Much talk has been seen about the most recent Dubai real estate laws and the requirements they set for developers to terminate purchase contracts vis-à-vis defaulting buyers. The requirements are stated in Dubai Law No. 13 of 2008 and call explicitly for a notice to be sent by the Dubai Land Department. For a long time there had been controversy over the question of how the developer may be compensated for the default of the buyer. Article 11 of the same law initially spoke of 30 percent of the paid amounts, whilst various sources advocated the opinion that it was to be 30 percent of the contract value. On the other hand it was not clear whether the new rule applied to the vast number of contracts concluded prior to the entry into force of Law No 13. All this speculation was effectively ended by the introduction of an amendment in 2009 by Dubai Law No. 9 of 2009 - to what avail is the topic of this article?

Dubai Land Department has begun to send notices to defaulting buyers as applied for by developers in conjunction with Dubai Law No. 13 of 2008. The relevant provision here is the new Article 11, which states that upon expiry of the 30 days notice period, without the buyer fulfilling his payment obligations, the developer will be able to revoke the contract. Article 11 declares that as a result of the revocation the developer may keep certain amounts from buyer’s money as compensation for the default. The amount of such compensation depends on the level of construction progress that has been achieved on the project: The higher the level of completion the bigger the compensation amount for the developer.

This complex scheme for compensation amounts that was introduced by Dubai Law No. 9 of 2009 has created some new difficulties and uncertainties with regards to its proper application. One of the strongest concerns for buyers in default is whether they may be required to pay even more money than they already have for the sole purpose of compensation. For example, where the law says that a developer may keep up to 60% of the purchase price in case construction has been completed by more than 60%, but the buyer may only have paid up to just 50% of the purchase price, does the law give the developer the right to claim the remaining 10% 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 monies to the buyer?

The answer must be “No!”

Article 11 is a special law made for the purpose to make exceptions to the general regulations of UAE Civil Law on compensation issues. Moreover, it is a Dubai law making exceptions to principles laid out by Federal law. Therefore, its provisions are to be strictly applied, i.e. in the actual sense of the word not giving way to broader interpretations.

Article 11 contains the wording that 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, i.e. an amount that the developer has received. Secondly, the use of the words “may” and “up to” shows that the mentioned percentages are to be regarded as the 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, especially where he has received communication form the investor stating that the same is not interested or capable of fulfilling the contract any further. 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 monies 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. However, unless there are special circumstances, much speaks against that the developer should be able to push the compensation amount to a higher category by simply dragging out the termination process.

Axel Jacob