By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute

There are not many people who understand the concept of escrow and how this legally binding arrangement can provide a substantial level of protection for investors.

In its simplest form, an escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives the formal advice that certain previously agreed obligations of the seller have been fulfilled upon which time, the seller can receive funds to the amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has been mandated by law for the specific purpose of protecting the prepayments made by buyers for properties that are being bought off-plan. This limits developers from gaining access to funds until certain construction milestones are completed helping to ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended.

Anybody can open an escrow account but not anybody can open an escrow account for the purposes of property development in Dubai. The developer must first be registered as a bona fide developer with the Real Estate Regulatory Authority (RERA) in Dubai which involves the provision of an expansive array of documents ranging from those which establish the bona fide nature of the developer including details of its officers and solvency,  Title Deeds proving ownership of the land to be developed, No Objection Certificates (NOC) from relevant parties such as the Master Developer to performance guarantees backed by a financial institution and all planning and financial details regarding the project.

RERA requires that the land subject to development should be fully paid and a title deed should be issued in the name of the owner.  Where the owner of the land cannot register as a developer, RERA permits the land owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner.  The property development contract however must be approved by the senior legal adviser of DLD to be accepted by RERA.

Only when a developer is recognised as a “registered developer” with RERA can they apply to RERA to open an escrow account.  When selling off-plan, the developer must ensure all proceeds of sale of the units are deposited into the escrow account and are used solely for the purposes of construction of the project.  Failure to comply with the Escrow Law can lead to hefty fines or criminal charges which may result prison sentences being administered. Once the developer has submitted all the required documents to RERA and the developer is granted the authority to sell units off plan RERA will issue an NOC to allow the developer to open an escrow account with an authorized bank in the UAE.

Obviously, the bank which will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with the provisions of that agreement. In this way, the bank can help protect the buyers pre-paid funds by referring and strictly adhering to the conditions of the underlying agreement

But while the introduction of escrow as a legal requirement for developers has helped safeguard the funds of off-plan investors, there are other steps that investors must take to provide additional self-protection.

First, buyers need to make sure you are dealing with a reputable developer, regardless if the developer is registered with RERA. Ask around or seek professional guidance, as those in the industry have a good appreciation of who the reputable developers are.

Warranties and any quality assurance policies should be discussed in detail. Have the Sales and Purchase agreement reviewed by a professional, to ensure you have legal recourse should any quality issues arise and make the effort to exercise your right to inspect (snag) your property and report any legitimate issues to the developer for rectification. Items which can be remedied in the short term should be fixed immediately and remember, once you have taken ownership of the apartment, the developer is obliged to fix any issues that may arise for a full 12 months following transfer of ownership.

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