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By Axel Jacob
Dubai Land Department has started to send notices to defaulting buyers. The provision states that upon the expiry of the 30 days notice period if the buyer fails to fulfill his payment obligations, the developer will be able to revoke the contract. Article 11 states that as a result of the revocation, the developer may keep certain amount of buyer's money as compensation for the default.
The compensation amount depends on the level of construction carried out on the project. The higher the level of completion, the bigger the compensation amount. This complex scheme of compensation amount, which was introduced by Dubai Law No 9 of 2009, has created some new difficulties and uncertainties with regards to its proper application, many of which have been discussed previously in this newspaper.
One of the major concerns of buyers facing default is whether they would be required to pay even more money than they already have only for compensation purposes. For example, when the law states that a developer may keep up to 60 per cent of the purchase price in case 60 per centconstruction has been completed, but the buyer may have only paid just 50 per cent of the purchase price, so does the law give the developer the right to claim the remaining 10 per cent from the buyer for compensation?
Moreover, could a developer choose to reach a better completion level of the project before he applies to the Land Department in order to make sure that he will not have to pay back money to the buyer?
The answer surely should be "No."
Article 11 is a special law enacted to make exception to the general regulations of the UAE Civil Law on compensation issues.
Plus, it is a Dubai-based law making exceptions to principles laid out by Federal law. Therefore, its provisions are to be strictly applied, that is in the actual sense of the word not giving way to broader interpretations.
Article 11 says the developer "…may deduct up to…" a certain percentage.
Two observations have to be made here: Firstly, a deduction can only be made from something that exists, that is an amount that the developer has received. Secondly, the use of the words "may" and "up to" show that the mentioned percentages are to be regarded as a maximum possible and not as standard amounts.
This in connection with the foregoing argument may naturally be construed as suggesting that the amount of payments received by the developer from the buyer serves as another limit for the actual compensation amount due in an individual case and that by no means there is room for the developer asking for higher compensation amounts.
In the absence of any other criteria given by this law in order to determine whether the maximum amount of compensation is reasonable or not, recourse can also be made to the general laws on compensation, which may leave the judges the possibility to look into the actual damage in the individual case at hand. General UAE civil law principles concerning compensation of damages include an obligation on the part of the damaged party to mitigate its damages once they become apparent.
A party shall not carelessly watch its damages grow trusting that they will have to be compensated by the damaging party anyway, but shall diligently aim to do everything reasonable in order to limit these damages.
This principle applies to torts as much as to contracts. Like an injured victim of an accident has an obligation to seek the necessary medical treatment (the costs for which becoming a part of the compensable damage) and must not wait until the effects of its injuries become more severe and medical treatment more difficult and costly, a developer who is faced with a defaulting purchaser of an off-plan unit, must not wait until the consequences of the default become more grave than they have initially been.
Pausing the construction activities in complex developments is normally not an option. However, the developer can seek early termination of the defaulted purchase contract. It would be highly questionable if a developer deliberately dragged out a possible termination until a time where another level of completion of construction may allow him to deduct more money from the buyer's paid amounts than at the time of the default being first established.
The obligation to mitigate their damages demands developers not to abuse their flexibility and apply to the Land Department for the final notice within a reasonable time from the moment of the first occurrence of default. It will remain for the courts to establish what should be considered reasonable in this regard.
- The author is a Legal Consultant with Fichte and Co Legal Consultants
