A law introduced last year to protect the interests of buyers in sale and purchase agreements has a significant grey zone.
Registering off-plan transactions in Dubai
The introduction of Law No 13 of 2008 ("Law 13"), which came into force on August 31 last year, aimed to create among other things a mandatory system of pre-registration for off-plan sales contracts at the Dubai Land Department. The purpose was to give purchasers reassurance that a note of their interest would be recorded at the Land Department and, assuming all obligations under the contract were performed, that title to the property purchased would be transferred to them upon completion.
Law 13 requires developers to register off-plan sale and purchase agreements on an Interim Real Estate Register maintained by the Land Department. In practice, a system known as "Oqood" is used to record such registrations. Law 13 provides that sales or transfers will be void if not recorded on the register. Law 13 also required developers to register sale and purchase agreements entered into prior to Law 13 coming into force, within a time limit of 60 days of the law coming into force.
The provisions of Law 13 caused some confusion in the market. For instance, what would happen if a sale and purchase agreement was registered outside the 60-day time limit? Would it be deemed to be void? The March 2009 decision involving Mizin added to the confusion and caused a flurry of claims by purchasers that contracts were void. What are the possible ramifications for developers who have not registered their transactions in the Oqood system either at all or within the 60-day time period specified in Law 13? Article 3 of Law 13 provides:
1. The Interim Real Estate Register is used to record all disposals of Real Estate Units off plan. Any sale or other disposition that transfers or restricts title or any ancillary rights shall be void if not recorded on that Register. 2. Any developer who made a sale or other disposition that transferred or restricted title prior to the coming into force of this Law should approach the Department to get it registered in the Real Estate Register or the Interim Real Estate Register, as applicable, within 60 days after the date on which this Law came into force.
At first glance, the provisions of Article 3 seem to be relatively clear. Article 3(1) requires transactions to be recorded on the register, failing which they will be void. Article 3(2) states that transactions must be registered within 60 days of the law coming into force. What is not clear, however, is what happens if a transaction is registered after the 60-day period. While Article 3(1) provides that transactions will be void if they are not recorded on the register, it does not set out a time limit for registration.
Looking at the wording of Article 3, the penalty under Article 3(1) for failing to register a transaction (the transaction will be void) is not linked to the time limit for registration in Article 3(2). The Dubai Courts have dealt with this issue in a number of cases this year, starting with the Mizin case. In March, Dubai's Court of First Instance ruled that Mizin, the development arm of investment company Tatweer, should pay back Dh7.4 million (US$2m) to a purchaser who had bought property in one of Mizin's developments. The court declared that the transaction was invalid because Mizin failed to register the purchaser's sale and purchase agreement within 60 days of Law 13 coming into force (although it is not clear whether the sale and purchase agreement was registered at a later date).
At the time of this judgment, many in the real estate sector believed the decision indicated that the Dubai Courts would take a hard-line interpretation of Law 13, opening the door for purchasers to successfully claim their money back if a contract had not been registered. The Court of Appeal released a decision in October upholding the Court of First Instance decision in the Mizin case, further giving support to this view.
More recent decisions in the Court of Appeal, however, indicate that the view may be changing. Since the Mizin decision was handed down, it appears that the Dubai Courts are adopting a more flexible approach to the interpretation of Law 13. Clyde & Co is aware of at least three Court of Appeal judgments where the result differed to that of the Mizin case. In two of these cases, the Court of Appeal has ruled that failing to register a sale and purchase agreement outside the specified 60-day time frame does not result in the nullity of the contract, as Article 3(2) of Law 13 does not explicitly mention this as the penalty.
In one of the cases, the Court of Appeal also stated that the sanction for registering an agreement outside the 60-day time period was provided by Article 13 of Law 13. Article 13 provides that if a developer has breached Law 13, the general manager of the Land Department shall prepare a report and refer it to competent authorities for investigation. A possible explanation for the apparent difference between the decision in the Mizin case and decisions in the later cases is that in the Mizin case, the sale and purchase agreement does not appear to have been registered at all (although this is not entirely clear from the decision).
If that is so, Mizin does not necessarily conflict with the later cases. If a sale and purchase agreement is not registered at all, it will be void under Article 3(1). It appears that this position can be cured, however, if the sale and purchase agreement is registered, even if it is outside the 60-day period set out in Article 3(2) (which appears to be the position adopted in the later cases). It is also the case that the Land Department has allowed various purchasers to apply and register their contracts on the Interim Register in cases where the developer has failed to do so. This may not have been possible at the time of the Mizin case.
While there is still some uncertainty as to the application of the Mizin case, it does appear that the Courts are adopting a more flexible approach in applying the provisions of Law 13 and seem to be moving away from declaring sale agreements void because of non-registration within the 60-day period. This makes practical sense. If a developer has complied with its obligations in all other respects and is proceeding with a development, it would be unfair, in our view, for a purchaser to be relieved of his or her contractual obligations simply because the developer has registered the sale and purchase agreement outside the 60-day time limit.
It is also important to note that the legal system in the UAE is not a precedent-based system and the Courts are not bound by previous decisions. Because of this, it is difficult to draw any specific conclusions from the Mizin case and the recent Court of Appeal cases on the registration issue. However, it does appear from the more recent decisions that the Dubai Courts are adopting a flexible approach to the interpretation of Law 13 and are moving away from declaring sale and purchase agreements void simply because they have been registered outside the 60-day time limit. This approach, in our view, is consistent with the Dubai Courts' desire to strike an appropriate balance between the rights of purchasers who have genuine concerns about the progress of a development and developers rights to hold purchasers to their contractual obligations. Whether this remains the case in an ever-changing market remains to be seen.
Richard Bell is a senior associate in the Dispute Resolution Group and Chloe Drew an associate in the Real Estate Group of Clyde & Co.