At a busy sales launch in central London in 2007, property investors scrambled to put their names down for a new off-plan project in Dubai. Hanover Square promised 400 five-star serviced apartments with gyms, swimming pools and other amenities in a then-undeveloped neighbourhood called Jumeirah Village Circle (JVC).
It all began well, with a flurry of signed contracts and parties looking forward to planned completion two years later, and a lucrative return on their investment.
Fast forward five years and the global financial crisis had left its mark on the emirate’s construction industry, with hundreds of projects delayed or, in some cases, abandoned altogether. Hanover Square investors were completing their purchases in line with a payment schedule linked to construction milestones specified in their sales and purchase agreements (SPAs). Yet, while they kept on stumping up the cash, milestones were being missed and the scheme was falling drastically behind schedule.
Move forward another five years, to April 2016, and the scheme is complete - but with a hitch. Many of the units have come in substantially bigger than planned – in some cases increasing the size of the apartments by more than 50 percent – and the developer, ACW Holdings, has demanded investors pay for it. A handful of owners have been hit with additional costs stretching to $136,000 over the original price they had agreed to pay in 2007. The total funds already involved in the scheme are thought to exceed $50.2m.
The situation, revealed by Arabian Business earlier this month, raises serious concerns about the transparency of off-plan property deals in Dubai, despite the Dubai government having updated laws to clamp down on unscrupulous developers that had been taking advantage of a previous lack of regulation to make a quick buck from investors at the top of the market.
Many property lawyers and other experts who spoke to Arabian Business warned that legislative grey areas still remain and the government ought to provide additional security to investors.
The Hanover Square issues also demonstrate the government’s position with regard to developers exploiting loopholes to make more money. Following determined lobbying by investors, a meeting was held between ACW and officials from Dubai’s Real Estate Regulatory Agency (RERA), which sought to quash the dispute by confirming that developers are not allowed to raise the cost of off-plan units on handover, even the size increased during construction.
RERA CEO Marwan Bin Ghulaita said in a statement to Arabian Business on June 16: “Two weeks ago, [RERA] held a meeting with ACW Holdings to discuss the issue they have with the investors.
“In a friendly manner, we have managed to solve the issue following the laws and regulations issued by Dubai Executive Council, and based on Executive Council Resolution No (6) of 2010, approving the Executive Regulation of Law No (13) of 2008 concerning the regulation of the Interim Real Estate Register in the Emirate of Dubai. Clause (2) of article (13) states that any area in excess of the net area of the sold Real Property unit may not be taken into consideration.
“Unless otherwise agreed, the developer may not claim the value of such extra area … Based on the above, there will be no extra charges on the investors.”
Alexis Waller, partner and head of real estate at law firm Clyde & Co’s Dubai office, notes: “This intervention shows that RERA and, by extension, the Dubai government, is prepared to step in, and in many cases is successful in resolving issues between investors and developers. This leads to greater consumer confidence in the market.”
Three investors said they were among several informed by ACW that they no longer have to pay the additional costs. In one instance, the buyer claimed his 1,013 square foot apartment had doubled in size by handover this year and he was asked to pay an additional AED463,000 ($126,000) on top of the AED908,776 ($247,424) price stipulated in the sales contract.
The second buyer claimed his 648 sq ft apartment that he bought for AED591,394 ($161,013) in 2007 had increased in size by 60.9 percent on handover and he was asked to pay an additional AED239, 556 ($65,221). The third buyer said his apartment increased by 55 percent and he was asked to pay an additional AED478,000 ($129,861).
The investors were initially offered two payment options: to pay the outstanding sum at a discounted rate this year, or settle on a larger sum by way of an interest-laden repayment plan. Investors said they were angry and anxious because they were unable to pay and would never have agreed to purchase their properties had they known they would be hit with substantial extra costs.
One investor, A.D., said in early June: “In my case, the size increase of my apartment is 51 percent, which works out to an additional AED478,000. Needless to say, I cannot afford this and may have to default.
“I am not alone in this –none of us investors were informed of the size increases until after the initial handover based on original spec. Instead of looking forward to an asset and retirement income I am now faced with the real possibility of a material loss.”
Other investors in the ACW project complained they were yet to receive the title deeds for their properties and so were unable to start generating a return on their investment, and that ACW was taking too long to respond to enquiries (one investor said communication from ACW had been “atrocious”).
An ACW spokesperson said in a statement on June 1: “Title deeds are being applied for at the Dubai Land Department (DLD) and when received they are available for collection. This is ongoing and subject to availability of issue by the DLD, which is completely out of our control.”
