Court challenges Land Department’s authority

Court challenges Land Department’s authority

In an important decision for property investors and developers, the Dubai Court of Cassation recently ruled that the Dubai Land Department’s role in relation to property disputes is limited to conciliation efforts, and it cannot give conclusive declarations regarding cancellation of a sale and purchase agreement or the developer’s entitlement to make deductions from the amount paid into escrow following a cancellation.

Once a sale and purchase of off-plan property takes place, Dubai Law No 8 of 2007, the Escrow Law, requires the developer to deposit all payments made by the buyer into an escrow account. The developer is also required to register the sale and purchase agreement with the Dubai Land Department under Dubai Law 13 of 2008.

Since late 2009 the Land Department has issued notices of cancellation for sale and purchase agreements in reliance on Article 11 of Law 13 of 2008, as amended by law 9 of 2009. This law sets out how much of the purchase price that has been paid into escrow may be retained by a developer if a buyer defaults on their payments. The amount is determined on a sliding scale based on the construction progress of the project and ranges from 25% if construction has not commenced due to no fault of the developer, up to 100% if construction is more than 80% complete.

The practice of the Land Department is to serve a notice of default on the buyer stating the reasons for cancellation, usually by reference to a document from the developer. The purchaser then has 30 days to respond stating whether they agree with the notice of default and whether they want to rectify the breach, terminate the contract or reach a settlement with the developer. The Land Department may then schedule a meeting where it acts as a conciliator to assist the parties to reach a settlement. If the buyer does not respond to the notice, or the parties cannot reach a settlement, the Land Department will make a determination regarding cancellation of the contract and the amount that may be retained by the developer based on the progress of the construction.

However a recent decision from the Dubai Court of Cassation has ruled that the cancellation of a sale and purchase agreement and the distribution of funds held in an escrow account following cancellation is ultimately a matter for the Courts to decide.

In the case in question the buyer, an investment company, had purchased an off- plan unit from the developer company. The buyer later discovered that the development had never commenced nor had the necessary building permits been obtained. The Land Department authorised cancellation of the contract but determined that the developer could keep the amounts paid by the buyer in accordance with the law.

The buyer brought a claim against the developer for this amount. The claim was rejected by the Court of First Instance. The buyer appealed to the Court of Appeal but the Court ruled that it could not hear the case because the Land Department had already determined that the contract was cancelled and the developer was entitled to retain the amounts paid to date.

On appeal, the Dubai Court of Cassation overruled the Court of Appeal’s decision. The Court of Cessation acknowledged that the Dubai Land Department was acting within its legal rights regarding the division of amounts contained in the escrow account but ruled that only the Court can decide whether a contract is cancelled and what consequences the cancellation may have on the amounts contained in the escrow account. The decision of the Court has some potentially wide reaching implications for those that have invested or acted as developers in Dubai.

For buyers/investors, those who believe that the Land Department incorrectly cancelled their contract or made a determination on the amount of the purchase price to be retained by the developer may now refer the matter to the Courts.

For developers, those who had relied on the Land Department’s cancellation of a contract and resold the property to an independent third party may find themselves in a difficult position if the original buyer seeks to challenge the cancellation in the Courts.

If you would like to discuss how this decision may affect you please contact Nathan Banks.

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