A change to property law aimed at shoring up developers could backfire, warns a Dubai consultant and fund manager

On 10 November, Dubai's government amended the law in a way that is alarming many. Now, anybody terminating a contract to buy a property in Dubai could lose 30% of its price - it sounds scary on the face of it, but a closer look at the implications is even more worrying.

Let's look first at the law that has been amended. It is law 13 of 2008 for “Regulating the Interim Real Estate Registry in the Emirate of Dubai”, which was issued on 14 August.

This law's main aim was to regulate the massive off-plan real estate activities including selling, marketing, registering, and defaulting cases between developers, buyers and brokers.

The law aimed to create further consumer comfort and protection within the Dubai property market by introducing a mandatory system of pre-registration for off-plan sales contracts for real estate units at the government's Land Department.

Article 11.2 of the law is the bit to look out for. It says: "1 - In case the Buyer violates any of the terms and conditions of the real estate unit sale agreement entered into with the Developer, the latter should notify the Department of the same. Then the Department shall give the Buyer, whether in his presence, by registered mail or by e-mail, a deadline of (30) days to fulfil his contractual obligations.

“2 - In case the deadline indicated in Paragraph (1) hereof expires without fulfilment by the Buyer of his contractual obligations, the Developer may revoke the agreement and return the amounts received from the Buyer after deducting maximum 30 per cent of the amounts paid by him.”

Of course, this law was issued before the world financial crisis kicked in September 2008.

What's changed since September?

Every year. Dubai experiences a regular summer slowdown (from July to September) as most investors and locals flee the 50ºC-plus temperatures, and this year it was followed by the month of Ramadan (the fasting month for Muslims) which ended on 30 September and overlapped with the world financial crisis.

Here in Dubai, people weren't sure what to make of the situation. Was it the summer? Was it Ramadan? Was it the global financial crisis?

Most were waiting for Dubai Cityscape (the annual real estate exhibition) and expecting the event to revive the market. But Cityscape (held on 6-9 October) did not go to plan. Very few off-plan properties were sold and big brokerage firms did little business.

With the deepening of the world crisis, Dubai's financial markets were hit hard - the index was 5,000 in June and plummeted to 1,800 in November. Financing became scarce as some mortgage companies stopped lending and others introduced new, tighter lending policies.

The market became bearish - sentiments were totally negative and people started to panic. As a result, many wanted to exit the market and so distress sales started happening everywhere. And this is where article 11.2 comes in. As it stood, it allowed investors to flee the market relatively easily.

The amendment

It seems that Dubai's Land Department realised that swathes of investors would use this law to exit the market, so it stepped in. It amended article 11 to the following: “in case the contract is cancelled, the developer may retain 30 per cent of the contract's value, and the rule of (30 per cent-70 per cent of the money paid) shall be applied on amounts exceeding 30 per cent”. Instead of “return the amounts received from the Buyer after deducting maximum 30 per cent of the amounts paid by him”.

And note, generally the contract value is much bigger than the amounts paid.

I think that the Land Department amended the law for these reasons:

  • Dubai's government is the main developer, as it controls Nakheel, Emaar, and Dubai Properties. Withdrawing deposits would affect these huge developers' positions.
  • Private developers will be damaged by deposit withdrawals; many might even collapse.
  • Properties returned to developers will have market price below their original selling price, so developers will have a huge stock to resell at depreciated prices.
  • Dubai cannot afford huge cash withdrawals from its banks (which already have liquidity problems).


The amendment is a major blow for investors because it gives developers the right to keep their deposits in cases where they default on further payments. With absolutely no off-plan sales, no chance of financing, and developers dying for cash, many buyers' only option was to sell their properties at below the original price in an effort to salvage whatever they could from their investments. But even trying to sell at 3% or 5% below the original price - and even 10% below - isn't working, because there are simply no buyers.

For example, a huge scheme called Badrah, developed by Nakheel, was selling at a premium of between 10% and 20%. Now it is easy to find tens of units offered for as little as 0% or less.

Is this amendment legally valid?

A top Dubai lawyer has attacked the amendment. Dr Habib Mulla, managing partner of law firm Habib Al Mulla & Co, published the following criticism in a local newspaper: .

He said: “This legislation was issued in order to organise Dubai's real estate legal regime, but has instead opened the door to disparate circulars designed to clarify, modify or amend existing legislation, thereby exacerbating the confusion and deepening the chaos.”

He added: “'[I]n case the contract is cancelled, the developer may retain 30 per cent of the contract's value, and the rule of (30 per cent-70 per cent of the money paid) shall be applied on amounts exceeding 30 per cent'. Article 11 is clear when it states that if the buyer does not fulfil its obligation under the agreement, then the developer has the right to cancel the agreement and 'return the amounts received from the Buyer after deducting maximum 30 per cent of the amounts paid by him'.”

He concluded that the amendment was to the “great advantage” of developers and at the expense of investors. It is a short-sighted move, though, because its ultimate effect will be to turn investors off the market, which will eventually damage everybody in Dubai, from developers to foreign contractors and consultants. Mulla's article also called the amendment “illegal”.

The Land Department has made some attempt to prevent the havoc this amendment threatens to cause. Marwan Bin Ghalita, the chief executive of one of the Land Department's bodies, the Real Estate Regulatory Authority, has warned developers that they do not have the right to ask for payments for projects not already started. The problem is that this warning was not a written decision or administrative circular. It was issued only in an interview with a newspaper. So we will have to wait and see if it will have any real impact on Dubai's already collapsed market.