Real guarantees? Escrow Account for Real Estate
By Alessandro Console
The Dubai Government Enacted Law № 8 of 2007, “Escrow Accounts of Real Estate Development”
What is the novelty of the Law?
The Law introduced a new “guarantee” instrument for buyers of properties that are not yet built or are under construction (so-called off-plan units). According to the Law’s purposes, an off-plan unit refers to a divided part of a real estate project under construction.
Legal Scheme for Buyer Protection
The Law provides a specific legal framework to protect the buyer who pays deposits to the developer:
• Payments must be deposited in a specific bank account (escrow account) managed by a bank or another third party separate from the developer.
• The escrow account is managed in accordance with predefined conditions and terms approved by a government entity, the Dubai Land Department (DLD), which also monitors and identifies any violations of the regulations governing the establishment and operation of the escrow account.
In other words, the escrow account is a deposit of funds with an independent third party (escrow agent). This entity receives specific instructions on how and when the funds should be released. The escrow is therefore a legal agreement that allows the parties to fulfill their respective contractual obligations without disputes. The escrow agent holds the funds in the escrow account and releases them to the beneficiary once certain future events occur or specific contractual obligations are fulfilled.
It should be noted that the escrow account is a standard mechanism already used for years in many countries. For example, in the USA, the buyer of real estate entrusts the purchase price to a lawyer who holds it in a special “trust account.” The sum is then transferred to the seller once a certificate demonstrating the completion of the property and the transfer of ownership to the buyer is issued.
To Whom Does the Law Apply?
In accordance with Article 3, the escrow account Law applies only to developers who sell off-plan units and receive payments from buyers before the completion of the project.
Main Purpose of the Law
The Law is part of the Dubai government’s plan to attract an increasing number of foreign buyers of real estate units. Before the Law was enacted, some developers might halt the construction process, causing significant delays and thus substantial damage to buyers.
Additionally, previously, buyers risked that foreign developers would sell the units and leave the country without completing the project.
The Law also aims to resolve these situations and thereby increase confidence in Dubai’s real estate sector.
Rules for Advertising the Sale of Off-Plan Units
As established in Article 5 of the Law, developers cannot promote or advertise (even by participating in fairs) the sale of off-plan units unless they are authorized in writing by the DLD.
Requirements for Selling Off-Plan Units
All developers intending to sell off-plan units must be registered with the DLD. Additionally, they must obtain specific approval from the DLD for each real estate project. To obtain such approval, the developer must submit the following documents to the DLD:
• Trade license
• Certificate from the Dubai Chamber of Commerce and Industry
• Title deed of the plot where the building will be constructed
• Copy of the agreement between the master developer and the developer
• Technical drawings and plans approved by the relevant authorities and the master developer
• A financial statement approved by an authorized auditor that includes the project’s costs and revenues
• Commitment signed by the master developer/developer to start work once all authorizations are received
• Copy of the sales contract model that will be used between the developer and the individual unit buyers
Procedure for Creating an Escrow Account
For each real estate project, the developer must open a specific bank account with one of the accredited banks in the Emirates. This account must be used only for that specific project. The escrow account is created based on a written agreement between the bank (escrow agent) and the developer, a copy of which must be deposited with the DLD. This agreement governs the operation of the account and specifies the rights and obligations of the parties.
It should be noted that, according to Article 9 of the Law, the developer’s creditors cannot seize any amount present in the escrow account.
Operation of the Escrow Account
A manager of the account, usually a bank official, is provided to oversee the operation of the account and release the funds to the developer according to the contractual conditions.
Before each payment to the developer, the manager requires a certificate issued by an engineer certifying that a certain stage of construction has been reached and that the next stage is underway. Once this certificate is received, the manager will inform the DLD of their intention to release the payment.
According to Article 11 of the Law, the bank must regularly provide the DLD with account statements indicating the amounts credited and debited from the escrow account.
Additionally, the DLD can request the bank to provide documents deemed necessary for evaluating the account’s operation at any time. The DLD has the right to appoint a third party to verify and audit these documents.
According to Article 12 of the Law, the buyer of off-plan units always has the right to examine the bank-prepared account statements.
Additional Guarantees for the Buyer
Article 14 of the Law states that upon project completion, the bank must withhold 5% of the account value for one year to cover any construction defects (plumbing, electrical, etc.).
In case the developer becomes unable to complete the construction, the Dubai Land Department intervenes, consults the escrow agent, and can decide to either have other developers complete the project or refund the amounts already paid to the buyers.
Sanctions for Violations
Fines of up to AED 100,000 and imprisonment are provided for false statements or for operating without being registered with the DLD. Additionally, a developer who delays starting the work for more than 6 months after obtaining DLD approval without legitimate reasons will be removed from the register of developers.
Currently, licenses to build and sell properties are granted by the DLD only to UAE citizens or GCC countries. Thus, foreign investors who own a plot of land must partner with a local company to obtain a license and the right to build on the land, which constitutes a significant deterrent to the entry of small-scale developers into the market.
Furthermore, although Article 17 of the Law indicates the deadline for starting the work, there are no rules to prevent delays in project completion, which could cause significant damage to buyers. It is therefore crucial to buy from developers with proven experience.
In conclusion, the Escrow Account Law is a decisive step forward in achieving the goal of increasing investor confidence in Dubai’s real estate market, as buyers are now protected against any potential misuse of funds by developers before the delivery of real estate units.