Everyone who lives in Dubai or frequents it knows what an off plan project is. For those who don’t the term means a project that is launched by a property developer to sell units yet to be constructed. The sale is usually made based on available renderings and other illustrative materials.
The legal framework for off plan sales in Dubai is quite robust as it ensures the following:
- Every project must be licensed by the Real Estate Regulatory Agency (RERA). The registration can only be obtained if the project’s land is fully paid for and the developer having demonstrated that at least 30-50% of the construction cost is secured.
- Every project must have an escrow account. This is a RERA controlled bank account which is operated in a manner that ensures that all monies collected from buyers go towards development costs.
- Every off plan sale must be registered in the Interim Real Estate Registry operable under Dubai Law No. 13 of 2008 (as amended) otherwise known as the OQOOD system. This ensures that every sale & purchase agreement is reflected in a central registry with official certificates being handed over to buyers.
Whilst most off plan projects go on without issues, some developers may end up unable to complete a project for various reasons. Under the current RERA regulations if construction is halted for a period of 6 months or more RERA will be entitled to issue a decision to cancel the project. The legal consequence of such cancellation would be for the project to be sent to the Incomplete & Cancelled Project’s Committee (“Judicial Committee”). This is a judicial committee formed by virtue of Dubai Decree No. 33 of 2020 which currently sits at the Dubai Land Department.
The Judicial Committee has broad jurisdiction to adjudicate any disputes relating to any cancelled project within Dubai on both interim and substantive levels. This excludes any projects situated within the Dubai International Financial Centre (DIFC) which would naturally fall under the jurisdiction of the DIFC Courts.
Today’s topic is specific to situations where you have a sale & purchase agreement that includes an arbitration clause.
So the question that first comes up is whether the Judicial Committee’s jurisdiction affects the standing of the arbitration clause ?
The answer lies in Article (8) of Decree 33 of 2020. This provision expressly states that the Judicial Committee will also assume jurisdiction over applications to ratify or nullify arbitration awards issued in relation cancelled projects. Therefore it can be inferred that the legislation does not intend to affect the standing of arbitration clauses.
As a matter of practice the Judicial Committee operates under a module akin to a liquidation process. This involves gathering all the assets that belong to the project such as any funds left in the escrow account, the project’s land and any other materials to create a pool of funds to be available for distribution to the creditors of the project. These will include the buyers, contractors and service providers. The project’s land (and any structures on it) will be sold by public auction through Emirates Auctions. A successful sale and liquidation of the assets will result in the committee issuing a ruling under which all previous sale & purchase agreements will be declared terminated. This is a logical step to ensure that the purchaser at auction is able to enjoy unencumbered ownership of the project’s land. The new developer would then be able to re-launch the project or repurpose the land as desired.
An issue that often comes up is that buyers might have other claims against the developer in addition to restitution. These may include claims for delay interest, loss of opportunity or rental income. In circumstances where the Judicial Committee has already terminated the sale & purchase agreement buyers wonder whether it would still be possible for them to go to arbitration to seek these claims ?
The answer is .. you guessed it .. it depends !
Primarily, one must first consider whether the termination ruling itself renders the arbitration clause to become non-existent. There can be multiple views on this. I am of the view that it does not due to the well established legal principles concerning the independence of arbitration clauses from their underlying contractual instruments. I am also aware of a few instances where tribunals appointed under the Rules of the Dubai International Arbitration Centre (DIAC) having adopted this view.
So in principle it would not be impossible to cross the jurisdictional bridge to commence your arbitration against the developer. The next step would be to persuade the appointed tribunal to rule in favour on the merits of the claim. Assuming that you do manage to do so the most important factor will be whether the award will be enforceable through the Judicial Committee.
Whilst there is no publicly available line precedents from the Judicial Committee on the topic, there are a couple of practical considerations to be noted. Generally speaking, to give your arbitration award the best chances of survival, you must first ensure that it does not contain any determinations that contradict any rulings previously issued by the Judicial Committee. This will certainly be a point that your opposing party will pick on to try to nullify the award or refuse its enforcement. So for example, if the Judicial Committee ruled to terminate a sale & purchase agreement then your relief sought in arbitration must steer clear of this territory.
Another important aspect to note is that your arbitration award must not include determinations that contradict the overall policy outcomes intended by Decree 33 of 2020. This includes the general concept that project’s land is released back into the market for a new developer/owner to take on unencumbered by previous obligations. Therefore if your arbitration award seeks to, for example, order the new developer to give the buyer a similar unit in a new project launched on the land then it would be less likely for such award to be ratified and enforced by the Judicial Committee.
It is therefore a fine line to walk and buyers must chose their strategy very carefully in order to avoid wasting time and cost on a teethless arbitration award. A fine line that can only by walked by those who practice with strategy at core !
Speak soon. Stay Tuned !