Michael Lunjevich is a partner at the law firm Hadef & Partners. As the head of the company's commercial and property practice in Dubai, Mr Lunjevich says there are laws to protect property investors, but it is an expensive process to exercise those rights if legal action is required.
Are there any laws to protect investors in off-plan developments in the UAE?
There are lots of laws. We've got laws that date back to 1985, like the Civil Code, which deals with the basic fundamentals of contracting. Then we've got various other laws that have been enacted. We've got the Dubai Escrow Law, which requires anyone collecting money for off-plan property to put it in an escrow account. Unfortunately, that didn't come in until 2007 and most of the off-plan sales were well under way before then. The horse kind of bolted on that one. But developers were required to bring themselves into compliance with Dubai Law No 8 of 2007 [the Escrow Law]. And then you've got the Pre-registration Law, which required developers to actually register the contracts they'd entered into with the Dubai Land Department. Previously, the developers were operating their own registries. You can imagine it was fraught with danger because you've got the same entity that is collecting the money, recording who they've sold to and controlling that whole database. More recently, you've had this investor protection law rumour, which the jury is still out on.
What rights do investors have if a project is delayed for years?
They can have all the rights in the world and they've probably got 100 per cent certainty on a claim. But the problem is the way the legal system has developed. You have to go to court, you have to get a judgement and then you have to be able to execute. That's not unusual; that's the same sort of procedure you'd follow in any jurisdiction. The difference between this jurisdiction and the jurisdictions that some of these investors are from is that there are three very important things when you are looking at going to a court case. One is, here, you don't get discovery. The second key point is that in a lot of western jurisdictions, you get awarded your costs if you win. Here, you don't get that. The third important consideration is that if you go to court, there is a huge reliance on court experts.
It seems like a long, expensive process to get your money back.
Absolutely - there's no detrimental impact on filing frivolous cases or defending cases you are 100 per cent going to lose. And everyone always appeals. They go from the Court of First Instance to appeal; they go from appeal to the Court of Cassation. You can drag cases out for a very long time if you really want to.
Under what circumstances can an off-plan investor get their money back?
If the development has been cancelled or you go to court and you get a judgement in your favour - a final judgement at the Court of Cassation. In both cases, there should be assets that you can use to get your money. If there's a cancellation, then you are in the pot with all the other buyers proportionally. So, for example, you may have spent Dh100 million [US$27.2m] on the land and it may now be worth Dh30 million. Even if you can sell the land, they'd only get 30 fils in the dirham.
Can the Real Estate Regulatory Agency (Rera) or the Dubai Land Department intervene on behalf of investors?
There is a mediation procedure and there are things that the Land Department or Rera can do. You have to remember that Rera only regulates the developer. So their capacity to regulate anything else outside of developers is limited. Quite often, the developers were quite tricky and they put in arbitration clauses [in contracts] so you have to go to arbitration. That's a whole other ball game because if you have a big claim, you have to pay a percentage of the claim to the arbitrators. The fees can start to rack up pretty quick.
What is force majeure? Has it been broadened here to include more than natural disasters?
It's not that it's been broadened in the law. The law that defines force majeure is in the Civil Code about what is required in a force majeure event. In the contract, the law here through the commercial code also protects the freedom of parties to the contract. So in the contract, you can agree among yourselves to a broader definition of force majeure - or what should have been categorised as a delay event; an event that entitles the developer to delay. But it is not force majeurein the true sense of the word because it is quite literally a "superior force"; an "act of God".
Are there any examples you could give as to why a developer might declare force majeure?
I've seen some pretty broad definitions out there, including entitlements of contract delay, a lack of utilities, a lack of access to the plot from the master developer and delays in getting approvals. There's all sorts of things.
If somebody can't afford legal representation, what can they do?
There are law firms around here who will do contingencies, but only for bigger claims. They normally want a down payment first. And they'll take some risk. The problem is that you pay for what you get. And you still have to pay the court fees, you still have to pay expert fees. So there's lots of little things that start to rack up. There's a whole industry around it.
So these companies are getting away with it?
It is geared towards the person who holds the key. The developer is holding the cash and doesn't want to give it back. They don't have to give it back unless there is a court order. But buyers who have lost their cash can't afford to get a court order and don't like the risk associated with getting it. They may not have the assets at the end of it and so write it off.
Is there any advice you'd give investors in off-plan investments?
If they were looking to buy now, don't do it unless you fully understand the risks you are taking.