Ask-a-lawyer: What to do when the escrow account is empty

In today's installment, we speak with

Dean Cheesley

, a senior legal consultant in real estate at

DLA Piper Middle East

in Dubai, about how to decide when to sue a developer when the escrow account is empty, and what recourse investors have in getting their money back under Laws no. 8 and 9.

He explains that disgruntled investors' chances are best when the developer has used the money in the escrow account for construction, and when it owns the land and is clear of any payments to the master developer.

Q: I went to the bank and said my developer has no money in the escrow account.  If this is true, what recourse do I have?  Why should I file a lawsuit if the company has no money - wouldn't that be wasting my time and an additional loss of money for me?

A: Before you decide whether or not to commence legal proceedings, you should determine the answer to several important questions which will give you an indication as to whether you should inject further monies into this venture.

First and foremost, you'll need to find out exactly why there is no more money in the escrow account. Have the funds been used for development purposes?  You should be able to obtain this information from the bank that is holding the escrow account, as the law provides for a right for purchasers to demand information from the trust account holder in relation to the disbursement of funds.  However, it may be that the information that is available does not make it clear what the funds were dispersed for, but rather a simple statement that the funds were paid to the relevant developer in accordance with the requirements of the escrow account.  You may have suspicions that the funds have been misappropriated, particularly where it is clear that little or no construction has actually taken place on site.  The difficulty you will have in that event will be tracing the funds particularly if the developer has effectively ceased to trade.  Further, if you are dealing with a relatively new developer to the market with very little or no history of delivering projects in the region, your chances of recovering any funds may well be reduced further.

You will probably be aware by now that most development companies are special purpose vehicles established for the purpose of each particular project. Generally speaking, they hold very few assets other than the development land itself.  You should try to find out whether the developer has paid in full for the land or whether there are still amounts outstanding under their plot sale agreement with the master developer. If it transpires that the master developer is owed monies under their agreement with the developer, your chances of recovery will be low as the master developer will still have legal title to the land which will mean that it will be difficult, if not impossible, to secure any judgment in your favour against that asset.

However, if you are certain that the developer :

(1) has utilised the majority of escrow funds in construction and completed a considerable amount of construction works, and

(2) owns title to the land free and clear of any payments to the master developer or repayment obligations to a secured financier,

this should make it easier for you to enforce any judgment which you may obtain in the Courts against the land, and will also assist in negotiations with RERA should the project ultimately be cancelled.

Q: As the Developer of my property has not started construction after six months, how do I get RERA and the Land Department to act?  I've called them many times, but they don't seem to be following through.   (What are the relevant statutes for this?)

A: I have assumed that you are not in default under the terms of your sale and purchase contract, and that the contract is registered on the interim register.

The relevant Decrees are Law no. 8 of 2007 ("Law no. 8") and Law no. 9 of 2009 ("Law no. 9"). Under Law no. 8, developers must commence construction of their project within six months of the date they receive all necessary approvals for the project. Under Law no. 9, RERA (not the Land Department) is vested with the power to cancel a project, in which case the law provides that the developer must  return all payments to purchasers in full.

As the law currently stands, there are three possible outcomes to your complaint to RERA. The first is that RERA has the power under Law no. 8 to remove the developer from its register of licensed developers for not commencing construction within the relevant timeframe - this of course does not assist you and other investors in getting your money back, so RERA is unlikely to pursue this course of action. Second, RERA can cancel the project under Law no. 9, however it may only do this "based on a report grounded with reasons".  This creates a problem for RERA. This power is extremely broad but there are no clear guidelines and procedures to be followed when deciding whether or not to cancel a project. Any decision to cancel a real estate project will effect many other interested parties such as other investors, the developer, financiers, contractors and consultants and the master developer. Such a decision by RERA will understandably take time and involve a lengthy consultation process. The third outcome may be the most likely for the time being, and that is that RERA will feel that they are prohibited from taking action until the new regulations supporting Law no. 8 and 9 are published. These regulations are due to be published very shortly.

The first action you need to take is to formally register a complaint with RERA which you can do online on their website.  Then once  the necessary regulations are published you can re-approach RERA with other investors in the project and file a formal application for cancellation of the project. At least at that point RERA should have a clear set of guidelines to be followed which will assist them in reaching a decision whether to cancel the project.

Finally, it may be that the developer itself decides to terminate its contracts with purchasers if the project is not to proceed.  In order to do so, they would have to follow the procedures laid down by RERA, and in which case you may receive return of the funds that you have invested.