Financial storm engulfs property

Ludmila Yamalova, a lawyer, is kept busy these days as disputes between developers and buyers are increasing amid the property slowdown.

The original version of Article 11 of the property law by the Dubai Land Department said that if a buyer defaults on a purchase they would be entitled to receive back 70 per cent of what they paid. The law was misstated in an earlier version. We regret the error. DUBAI // Ludmila Yamalova, a partner and lawyer at MAC Davidson and Associates in Dubai, spends many of her waking hours in the hectic headquarters of the Land Department and the Real Estate Regulatory Authority (RERA) just trying to find out what is going on. "I basically live in their offices," Ms Yamalova says. "All of these investors, who are my clients, are in trouble and there is nowhere else to go to find out how it is going to be resolved." With the sudden slowdown in property sales, disputes between developers and buyers are sprouting up across the nation. Lawyers are dealing with everything from fraud cases against developers who have absconded with investors' money to speculators trying to escape purchase deals they had made with the hope of reselling. "We are really in a period akin to a gold rush, with a lot of conflicting interests between developers and purchasers," says Jonathan Davidson, the managing partner at MAC Davidson and Associates. "They are all clamouring to be heard." The authorities, for their part, have been busy introducing laws and regulations to regain control of the sector, leaving lawyers scrambling to keep up. Marwan bin Ghalita, the chief executive of RERA, declined to comment on the situation, but he has said in recent weeks that the authority is pushing forward with plans to help the property industry become more sustainable. These include a reliability ranking system for developers and a requirement that payment plans be linked to construction progress of buildings. "It's not only about making money and building fancy projects," Mr Ghalita said in an interview earlier this month. "It's about adding value to people's life and how the sector contributes to the social development of Dubai." While it is to be expected that a sudden economic downturn will trigger legal disputes, the situation in Dubai is complicated by rapidly emerging interpretations of old laws, an overloaded courts system and new regulations. The result? "Go to RERA" has become the action of choice for law firms across the country. Lawyers interviewed say that their main place for legal information are "sources" in RERA and the Land Department. This has meant much uncertainty for people in need of legal guidance, so much so that Ms Yamalova's first advice to a new client is to settle out of court. The Property Court, set up last year to handle such disputes, has yet to take a big role in these cases. "I always recommend that clients forget going to court," she said. "Developers are starting to open up. Now they are saying 'we can negotiate, we can even look again at the price'." But there are a growing number of people who are either not in the position to negotiate - meaning they do not have enough money to pay for even part of their purchase - or are unwilling to do so because the developer has not progressed far in construction. For these, the best answer lies with the authorities. Several regulations and interpretations have swayed the balance of power back and forth between developers and buyers in what lawyers described as a balancing act necessary in a mature property economy. The most contentious issue has been a reinterpretation of Article 11 of the property law by the Land Department. That law originally said that if a buyer defaults on a purchase they would be entitled to receive back 70 per cent of what they paid. The new interpretation entitles the developer to 30 per cent of the value of the purchase, and 30 per cent of any payments after that. The sudden change meant some buyers risked their entire investment if they walked away. "They issued the circular to prevent the snowballing of purchasers wishing to terminate their unit contracts," says Lisa Dale, the head of the property department at the law firm, Al Tamimi. "It turned Article 11 from pro-purchaser to pro-developer." This was complicated because the interpretation was not a new law, but an emergency step to protect developers from a flood of cancellations, Ms Dale says. There are no indications that the authorities plan to amend the law to include the new guidelines in the immediate future, she adds. Then, in an example of a regulation that protects buyers, RERA announced earlier this month that developers would no longer be able to collect more than 20 per cent of the purchase price from buyers until construction begins. RERA is expected to announce two more regulations to protect investors and prevent inexperienced developers from entering the market. One would require payment plans to be linked to actual progress of the building, which would remedy a situation where a buyer may have paid a significant percentage of the price to the developer when construction has only just begun. The other regulation would require developers to have completed 20 per cent of the building before it can start sales. This would make it difficult for developers to start a project without a source of financing other than sales. These swings back and forth create a difficult legal environment, but lawyers say this year will see a regularising of the system as part of the overall maturing of the sector. Alexis Waller, a partner at the law firm Clyde and Co, says RERA and the Land Department will focus on regulating trust accounts, pre-registration and forfeitures of sale-and-purchase agreements, while the newly formed property court will handle disputes between developers and buyers. "The main challenge facing us in 2009 is how the property market and its main players deal with a slowdown and how quickly investor confidence can be resumed," Ms Waller says. Tom O'Grady, the head of the property group at DLA Piper, says he expects less new regulation this year and more focus on how the laws will work and interact with each other. "Certainly there is an increasing amount of litigation in the market," he says. "There is a lot of concern in the market about existing contractual arrangements ? Adding further regulations won't really help those concerns at this stage. We need to get to a situation where people understand the law that is already in place." Another area where there will be more regularity is the way contracts are drawn up for sales. At the height of the boom, people were buying multimillion-dirham homes with little or no attention to the documents they were signing. "Now that we are looking at these documents, it is difficult to figure out what people agreed to," says John Hermann, a lawyer with Baker Botts in Dubai. "It is difficult because the laws and contracts are sometimes at odds. In some cases, both parties are at fault. What do you do?" For new sales, buyers are likely to be much more cautious. "The terms will be very different," says Nicholas Gee, another partner at MAC Davidson and Associates. "Buyers will be more discerning. There will be more negotiation with the contracts. This will lead to a better set of standard terms that is more balanced between buyers and sellers." [e-mail]