Off-plan investors urged to take other steps to boost self-protection.
Anybody can open an escrow account, but not anybody can open an escrow account for property development in Dubai.
With Cityscape just around the corner, more people will be considering purchasing their first home or investment property, or expanding an existing investment portfolio by making an off-plan purchase.
An important feature of any off-plan purchase is escrow there are not many people who understand the concept of escrow and how this legally binding arrangement can provide protection to investors.
An escrow is 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 providing the escrow service (bank) until the latter receives formal advice that certain agreed obligations of the seller have been fulfilled, upon which time, the seller can receive funds in the amount specified in the agreement.
The use of escrow accounts by Dubai developers has been mandated by law to protect buyer prepayments. This limits developers from gaining access to funds until certain construction milestones are completed.
Anybody can open an escrow account, but not anybody can open an escrow account for property development in Dubai. The developer must first be registered as a bona fide developer with the Real Estate Regulatory Agency (RERA) which involves the provision of an expansive array of documents.
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 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 for an escrow account. When selling off-plan, the developer must ensure all proceeds of the sale of the units are deposited into the escrow account and are used solely for the construction of the project. Failure to comply with the Escrow Law can lead to hefty fines or criminal charges. Once the developer has submitted all the required documents to RERA and 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 authorised bank.
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. In this way, the bank can help protect the buyers’ pre-paid funds.
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.
Buyers need to make sure they are dealing with – a reputable developer regardless if the developer is registered with RERA. Ask around or seek professional guidance.
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. Remember, once you have taken ownership of the property, the developer is obliged to fix any issues for 12 months following the transfer of ownership.