Developer needs to file civil claim, obtain court order to terminate contract

A property purchaser whose sale and purchase agreement was terminated for non-payment and the property is re-sold by the developer without a court order, can file a claim to recover the amounts paid, according to a judgment by the Dubai Court of Cassation.

In a report titled ‘Terminating a contract for an off-plan’, law firm Hadef and Partners said the Dubai Court of Cassation found that going through the Article 11 Cancellation Process was not sufficient to give the developer the right to repossess and to sell the unit, and that a developer still needs to file a civil claim and to obtain a court order for the termination of the existing contract.

“The court took the view that the Article 11 Cancellation Process are simply a set of administrative guidelines/recommendations and they do not override the general requirement that a court should determine the matter and decide whether or not the contract is to be terminated due to the purchaser’s default,” Walid Azzam and Karim Mahmoud wrote in the report.

This general requirement is found in Article 267 of the Federal Law 5 of 1985 (‘the Civil Code’), which provides that a contract can only be terminated “by mutual consent [of the parties], court order, or under a provision of the law”, they said.

The Court of Cassation was reported to have said that if a developer re-sold a repossessed unit; the purchaser (even if he was in default) may be able to recover the payment(s) he made.

“Given the recent ruling, the developer’s actions in repossessing the unit and reselling it constitutes a unilateral termination of the contract, so making the developer liable to repay any amounts received from the defaulting purchaser,” the lawyers said.

In the court’s view, Article 11 Cancellation Process is just an administrative step which is separate from obtaining the court’s approval to the termination of the contract.

The law firm further mentioned that in case of a defaulting purchaser, even if the developer is able to de-register the unit from the interim register prior to re-selling that particular unit, it would be strongly recommended to file a claim against the defaulting purchaser to implement the compensation provisions of Article 11 and to secure a court order for the termination of the contract.

The Dubai Land Department (DLD) cancellation process arises out of Law No. 13 of 2008 regulating the Interim Property Register in Dubai (Law No. 13), which was later clarified and amended by Law No. 9 of 2009 (Law No. 9). The revision of Law No 13 by Law No. 9 was intended to set up a clear termination mechanism and to provide guidelines in case purchasers stopped making their contractual payments.

It also established a specific compensation mechanism that correlates to the construction level of the project at the time of the purchasers’ default. Law No. 9 also made the specific article, Article 11, apply retrospectively.

Article 11 of Law No. 9 provides that:

1. In the event the purchaser shall be in default of any of the terms and conditions of the contract for the sale of a real estate unit entered into with the developer, the developer must notify the DLD of such default. Thereupon, the department shall give the purchaser, by hand, registered post or e-mail, a 30-day notice to fulfill his contractual obligations.

2. If at the end of the notice period stipulated in the preceding paragraph the purchaser has not fulfilled his contractual obligations, the following provisions shall apply:

a. In case the developer has completed at least 80 per cent of the project, the developer may keep the full amounts paid and request the purchaser to settle the remaining amount of the contract price. If this was not possible, the developer may request that the property be auctioned in order to collect the remaining amounts due to it.

b. In case the developer has completed at least 60 per cent of the project, the developer may revoke the contract and deduct up to 40 per cent of the purchase price of the real estate unit stipulated in the contract.

c. In case of projects where construction commenced, but did not reach 60 per cent, the developer may revoke the contract and deduct up to 25 per cent of the purchase price of the real estate unit stipulated in the contract;

d. In case of projects whereat construction has not yet commenced for reasons beyond the developer’s control without any negligence or omission on its part, the developer may revoke the contract and deduct up to 30 per cent of the total amounts paid by the purchaser.

Based on this cancellation process, when a purchaser was sent a notice and did not rectify his position, the DLD traditionally de-registered the property from the interim register and re-registered it in the name of the developer.

The DLD cancellation process appears to have permitted developers to address issues related to losses from defaulting purchasers quickly and without having to go through a lengthy court process.

Likewise, the developer also had recourse under Article 15 of Executive Council Resolution No. 6 of 2010 to apply to the courts in the event the monies paid by the defaulting purchaser did not meet the thresholds outlined in Article 11, and to claim for the balance.

“Generally, these laws appear to provide a balance between the needs of developers (who are harmed by both defaults and having to wait for a court judgment to recoup losses) with the interests of purchasers (who stand to have a part of their deposits returned to them).

“However, due to a recent Dubai Court of Cassation judgment, any developer considering terminating a contract through the DLD for lack of payment now faces a great deal of uncertainty,” the lawyers said.

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