Discussion on Developers Rights of Termination

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Executive Council Resolution No (6) of 2010 also introduced the grounds upon which RERA could take action to cancel a development project and the process to be followed after such cancellation.
Developers Rights of Termination

During the boom years all construction projects were vigorously under development and there was an escalation of off-plan property prices. Law No (13) of 2008 was published with the view of introducing measures to discourage developers from terminating sale contracts in order to re-sell units at a higher price to new investors. Article 11 of Law No (13) of 2008 established a process for a developer to adhere to when terminating an off-plan sale contract in the event of a purchaser’s default of its payment obligations. Once a sale contract was terminated, Article 11 required a developer to refund to the defaulting purchaser all money paid by him after deduction of an amount not exceeding 30 percent of such money.

During the last quarter of 2008 we saw the effects of the world economic downturn on the property market in Dubai resulting in a slowing down or putting on hold of construction activities and disputes arising between financiers, purchasers and developers. The Dubai Government introduced law to the effect that the measure of compensation that a developer could expect would be directly related to his own progress towards completion of the project and fulfillment of the sale contract. Law No. (9) of 2009 amended, amongst other things, Article 11 of Law No. (13) of 2008.

The provisions of Law No. (9) of 2009 were confirmed by Executive Council Resolution No. (6) of 2010, which provides at Article 15 that in the event of breach by the purchaser of any of its obligations in the sale contract, then:

  • The developer shall notify the purchaser to perform its contractual obligations, either by appearing in person before the Land Department or in writing by registered mail or email, provided that in such event the Land Department shall be provided with a copy of such notice.
  • The Land Department shall grant the purchaser a period of 30 days to perform its contractual obligations, starting from the date of the notice given by the developer to the purchaser.
  • Unless the purchaser has performed its contractual obligations within the period of the notice, the developer may:
  1. If the developer has completed at least 80% of the real estate project, the developer may retain all the amounts paid by the purchaser and sell the property by way of public auction to recover the balance amounts payable to the developer or deduct 40% maximum of the purchase price and terminate the sale contract;
  2. If the developer has completed at least 60% of the real estate project, the developer may terminate the contract and retain 40% maximum of the purchase price;
  3. In the event of real estate projects where the construction has not reached 60% the developer may terminate the contract and retain 25% maximum of the purchase price;
  4. If the developer has not commenced the construction of the project for reasons beyond its control, the developer may terminate the contract and retain 30% maximum of the amounts paid by the purchaser to the developer.
  • Where the payments in possession of the developer are less than the respective percentages set out above, the developer may apply to Court to award the developer a judgment in accordance with the above percentages.

The developer is required to refund the balance amounts retained by the developer in accordance with the provisions of Article 15 to the purchaser no later than one year from the date of termination of the contract or within 60 days from the date of selling the property, whichever is the earlier.

Article 16 provides that a developer that has not commenced the construction of the project may not demand to terminate the contract or retain 30% of the payments made by the purchaser unless the developer provides evidence that the developer has performed all its contractual obligations to the purchaser and that the failure to commence the project as agreed is not attributable to the negligence or default on the part of the developer or is attributable to reasons beyond the control of the developer.

Purchasers Rights of Termination

Executive Council Resolution No (6) of 2010 not only confirmed the provisions of Law No (9) of 2009, it went further by also establishing grounds upon which a purchaser could seek termination of a sale contract due to the developer’s breach. In particular, Article 20 provides that a purchaser may apply to a competent court to terminate the contractual relationship between the purchaser and a developer in any of the following events:

  1. If the developer refuses without good reason acceptable to the Land Department to deliver the final sale agreement of the property to the purchaser;
  2. If the developer declines to link the payments to the construction milestones as proposed by RERA;
  3. If the developer materially changes the agreed specifications;
  4. If, upon the handover of the property, it is established that the property is not fit for use due to material construction defects;
  5. Any other events that may require terminating the sale agreement in accordance with general statutory rules.
Cancellation of Projects

Executive Council Resolution No (6) of 2010 also introduced the grounds upon which RERA could take action to cancel a development project and the process to be followed after such cancellation. Article 23 provides that RERA may, under a reasoned technical report, resolve to cancel a development project in any of the following events:

  1. If the developer fails, without good reason, to commence construction, notwithstanding the developer having already obtained all the required approvals from the relevant authorities;
  2. If the developer commits any of the crimes as provided under Article 16 of Law No. 8 of 2007 concerning the escrow accounts for real estate developments in the Emirate of Dubai;
  3. If RERA confirms that the developer has no serious intention to perform the project;
  4. If the plot proposed for construction is withdrawn due to the breach of the Sub-Developer of any of its contractual obligations with the Master Developer;
  5. If the plot is materially affected by planning or re-planning projects of the relevant authorities in the Emirate;
  6. If the developer fails to perform the project due to its gross negligence;
  7. If the developer expresses its intention not to perform the project for reasons satisfactory to RERA;
  8. If the developer declares its bankruptcy; or
  9. Any other reasons as determined by RERA.

The developer may appeal the resolution issued by RERA to cancel the project. RERA shall consider the appeal and issue its resolution. If RERA accepts the appeal, RERA shall determine the conditions and requirements that the developer shall meet in order to annul the resolution canceling the project. However, if RERA rejects the appeal, its resolution therein shall be final, and RERA shall proceed to cancel the project.

In the event of cancellation of a development project, RERA shall in addition to preparing the technical report explaining the reasons for cancellation and notifying the developer of the cancellation resolution, RERA shall also appoint an auditor at the cost of the developer to review the financial position of the project to confirm the amounts deposited into and amounts disposed from the escrow account.

Article 26 provides that if there are insufficient funds in the escrow account to repay purchaser’s the amounts paid by them, the developer shall refund purchasers the amounts payable to them no later than 60 days from the date of the resolution canceling the project, unless RERA determines to extend such period for good reasons.

Article 27 states that “If the developer fails to repay the amounts payable to purchasers within the period set forth in Article 26 of this Resolution, the Agency shall take all the required procedures to secure the rights of the purchasers, including the reference of the issue to the competent judicial authorities.”

In addition to the development of legislation to regulate the Dubai property market, Dubai Government has also developed a comprehensive property dispute resolution forum which deals with all types of property disputes and bounced cheques. In this regard you are referred to our article “Discussion on Dispute Resolution Forums in Dubai” for a more detailed discussion thereof.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For more information about this article, please contact Ashraf El Motei at a.motei@motei.com