Freehold title does not allow the same freedom as that of a free zone

Across Dubai the property market is beginning to pick up and many investors are looking at opportunities across the emirates. However, many investors get caught out by the differences between 'freehold' and 'free zone'

Buildings are reflected in a window advertising property at a real estate firm in Dubai. Amy Leang / The National

Across Dubai the property market is beginning to pick up and many investors are looking at opportunities across the Emirates.

However, many investors are caught out by the differences between "freehold" and "free zone" properties and care must be taken to fully understand the legal differences before entering into any type of agreement as the consequences can make or break the development.

Although freeholds and free zones relate to a property right in the first case and to a type of business in the second, the similarity and common misuse of the phrases quite often creates misunderstandings. From a legal perspective the differences are vast and a clear understanding of each area is essential before signing on the dotted line.

From a foreign investment perspective, properties referred to as freehold in Dubai are those located in "designated areas" in which non-nationals can own an absolute interest in land.

Freehold areas were established by Law No 7 of 2006 Concerning the Land Registration in the Emirate of Dubai. Article 4 of the law gave non-UAE nationals the right to acquire real rights in certain areas of Dubai and to have their rights registered with the Dubai Land Department (DLD).

Registration at the DLD results in the issuing of a title certificate, which is considered full and legal proof of title. In other words, once a property is registered at the DLD, the property will be in the name of the owner for life and in theory should be transferred to his/her estate upon his death.

A freehold right gives its owner the right to dispose of such right to a third party (sell, lease or mortgage) at his discretion but such principle is subject to some restrictions. There are 47 freehold areas in Dubai. When buying a property it is very important, as a non-UAE national, to be aware of the fact that foreign ownership only being permitted in those specific designated areas in Dubai. It is also essential to instruct a property lawyer to conduct thorough due diligence.

Another important aspect of the regulatory framework in Dubai an investor needs to be aware of is the entity under which he can register his property. Law No 7 states that a non-UAE national, regardless of whether he is personal or corporate entity, can own a property in designated areas of Dubai. However, the DLD will only register property in the name of a foreign company if such company is a Jebel Ali Offshore entity and will no longer accept applications from other foreign entities such as a British Virgin Islands or Cayman Island company.

Following the acquisition, a non-UAE national is not automatically entitled to operate a business from such property despite its location in a freehold area. The reasons may be that the property is located in a residential area and therefore a company may not operate from this area, or even if the property is in a commercial area, an investor would need a UAE national partner to operate the business.

The most common way of doing business in Dubai is through limited-liability companies in which a foreign investor is entitled to hold a maximum of 49 per cent of the shares with a UAE national holding the remaining 51 per cent. To encourage foreign investments into Dubai, the Government of Dubai passed several laws to allow for businesses located in a free zone to be 100 per cent owned by non-UAE nationals.

A free zone is a specific area in Dubai, where certain laws or restrictions on carrying out business activities and restrictions on establishment of 100 per cent foreign-owned companies do not apply. Free zones are defined under the Dubai Law Number 4 of 2001 Concerning Freezone.

The Government of Dubai has created a free zone for many sectors - Dubai Internet City is a free zone for internet companies and Dubai Media City is for media companies. Other examples include Dubai Academic City, Dubai Knowledge Village, Dubai Maritime City and Dubai International Financial Centre. But these free zones are not strictly restricted to the sectors they target and cater for. Each free zone offers varying facilities and investors should take this into account when deciding where to locate.

The most attractive factor when deciding whether to establish a free-zone company is that the investor can own 100 per cent of its business without the need for having a local sponsor. However, it is a general rule of free zones that the companies incorporated in them can only do business within the free zone itself or outside of the UAE.

Andre Saade is a senior legal consultant with DLA Piper Middle East

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