Deferred sale and purchase agreements in Dubai: Issues to consider
Dubai’s rental growth is the highest on record with average rents in the residential sector having grown by 28.5% in 12 months to January 2023.1 As a result, many tenants are looking to buy their own home and developers are offering flexible payment plans to attract prospective purchasers to purchase on a “deferred sale” basis.
A deferred sale arrangement is a transaction structure where a developer agrees to hand over occupation of completed units to purchasers with purchase price installments outstanding, to be paid to the developer in accordance with an agreed payment schedule.
Registration of a “deferred sale” sale and purchase agreement (SPA) with the Dubai Land Department (DLD) records the purchaser's entitlement to receive absolute legal title following payment of the final instalment of the purchase price. It also restricts both the buyer and developer from dealing with their respective interests in the property without the consent of the other party.
If a termination event arises in respect of a deferred sale transaction for a completed unit (eg the purchaser fails to pay the balance of the purchase price when due), the DLD would, in the absence of a consensual cancellation, require an order from the Dubai Court to cancel the deferred sale registration and remove the restriction against the developer’s title.
An opportunity for developers and purchasers
Deferred sales allow developers to attract purchasers who may otherwise not have the up-front capital to pay the whole purchase price for a completed unit at the outset or under a typical off-plan sales payment plan where up to 70% of the purchase price may be payable on completion. Mortgage rules in the UAE prohibit lenders from financing more than 50% of the purchase price for off-plan sales, which can be a significant constraint for purchasers.2 The deferred sales route offers a solution to this potential funding gap for purchasers and widens the potential pool of purchasers for developers. However, the structure also brings with it key considerations.
Key considerations for developers
From the developer’s perspective, by handing possession of the property before the purchaser completes its payment obligations under the SPA, the developer takes on the risk that the purchaser may cause damage to the property or carry out unauthorized alterations. The developer may be able to insure against some of this risk, but this becomes an issue where the purchaser is in default of its payment obligations and the developer is forced to terminate the SPA. To address this, a developer will usually include provisions in the SPA requiring the purchaser to make good any damage and reinstate the property to its original condition at the handover date. However, where a purchaser in default fails to fulfil their reinstatement obligations, the developer’s remedies may be limited to a claim in damages. The developer will need to satisfy itself that the percentage of the purchase price paid before handover is sufficient to cover the developer's potential remedial costs while being mindful that the court has discretion to vary the damages amount to reflect the developer's actual loss.
If the purchaser defaults on a deferred sale arrangement, the SPA will usually contain provisions providing that the developer can immediately terminate the SPA without the need for a court order and retain any part of the purchase price paid by the purchaser as compensation. Notwithstanding the provisions contained in the SPA, the DLD will require an order from the Dubai court to cancel the deferred sale SPA and remove the restriction against the developer’s title. In this scenario, it’s possible that the court would require the developer to reimburse the purchaser for purchase price instalments paid by the purchaser. In the absence of purchaser consent, the developer will only be able to lawfully retake possession of and deal with its interest over the property with an order from the Dubai court. Developers should note that proceedings through the Dubai courts can become protracted because of parties' automatic rights of appeal up to the Court of Cassation. This could become a significant issue for a developer who will be restricted from dealing with the property until a cancellation order has been issued.
Key considerations for purchasers
In most cases the SPA will include covenants prohibiting the purchaser from dealing with the property before full payment of the purchase price. This may also include a prohibition on granting a lease or other occupation rights (eg short-stay agreements) over the property to third parties to generate a rental income from the property. The affordability of the continuing payment obligations therefore needs careful consideration.
Another concern for many purchasers who consider a deferred sale structure for an off-plan development is the potential for delays to construction milestones and handover dates. If a development is relying on deferred sales for the bulk of its sales, this could put the development under greater cash flow pressures. Additional costs could arise during construction that can’t be met by purchase price instalments which would otherwise have been payable on satisfaction of construction milestones during the development period. Where a developer becomes insolvent and the project is incomplete, the development may be referred to the Cancellation Committee.3 Purchasers should be aware that whilst the off-plan development is under cancellation proceedings, purchasers won’t be able to take any action against the developer before the Dubai courts until the Cancellation Committee has issued its decision. Where the Cancellation Committee decides to cancel the off-plan project, the Cancellation Committee may auction the development to other developers or liquidate the project.
Key consideration for mortgagees
Under a typical off-plan sales SPA registered on the interim title register (Oqood), the purchaser may mortgage or transfer its interim title to the under-construction unit, subject to any contractual restrictions on dealings imposed by the developer under the SPA.4 In the case of a deferred sale following construction completion, any mortgage registered against the purchaser’s interim title would be carried across to the deferred sale certificate for the completed unit which would be issued in the purchaser’s name on a restricted basis pending payment of the final instalment of the purchase price.
In the case of a deferred sale structure where the developer retains title to the property until the balance of the purchase price has been paid, a lender may require the developer to be a party to any mortgage arrangement so the lender can enforce its security against both the developer and the purchaser in the event of a default. In this case, the developer and the purchaser would likely be held jointly and severally liable to perform the borrower's obligations under the loan agreement and the mortgage won’t be discharged until the debt had been repaid.
In the event of a continuing default, a lender will most likely seek to enforce its mortgage. Extra-judicial enforcement of a lender's powers under a mortgage is not recognized and enforcement of the mortgage would require a judicial process and would depend on the courts issuing an order for the public auction of the property.5
1 CBRE: Dubai Residential Real Estate Market Snapshot February 2023.
2 Article 3(2) of Regulations Regarding Mortgage Loans issued 28 October 2013 by the Central Bank of the UAE
3 Regulated by Decree No. (33) of 2020 in respect of the special judicial committee for uncompleted and cancelled real estate projects in the Emirate of Dubai.
4 Article 6, Dubai Law No. 13/2008 On the Interim Real-Estate Register in the Emirate of Dubai.
5 Enforcement of the mortgage would be controlled by Dubai Mortgage Law No. 14 of 2008 (as amended) and the Dubai courts