Factors in buying a property

The Abu Dhabi Government has implemented numerous laws and regulations regarding the real estate sector lately. The Emirate of Abu Dhabi has experienced an exponential growth in the past few years. The new real estate law – Number 3 of 2015 Regulating Real Estate Sector in the Emirate of Abu Dhabi – has now been published, and is effective from January 2016. The disputes affecting real property and homeowners will continue to be an important factor for the potential homeowners to throw the towel in. The introduction of a Land Department and a regulatory authority in Abu Dhabi (similar to the Dubai Land Department and Real Estate Regulatory Authority in Dubai) would be a step forward to ceasing this hesitation by the investors. With the implementation of such a dedicated department and machinery set up solely for the purpose of dealing with property registration and impediments would certainly enhance and safeguard the rights of the investors and homeowners at large. Real estate is and has always been, a sector that has stability and high potential for growth. By the establishment of the land department and enactment of the regulatory authority, such stability and potential would be unassailable and resistant up to a level from economic and market variations.

The new property laws in Abu Dhabi mainly aim at securing and enhancing transparency in the transactions of the real estate sector. The new law also mandates that a register shall be maintained to record all the documents and transactions relating to real estate development. The administration of such a register would safeguard the rights of the buyers. The commission of the register would enable the authorities to track all the transactions of real estate units sold off-plan. This would focus and deal with issues such as failure of developers to implement the project and sale purchase contracts. The primary intention of these regulations is to protect the rights of developers and investors. The law also explains the rights and duties of the different people involved in the real estate sector such as the developer, mediator, appraiser etc.

FACTORS TO BE CONSIDERED – WHILE BUYING PROPERTY

Investing in off-plan properties is on the rise in the Emirate of Abu Dhabi. Buying off-plan properties would enable homebuyers to acquire units at an affordable price and it is also a way to get a set of features or a particular location as the choice would be limited once the construction commences.  Therefore, it is easy to conceive that the risk rate involved in purchasing such off-plan properties would eventually be higher than purchasing a unit from a developed project. Due diligence should be conducted about the details of the developer. The construction process and the developer’s ability to complete such process should be taken into account. Before purchasing off-plan properties, the buyer should look into:

• Commercial License: The buyer should make sure that the developer of the off-plan property is an entity that has been registered with the Abu Dhabi Department of Economic Development (DED).
• Purchase Agreement: The buyer should also note the completion date of the project and the compensation that would be awarded in the event of non-completion of the project on such mentioned date.  The new law also addresses escrow law requirements (discussed below)and buyers should ensure that project has an escrow account.
• When you are buying furnished property, make sure that a schedule describing the furniture and fittings of the property are drawn and an appropriate deadline for furnishing has also been decided by the parties.  

Not all places in Abu Dhabi provide expatriates with the option of purchasing freehold properties. Abu Dhabi property laws permit expats to buy properties in specific areas of the Emirate known as ‘Investment Zones’ (eg: Yas Island, Saadiyat Island, Raha Beach etc.). Hence, firstly, it is necessary for the expat buyers to determine whether the property they intend to buy is in one of the investment zones. If the property is not in one of the investment zones, then an expat would not be able to acquire freehold rights. Secondly, the buyers should ensure that the seller has ownership over the property and also has an undisputed right to sell such property as ownership in the title can only transfer from a rightful seller. Thirdly, the buyer should carry out a detailed inspection and verify the size and particulars of the property and make sure that he is not being defrauded or misled in any manner. Buyer should exercise a reasonable degree of caution to determine whether there are any liens or mortgage on the property being acquired. If so, whether such mortgage will effectively be settled prior to transfer of title from seller to buyer. The buyer should also see to the current tenancy of the property as the sale would then be subject to the tenancy rights. The due diligence on part of the buyer is very important in order to avoid any future tribulation.

LEASING RIGHTS

Freehold property implies that the party owns both the structure and the land in perpetuity. This means that the ownership lasts forever and is absolute. The name of such owner would be registered as the ‘landowner’ in the registry. Freehold owners have the right to sell, lease and inherit the property upon the death of the owner whereas, leasehold is when a party takes interest in a property for a period of up to 99 years. Basically, it is buying the right to occupy a property for a long period of time. Upon completion of such period, the property would revert back to the owner of the land. The leaseholder has the option of renewing the contract at the end of the tenure.

The right of Usufruct: Usufruct Rights are defined under Article 1333 of the UAE Civil Code. A tenant can be said to have usufruct rights over a property when the owner of such property has entered into a usufruct agreement with the tenant wherein the tenant is allowed to use the property provided such property remains in its original state/ condition. But fair and reasonable wear and tear of the property would be exempted. A usufruct agreement is generally for a period of 50 years unless mentioned otherwise. A usufruct agreement would be terminated due to the destruction of the leased property or waiver by the usufructuary or purchase of the leased land by the usufructuary or even by a court order.

Right of Musataha: Musataha rights are defined under Article 1353 of the UAE Civil Code. A musataha right is granted to the UAE nationals where the right to build a building or to plant on the land of another is being given for 50 years. The musataha holder, basically, gets a right to exploit and develop such property. A musataha agreement is for a maximum period of 50 years and can be terminated by either of the parties with two years prior notice unless otherwise agreed upon. The musataha agreement would be considered as terminated upon expiry of the musataha period or purchase of the leased property by the musataha holder. Both usufruct and musataha agreement should be registered. In the event of the agreement not being registered, third parties would not be bound by the agreement and would only bind the parties to the contract on a purely contractual basis.

PROJECT GUARANTEE ACCOUNT

The new law mandates the setting up of a ‘project guarantee account’ in an accredited bank. Such an account should be opened by the developers for each project after obtaining approval from the Abu Dhabi Department of Municipal Affairs. The funds paid by the buyers of off-plan properties towards payment for the units in the project would be deposited in the project guarantee account. The project guarantee account cannot be used for any purpose other than for deposits by the buyers and the amounts in this account would be released to the developers only if the property is developing as per the schedule. The set-up of this account will ensure that the property is completed on time without troubling the buyers. Its main purposes are to make sure that the interests of the buyers of off-plan properties are met and to prevent failure of completion of projects by the developers. An escrow account is not the same as a project guarantee account but both have undeniable similarities as they are both created by the developers for protecting the interests of the buyers of off-plan properties.

CONCLUSION

The new law provides much clarity on the provisions in relation to seller, buyer, and even financiers. It is likely that this step would encourage the investors prominently and real estate market seems to be promising in coming years.

STA’s property lawyers in Abu Dhabi will continue to share more insights and updates on Abu Dhabi property laws in the coming issues of Court Uncourt.