holistic real estate legal services will complement our diverse line of services and govern all the activities and transactions of our clients.

The combined real estate experience of our firms enable us to provide clear candid counsel and guidance to our clients at all times to ensure that their rights are always protected.

Is this a new trend due to the downturn in the real estate sector?

Guruswamy: Real estate transactions, whether sales, lease, or appointment of sub-agents, are all essentially structured through legal contracts. Therefore, all these underlying documents need to be verified to ensure compliance to statutes and contract laws.

It is not a new trend but as the market matures there is greater emphasis on regulation and transparency. Therefore, there is increased need to have people with necessary legal background and expertise to scrutinise or draft documents. It is in no way related to the downturn because we had a legal department in place and operational long before the onset of the downturn.

Neil: We feel there should be laws allowing the setting up of trust accounts, but in our case customers trust us as we have strong finances and strong shareholders.

O’Connor: No, for us this is not as a result of the downturn in the real estate sector. We created this position a number of years ago due to volume of transactions and to oversee our international operations.

Alwadiya: Real estate-related enquiries have increased since the 2008 financial downturn. Many of the clients have serious concerns about the security of their real estate investments.

It was estimated that the number of cases filed in the first quarter of 2009 increased by 55 per cent compared to the fourth quarter of 2008. This drastic increase in the number of real estate disputes is a result of many reasons ranging from investors not fulfilling their obligations, sale and purchase agreements containing provisions that contradict the law about developers not delivering projects on time, and many more.

Prospective buyers are also seeking legal advice prior to making a transaction. This was not the case in previous years and also contributed greatly to the problems that clients were facing as proper due diligence was not conducted prior to the sale and purchase of property.

Most of the current legal enquiries that our legal division receives are usually concerned with the real estate regulations and legislations.

The profound perception of the industry and the daily interface with real estate clientele have resulted in the espousal of a fresh innovative legal counselling scheme. According to a recent study conducted by Harbor research division, majority of people perceive legal counseling as an exhorbitant service which leaves them with no alternative other than staying unaided and frustrated.

For that reason, the legal solution introduced by Harbor & Prestige is viewed as a results-driven method. Customers who seek legal counselling will incur minimal fees and no extra charges will be required in case of not winning the case.

Real Estate Regulatory Agency (Rera) recently proposed a free legal advice service for buyers and sellers, an initiative that we applaud. We believe that this innovative policy will assist in boosting the confidence levels in the real estate industry.

Can you specify which particular transactions are scrutinised by your analysts and lawyers?

Guruswamy: The legal department is involved in overseeing all transactions not limited to primary sales, secondary sales, leases, registration at the Land Department verification of power of attorneys etc. Should a party to the transaction be a corporate body, incorporation documents of companies need also to be verified.

Neil: We do use lawyers for more complicated transactions and are working with one firm to do conveyance transactions.

O’Connor: We have standardised processes and procedures that govern every transaction. Our in-house legal advisor oversees all the legalities of these processes to ensure that all parties, wherever possible are secure.

Alwadiya: The legal services introduction is vital as the real estate market matures through the current economic crisis to become a more structured and regulated market. We obtain legal counselling for all our transactional activities in order to ensure providing our clients with a secured transactional experience. Needless to say, the more complex and high-end the transaction is, the more legal involvement we require.

Do you collect a deposit from a client in order to lock-in your clients?

Guruswamy: We generally do not encourage collection of deposits. However, should there be a delay in completion of transaction, a deposit may be collected by the agent to secure buyer’s interest and lock the seller to a commitment. In this case the agent takes up the role of an escrow agent.

In case of default, deposit maybe forfeited and returned to the aggrieved party. On successful closure of the deal, the deposit is adjusted towards the balance sale price of the transaction.

Neil: We only take deposits as part of a transaction and to secure the rights of the parties involved in a transaction, we don’t take it in to lock in a client. If the deal falls through, then the deposit is returned in the manner agreed upon by the parties at the time of signing the agreement. Sellers can no longer demand deposits and hold on to them.

O’Connor: We have now begun to encourage our customers to hold their deposit with a Rera-approved escrow facility, but in the absence of an escrow we take a deposit from the buyer as security for the seller.

Alwadiya: Accepting deposits from potential buyers or tenants is a common practice in the property market which is usually used as a closing technique or a gesture to test the seriousness of the potential client. More sellers and landlords are starting to ask for deposits as well in order to secure their interest in the transaction, especially when the closing date of the transaction is delayed for justified reasons such as releasing a property mortgage or finalising the transaction contracts or obtaining a date to conduct the transfer at the developer’s office or the Land Department.

We try to avoid retaining any deposits at our end as this is an added liability on us and it can place us in a conflict of interest situation as we usually represent only one part in the transaction. Having said that, we usually recommend that deposits are usually handed by a financial or legal third party entity with neutral position in relation to the parties involved in the transaction.

Do you maintain a separate account to receive agents’ commissions?

Guruswamy: Commission fees are payable to the agent by the parties involved and shall not form a part of the purchase consideration.

Normally, the purchase consideration is exchanged between the buyer and seller and the commission is paid to the agent. Therefore, there is no possibility of both of them being booked into the same account. However, should the agent be involved in collecting the booking deposit, it is booked separately into a designated account, which is distinct from all other operational accounts. Such payments are held on behalf of the buyer and seller and do not form part of the operational funds of the agent.

Neil: No comment.

O’Connor: We have an accounts department and we run a series of profit centres, most of which have commissions as the primary revenue source.

Alwadiya: Our company’s bank account is supervised by an independent certified accounting and auditing firm. Our internal accounting and finance resources follow the processes and guidelines set by this consultant/firm in order to ensure complete compliance with the best financial and accounting standards.

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