Sale and Purchase Agreements
We thank you for your questions. In light of the great number of questions mostly regarding Purchasers’ possibility to terminate Sale and Purchase Agreements (“ SPAs ”) when Developers (“Seller”) fail to fulfill their contractual obligations, we cover below the largest possible number of inquiries by presenting an introductory post which we hope sets the parameters of current real estate disputes in Dubai.
The issue covered from a general standpoint is can Purchasers of real estate property terminate SPAs when the Seller fails to deliver a property on the agreed date?
Purchasers of real estate property in the United Arab Emirates can seek the termination of a Sale and Purchase Agreements and a full refund of the monies advanced toward the purchase of the Properties based on the provisions of the United Arab Emirates (hereinafter referred to as “UAE”) civil law.
Article 272 of Federal Law No. 5 of 1985 (hereinafter referred to as the “Civil Code”) allows parties to a contract to seek its termination if the counterparty does not fulfill its contractual obligations.
Would a given contract be cancelled in furtherance of the above article, Article 274 establishes the effects of such termination. In this regard, it indicates that the parties shall be restored to the position they were prior to the conclusion of the contract, and would this not be possible, compensation shall be ordered.
Undoubtedly, increasing court decisions are finding in favor of Purchasers when they seek legal recourse in light of the general inability of Developers to fulfill their obligations pursuant to the contracts concluded and hence are failing to deliver the properties on the contractually agreed dates.
Obviously, in order to obtain an accurate assessment of such viable legal option, it is crucial to establish that the Developers have failed to act as contractually agreed and that the Purchasers have fulfilled according to theirs. In addition, the defaulting party must not be able to excuse its non-compliance with the agreement of the parties.
Our analysis in this regard follows below.
Buyers Compliance with Contractual Obligations
The Buyers must have fully complied with their contractual obligations, i.e. payment terms, and must be in possession of evidences supporting the said compliance.
Sellers’ Inability to meet the Anticipated Completion Dates
In general, SPAs include an Anticipated Completion Date (hereinafter referred to as “ACD”) by which they commit to deliver possession of the particular property. It is common that SPAs additionally grant the Seller the possibility to unilaterally extend the ACD by a period of 6 to 12 months.
It is crucial to verify that this period has expired. Otherwise the corresponding claim could be rejected on prematurity grounds.
Contractual Remedy afforded to the Purchasers
A large number of SPAs allow Purchasers to terminate the SPAs when the Seller fails to deliver the Property on the agreed date.
A smaller percentage of SPAs affords no remedy or provide only interest, i.e. a percentage interest per month upon the expiration of the ACD, as contractual remedy afforded to the Purchasers in case of default by the Seller. Accordingly, it can be understood that the Purchasers shall not be entitled to terminate the SPAs or merely be entitled to such interest up to the date of actual delivery.
Despite the above, numerous national court and arbitral tribunal decisions have applied by default general provisions of the Civil Code, i.e. Articles 272 and 274 above, and have consequently allowed Purchasers to terminate SPAs which had been left with an indeterminate completion date.
In turn it is important to note that court and arbitration decisions have rejected to apply the interest agreed by the parties in similar SPAs and usually apply the default provisions with regards to the interest granted to the Purchasers. Currently Dubai courts and Arbitral Tribunal decisions are applying interest in the amount of 9%.
In addition, decisions are not granting specific performance, save in the scenario of the Project being 100% completed at the time the competent authority is prepared to render a final decision, rather courts and arbitral tribunals are rendering compensation comprising return of monies advanced plus interest, court costs and legal fees.
Based on the above and provided the intention of the Purchaser is to obtain the return of the amounts advanced towards the purchase of the particular property, we advise to verify that the project will not be completed at the time a decision is likely to be rendered to avoid a potential specific performance decision as opposed to one of compensation.
The only afforded remedy available to the Seller when it has failed to comply with its contractual obligations would be the applicability of force majeure.
In order to assess the viability of its application, one must refer to the terms of each particular SPA which specifically defines the contours of such available defense.
It is important to note that the UAE legal system has always followed the civil law doctrine rooted in the French civil code of 1804. The interpretation which has been given to force majeure contentions has regularly been one of “unforeseen occurrence”. Accordingly, the circumstances which gave rise to its proper application must have been difficult to imagine for the breaching party at the time of executing the SPA. We do note that financial difficulties, even in a time of crisis!, and the breach of a parallel contract by a third party, i.e. Master Developer, do not qualify as force majeure.
Pursuant to the foregoing, a Purchaser who has complied with the SPA but has not received possession of the property by the completion date agreed in the SPA can seek its termination in front of the competent authority, national courts or arbitration, and request the refund of the amounts advanced towards its purchase.
We hope this first post is of help in describing the four corners of current real estate disputes. Evidently, covering every single aspect in an introductory post is impossible. We look forward to your additional questions in order to further delimit the rights and obligations of real estate contract parties in UAE. Below are some suggestions.
1. What is arbitration? How do I know that I have to refer my claim to an arbitral institution rather than to the national courts?
2. What happens if the Developer never submitted an SPA and the only document we have in our possession is the Reservation Form?
3. Am I obliged to sign the SPA if the terms are substantially different from the Reservation Form?
4. What option do Purchasers have when the size of the property has been substantially reduced from the size reflected in the SPA?
5. What do new Dubai Law and Regulations add to the application of Force Majeure?
Which one is of most interest to you? We look forward to your questions.
Written by Contributor Maria Rubert.
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