Escrow law protection

With the recent flurry of new developments in Dubai, investors and potential owner-occupiers have been asking me how much protection is provided for the funds they are paying developers in advance. The conversation invariably turns to the concept of escrow and how this legally binding arrangement provides substantial 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 formal advice that certain previously agreed obligations of the seller have been fulfilled, upon which time the seller can receive an amount specified in the agreement between the seller and buyer.

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

Anybody can open an escrow account but a developer must first be registered with the Real Estate Regulatory Agency (Rera), which involves providing an expansive array of documents, ranging from details of its officers and solvency, title deeds proving ownership of the land to be developed, and no-objection certificates (NOCs) from relevant parties such as the master developer, to performance guarantees backed by a financial institution and all planning and details about the project.

Rera requires the land subject to development to be fully paid for and a title deed issued in the name of the owner. Where the owner of the land cannot register as a developer, Rera permits the owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner. The development contract, however, must be approved by the senior legal adviser of the Dubai Land Department to be accepted by Rera. Only when a developer is registered with Rera can it apply to open 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, which may result in prison sentences.

Once a 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 UAE bank.

The bank that will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with its provisions. In this way, the bank can help protect the buyers’ prepaid funds by referring and strictly adhering to the conditions of the 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 protection.

Buyers need to make sure they are dealing with a reputable developer, regardless if it is registered with Rera. One positive effect of the global financial crisis was that many suspect developers were exposed and forced out of business. Seek professional guidance, as those in the industry know who the reputable developers are. Ask the opinion of those who have transacted business with the developer.

Ask the developer what measures have been taken to ensure the end product is built to an acceptable standard and inspect buildings already completed by the developer. Warranties and 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.

Upon completion you have the right to inspect your apartment and report any legitimate issues to the developer for rectification. Items that can be remedied in the short term should be fixed immediately. Remember: once you have taken possession of the apartment, the developer is obliged to fix any issues that would arise 12 months following the transfer of ownership.