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Investors vs. developers

September 2009
Property market reeling from lack of trust and a rush of litigation
Property disputes between real estate developers and investors in the United Arab Emirates have increased since the financial crisis crippled the country's property market. Dubai's property court has already recorded 833 dispute cases in the first six months of this year.

Analysts told Executive they believe numerous cases have not reached the courts yet, and with the continuing recession, the number is likely to increase in the coming months.

Little or no confidence
The rise in the number of disputes stems mainly from Dubai's property values decreasing and the sudden lack of credit and investors, which caused many projects to be put on hold or canceled. As a result, investors' confidence in the market plunged and they started questioning if the projects would actually be delivered.

Jim Delkousis, partner and the head of mitigation and arbitration at the law firm DLA Piper , said these disputes are a catch 22: Investors claim that developments are not being built quickly enough and thus withhold further payments. On the other hand, developers say they will have to stop building due to investors' payment defaults.

Nick Clayson, real estate partner at the international legal practice firm Norton Rose agrees, adding that there may be other parties involved who could slow the progress of construction and make the issue even more complicated.

"Some of the reasons why the properties are not being finished are because of disputes between building contractors and developers," he said.

Investor confidence is also lower when dealing with developers who are delivering their first project, as they have no track record and are more likely to fail.

"Now that times are more difficult, a number of purchasers and investors are asking themselves if the developers are capable of completing their developments as they have little or no history to back them," said Delkousis. Still, to know who to blame, each case has to be considered separately.

Investor groups
As investors started to worry about the completion of projects, they formed investor groups, putting themselves in a stronger position against developers. Clayson said that even though they can take no legal action as a group, they can discuss the issue and agree on taking the same steps.

One example is the 100 investors who own more than 200 apartments in the Abu Dhabi Tameer Towers that formed an investor group because they were concerned about the progress of the $1.64 billion project.

"Three CEOs in 15 months, cancelation of contracts, sacking of over half of its staff and no progress on site initiated our concern," said one of the Tameer investors who didn't want to be named because of the legal proceedings.

Since the group was formed, the 100 individuals stopped making payments, explains the investor. He adds that they do not wish to discredit Tameer in any way, but have put forward a series of questions that they would like to see answered.

"We put these questions through 'The National' (newspaper) but they never got answered -- Tameer wishes to deal individually and not with a group," he said.

Tameer was unavailable to comment about the issue. Frederico Tauber, the company's president, told Arabian Business in May that he would be glad to talk with concerned investors, but the company will not be able to return the money invested. He also said that some investors thought the project was canceled, which he said was a "misunderstanding." In July, Tauber also told Arabian Business they had approached investors trying to understand their concerns, but some were reluctant to come forward.

The Tameer investor said the company did not promise the group anything.

"They did say that they would work with all individuals to solve their payment issues and concerns -- [a] divide and conquer strategy we feel, [as] individuals have less power compared to a collective group," the investor said.

He also added that work on the site at the Tameer Towers has been progressing since August, but not to the extent that was promised.

"Our way forward -- well we are still evaluating this as a group -- we have some good leads through some of the group's members which we are looking into," the investor said.

Lack of transparency
The recession is the main reason behind these disputes, but certainly not the only one. Another important factor that is negatively effecting the market is the lack of transparency between investors and developers.

"The communication is not as good as it should be, investors do not always know what is happening and they are not being kept fully informed by the developers," said Delkousis.

The blame does not fall only on developers, since some companies might be very transparent and have offered solutions, given the current market situation. Some investors might also be "closing their minds to discussing the issue of delays, payments and things like that with developers," said Clayson.

Property court
The Dubai Property Court started functioning in September 2008. Delkousis draws a paralell between the courts and the issue of transparency, saying that investors are not being able to derive any guidance for their own case because most of the cases are private, confidential and run in Arabic.

It is expected that the number of property disputes will increase further, since some investors and developers are waiting to see what the next step of the other party will be. On the other hand, some cases might not even reach court. Clayson says that it would be much better for everyone to negotiate rather than go through the demanding process. Some developers might not even continue pursuing end-users who surely have no money left.

"It can be very time consuming and costly. They might be happy enough to accept that they will not get their money... [and] walk away," said Clayson.

What about the laws?
One of the most important laws that is supposed to back investors is the escrow law, which came into effect on June 28, 2007. It applies to developers selling units off-plan and stipulates that payments by investors should be put into a special escrow account, which will be used solely for the designated project.

Delkousis said that having an escrow account is better for the purchaser, but it doesn't make disputes easier to solve. "Investors and developers are fighting to see who is entitled to the money in the escrow [which] will depend on many things, including which party breached the contract," he said.

Clayson said that a problem with the escrow law is that developers have been able to use the payments to pay for the land, thus leaving no money for construction and for refund if the project is canceled.

"Going forward, the escrow law now does not allow land payments to be made, that is my understanding from having spoken to the land department," said Clayson. He added that the law should be taken one step further, and not used until the project is completed. Therefore in the case of any dispute, investors will be able to take their money back.

Going forward
The more investors hear about projects not being delivered, the more they are nervous about their money, and the more disputes arise. So far, the market has not begun to settle down.
"I think it is safe to say that the [number of] cases is still increasing," said Delkousis.

Clayson said investors and developers should understand that they are entering into a long-term deal, so due-diligence is necessary to ensure both parties can deliver. From the regulatory point of view, he said that the way for the market to recover is first to have a consistent legal regime.

"Investors should be able to make their investment decisions knowing that the law is certain and will be applied fairly and consistently. That's what the aim should be so that the market will recover," he said.

By Nada Nohra

© Executive 2009