Real property development in the United Arab Emirates (“UAE”) is often undertaken on a joint venture basis. The reasons are not dissimilar to other jurisdictions, and include the sharing of risk, specific development expertise, ownership restrictions of the real property and the increase in public private partnerships.
It is vital that the joint development agreement (“JDA”) between the development partners is transaction specific and in line with the applicable law of the jurisdiction in which it is to be carried out.
In the UAE the key requirements for the property development structure include the following:
• The Property must be registered in the name of the Property Owner;
• The Property may not be mortgaged (and if mortgaged for the development of the project the proceeds of the mortgage must be paid into the escrow account established for such development project);
• The Developer may in certain circumstances be required to be 100% wholly owned by UAE national/s;
• The Developer must be licensed to develop real estate in the UAE;
• Additional legislated requirements must be complied with (as set out hereinafter) especially when dealing with a project intended for off-pan sale.
The JDA is normally a comprehensive document or suite of documents detailing the structure and elements of the project development. We set out below the key considerations in drafting a JDA for execution in the UAE.
Like all agreements it is essential to set out the identity of the parties accurately so as to ensure that any enforcement of the contractual terms is effective. The separate legal personality of corporate entities is strictly enforced in the UAE and requires that the correct parties conclude the agreement.
In consideration for their financial and technical commitments, Developers (unlike contractors) require that they share in the overall profit of the development project. Developers also wish to protect their investment and capital contributions by having control of the final sales, both in terms of the sales prices and the processes.
Developers also require the right to sell and register any off-plan sale units and to collect the proceeds of such sales, through the project escrow account. Both parties should agree to the appointment of the Developer as an agent of the Property Owner for purposes of the development of the project.
The Developer should have the necessary authority to make any reasonable and necessary changes to the building project during the term of the JDA without reverting to the Property Owner.
The Property Owner’s Key Obligations are to:
A property owner must provide all the necessary documentation on the legal status of the property including zoning details and permitted use.They must also undertake to
sign all necessary documentation to facilitate the utilisation and investment in the property and grant the developer the right to represent the Land Owner in all matters relating to the property and the construction of buildings on it. Finally they must agree not to interfere with the developer’s development of the project.
Developer’s Key Obligations are to:
A developer must comply with all local laws, open a dedicated escrow account as per regulations for off-plan projects and adhere to the construction schedule. They must also obtain the necessary approvals from the master developer, the Municipality and relevant Land Department for the project and carry out the construction on the property within a certain timescale.
Finally they must adhere to the construction requirements before the sale of off-plan units, manage the budget, payments and amounts received from purchasers and register all off-plan sales contracts on the Land Department’s Interim Property Register.
Project Funding and Budget
Projects are not funded from third party funding (finance) alone and the parties are required to invest and utilize their own resources, especially in the initial phase of the project. The financial institutions will not fund 100% of the required project budget as the regulations require 20 to 25% unleveraged equity in a project.
In respect of off-plan projects the funds from the sales and financing are held in the project escrow account and released on progress of the project, which is aimed at protecting the interests of the purchasers.
Completion and Termination of JDA
The parties must agree that after obtaining the completion certificate and having registered the units in the land registry, ownership of the property and buildings thereon shall pass to the said individual purchasers of the units (ie in accordance with the individual purchasers’ unit entitlements). Neither party should have the right to terminate the JDA or the project during its term. The JDA will only expire after construction has been completed and the units of the purchasers have been registered in their names in the land registry.
Article was published in Lexis Nexis Middle East Law Alert – Contract Watch