Dubai Lagoon project collapse puts spotlight on third party deposit system

UAE law dictates that a developer or agent that does not use an 'escrow' account can be fined or jailed

The remains of the Dubai Lagoon project: the outer structure of only a few buildings and some interior work have been built. Reem Mohammed / The National

Developers who breach the UAE's 'escrow' law can be fined and jailed for failing to deposit investors’ funds into a mandatory third party account.

The land plots, property and escrow accounts of developer Schon Properties were seized by Dubai Land Department last week until Dubai Public Prosecution and Dubai Courts complete legal procedures.

The term escrow refers to an arrangement whereby a third party keeps an amount of money in safekeeping until completion of a contract, in this case an apartment.

It is often used in property sales and involves the buyer depositing the purchase amount with an escrow agent on the understanding that the money is not released to the seller until both parties meet their required legal obligations.

“The involvement of Dubai Public Prosecution suggests that the Dubai Government believes that criminal acts have occurred with respect to Schon Properties,” said Shahram Safai, partner at Afridi and Angell Legal Consultants.

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“These criminal acts are probably primarily related to failure to place purchasers’ funds into escrow accounts as mandated by the escrow account law of 2007.

“Failure to do so carries large fines, but more importantly, imprisonment. Such action by the Public Prosecution and Dubai Courts is likely to take several years to complete, with initial results due in about six to nine months.”

Legal redress is possible for investors who did not deposit into escrow accounts.

This was because it was the developer and/or the real-estate broker are obliged to deposit the money into the escrow account, not the buyer.

“Hence, the investors can sue the developer and the real-­estate brokers involved for their invested monies,” Mr Safai said.

He said there was also protection for people who deposited funds with the developer or broker before the law was introduced.

When the escrow account law was introduced, the Dubai Land Department required accounting to be done by all developers with respect to monies collected, spent and the leftover balance.

“The leftover balance was required to be deposited in an escrow account, even though sales had occurred in 2005, 2006,” Mr Safai said.

The Escrow Accounts for Real Estate Development (Escrow Law) introduced in 2007 was part of legislation to regulate developers and safeguard the funds of purchasers in off-plan projects.

Potential homeowners could pay in instalments in keeping with the phases of construction. The law restricted developers to use funds specifically for the project. However, if an investor knowingly or in collusion with the developer or broker did not deposit the money in escrow in return for a discount on the purchase price, the law could deny the purchaser a return of funds.

The land department’s decision is a pre-emptive step to prevent further loss of investors’ money.

“It is likely that the land department’s steps will include the freezing of all Schon Properties’ related transactions, including registrations of sales, purchases, mortgages and movement of funds into and out of related escrow accounts pending completion of legal steps,” Mr Safai said.