September 01 2009
The real estate market in Dubai has faced frequent changes in legislation in response to an increase in activity and a growing need for regulation. Within a relatively short period the market has witnessed unprecedented growth, followed by a sharp downturn due to the international financial crisis.
The Law Regulating the Interim Real Estate Register in the Emirate of Dubai (13/2008) has had a particularly significant impact on the market. A debate has raged over the penalty that the law imposes for breach of the developer's duty to record off-plan sales contracts concluded before the enforcement of the law under Article 3. Can such contracts be declared void?
Articles 3(1) and (2) state that:
"The Interim Real Estate Register is used to record all disposals of Real Estate Units off-plan. Any sale or other disposal that transfers or restricts title or any ancillary rights shall be void if not recorded in that Register.
Any developer which made a sale or other disposal that transferred or restricted title prior to the coming into force of this Law should approach the Department to get [such sale or disposal] registered in the Real Estate Register or the Interim Real Estate Register, as applicable, within 60 days of the date on which this Law comes into force."
Although a number of issues arising under the law have since been resolved, the question of off-plan sales contracts remains undecided and is even more significant in view of the financial crisis, which began to affect the market in the second half of 2008. Many buyers that had entered into off-plan purchase contracts before the law came into force and were experiencing difficulties with such contracts decided to file civil actions to void the contracts, basing their actions on the developer's failure to register the contracts in the Interim Register within the 60-day period stipulated in Article 3(2). The real estate courts are dealing with a growing number of such cases.
Lower Court Approach
The issue was controversial among real estate judges, but they have since arrived at a unified position: registration in the Interim Register within the given grace period is an issue of public order that can be raised at the court's own initiative. As a result, the lower court will ask the Land Department about a contract's status. If the court finds that the contract was not duly registered, it will declare it null and void and will order the developer to refund the buyer's deposit.
The rationale appears to be that as a matter of statutory interpretation, the general provision of Article 3(1) is clear and specific. However, Article 3(2) provides for the registration of pre-existing contracts within the grace period, as a law may not otherwise apply retrospectively to a pre-existing state of affairs.
Court of Appeal Rulings
However, in recent decisions the Court of Appeals has taken a different view, overruling lower court decisions and declaring pre-existing contracts null and void if the developers failed to record the contracts in the Interim Register within the given grace period.
The Court of Appeal's rationale appears to be that Article 3(2) is independent of Article 3(1) and deals with a particular situation by giving the developer an opportunity to record a pre-existing contract within a given period. However, this period is purely administrative and a breach of this requirement should not lead to the entire contract being declared void, especially since the obligation to record the contract within the grace period lies solely with the developer; thus, the buyer should not be penalized for the developer's failure in this respect.
This approach is supported by the view that if the legislation had been intended to nullify contracts in the event of non-registration within the grace period, it would have made express provision to this effect, as it did in Article 3(1), since a court cannot decide on nullification as a penalty for breach of duty unless the law expressly so provides.
Although Court of Appeal rulings prevail over lower court rulings and are enforceable, they are not final and have no influence on other courts. The courts at both levels have articulated sound, valid arguments; therefore, the issue will remain controversial until a definitive precedent is established by the Supreme Court. No decision at this level is known to have been issued, but in light of the volume of litigation involving this issue, a final decision is expected soon.
Particularly in view of this judicial controversy, parties should guard against making assumptions about their legal position in similar situations, since a petition for voiding off-plan sales contract may be based on many causes of action under various laws, not merely on non-registration of a pre-existing contract by the developer within the required period. The facts of the matter should be examined on a case-by-case basis.
For further information on this topic please contact Ali Al Aidarous at Ali Al Aidarous, International Legal Practice by telephone (+9714 282 8000), fax (+9714 282 8011) or email (email@example.com).
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Ali Al Aidarous