With the market already in a state of extreme turmoil, Dubai's imposition of stiff penalties on loan defaulters could impact heavily on buyer sentiments, those who have already bought and even those who plan to.
Buyers will have to forfeit 30 per cent of the property's contracted value in the case of defaults, the Land Department has confirmed in a new circular. While the ostensible aim is to protect the interests of developers and hurt speculators, it could also end up harming end-users.
“Those buyers who have made installments of 5 or 10 per cent until now and have concerns about whether they can go on would rather forego their rights on this property if they cannot find a buyer,'' says an official with a leading real estate agency. “These days it is extremely difficult to find a buyer. Rather lose the 5 or 10 per cent now than continue to make installments and then be caught in an even more dire financial situation later on.'' If this suggestion does prove right, the market would have to face up to a spate of foreclosures just when it can least afford to.
What about prospective buyers? “It is the rule of thumb that when stiff penalties are brought into play, new buyers will be extremely reluctant to get in, especially when the market situation has turned sour,'' the broker adds.
The Land Department's latest circular incorporating Article (11) is an update on the Law 13 issued in August.
Article (11) notes that ‘In the event that the purchaser defaults on any term of the contract he made with the developer for the sale of the real estate unit, the developer should notify the (Land) Department accordingly and the Department will then give the purchaser 30 days notice to fulfill his contractual obligations, by hand, registered post or e-mail.
‘If at the end of the period referred to in item 1 of this Article the purchaser has not fulfilled his contractual obligations, the developer may cancel the contract and repay the purchaser his money less a deduction that does not exceed 30 per cent of the monies paid by the purchaser'.
The times are certainly tough for a property buyer.
Some surprises: Shahram Safai, partner at law firm Afridi & Angell
“The Land Department's administrative circular of November 10 with respect to Article 11 of Law No. 13 of 2008 contains a few surprises.
“The first is that in the event of breach of contract by the purchaser, the developer may terminate and retain 30 per cent of the purchase price plus 30 per cent of any amount paid in excess.
“Previously Law 13 stated that the developer could only retain 30 per cent of all amounts that had been paid by the purchaser. This is a major change to the amount that may be retained by the developer.
“The second surprise is that the developer does not have to return the remainder amounts after terminating the purchase agreement until he has resold the unit.
This means that the developer can terminate and defer return of the purchaser's fund (less amount retained due to forfeiture) until the unit is sold again - which in this market could mean a long wait for the purchaser.
“The third surprise is a confirmation of the intention of Article 11 (which intention had been misunderstood by many in the market when the law was announced). The developer shall have the right to insist on performance of the purchase agreement by the purchaser even if the purchaser has defaulted (this is a basic principle of contract law) and the developer does not have to terminate.
“The fourth surprise was a statement of the obvious, but one that was necessary to clear up much confusion. The law only applies to purchase agreements entered into on and after the law was issued (which was August 14, 2008). Purchase agreements entered into before such date shall be governed by their terms on such matters.''
Dubai imposes tough penalties on loan defaulters
Stiff penalties on loan defaulters to impact heavily on buyer sentiments