On complaints over customer service, the spokesperson said: “We are not stating that everyone we speak with is 100 percent satisfied but we endeavour to answer queries and questions quickly and professionally and in line with contractual agreements.”
The statement also insisted that ACW “has broken no real estate laws or contractual agreements with our investors”.
It said: “The project has been delayed past the agreed date of delivery. There are remedies in the contract for this occurrence. The Hanover Square development has increased overall in size by approximately four percent. This is perfectly normal with off-plan property. Investors who have been affected by this either have been or will be contacted in order to discuss options.”
The additional cost does not represent a breach in contract, ACW said, “as the SPA includes clauses related to this matter and there is a published Dubai law if this arises.
“If any investor was dissatisfied with the SPA they should ask themselves why they continued to make payments knowing the position with regard to the terms and conditions of the SPA from day one.”
ACW did not respond to requests for further information after June 1.
There is no suggestion that ACW acted unlawfully. As RERA’s CEO noted, article 13 of the relevant law provides that the developer may not claim the value of the extra area “unless otherwise agreed”. The SPA included a clause stating: “If the floor area is increased by more than three percent the seller shall be entitled to increase the purchase price in accordance with the size increase.”
The contract, seen by Arabian Business, added: “The purchaser acknowledges and agrees that all plans, specifications and finishes are subject to the above variations and the purchaser will have no claim against the seller for any such variations.”
Unfortunately for investors, neither the law nor the SPA set a maximum increase above which the seller’s entitlement is nullified – although purchasers may have recourse if there are “material differences” between what was promised to them and what was delivered.
“The question is, at what point is the developer no longer in accordance with the law?” asks Jeremy Scott, senior real estate associate at law firm Al Tamimi & Co. “My instant reaction here is, there is such a discrepancy between the planned and delivered unit sizes as to suggest there has been a mess-up in planning. I would argue size increases of more than 25 percent constitute breach of contract.” ACW vigorously denies its actions amount to breach of contract.
Geoff Smith, senior associate at Dubai’s Afridi & Angell Legal Consultants, agrees: “Normal procedure with off-plan sales is that the purchaser has committed to ‘slight variations’ to take into account minor changes in the construction process. Here, the internal dimensions have changed dramatically. I would class this as a redesign.”
Scott adds that there is a degree of fault on the investor’s side if they did not go through the SPA with a fine toothcomb, but at a time when the global property market was riding a high, people were less cautious. One investor claims to have queried the clause in 2008 and says he received a response from ACW’s solicitor confirming the size increase “is intended to cover slight variations in size arising during the course of construction. There is no way we would build the flats grossly larger than planned as it would be both incompetent and bad business to do so”.
Lawyers note that real estate regulations introduced since the crash give some protection to off-plan purchasers. However, there are areas that could be improved, Smith says. For example, a 2007 law requiring escrow accounts to be set up to manage investors’ funds was applauded at the time but the developer can still withdraw money from the account with the escrow agent’s permission, meaning funds are not 100 percent protected until completion.
“In the event of a project failing, the installments paid by investors may already have been withdrawn to pay for the construction to date. That may not have advanced at the same rate as funds were withdrawn, leaving the off-plan purchaser out of pocket,” he says.
Another reason issues remain in Dubai’s off-plan market is that, unlike in mature markets, liability typically sits with investors.
“In the UK, project risk sits firmly with the developer who has injected large parts of its own funds and also obtained normal project finance from banks or other sources of investment,” Smith says. “In Dubai, with the off-plan purchaser’s funds being used for construction, the risk has shifted on to them and this will continue as long as that business model does.”
Clyde & Co’s Waller says the government should consider additional regulations, for example imposing financial penalties on developers in specified circumstances; requirements for information on money in escrow accounts to be made more freely available to investors; and a faster process to release investors’ money following cancellation of projects.
Faisal Durrani, partner and head of research at Cluttons, says many developers have sought to self-regulate around the resale of off-plan properties to limit speculation. For example, Emaar forbids the reselling of off-plan units until they have been completed and handed over. However, Durrani says it would be helpful for the law to set out a maximum size increase above which investors could terminate the contract.
The ACW dispute is not over. A remaining bone of contention hinges on the fact that Hanover Square is a serviced apartment scheme. Under the SPA, a management company (ACW subsidiary Oryx Hospitality) will rent out the apartments on behalf of the owners, who receive a share of the money raised by the overall complex, based on apartment size.
Investors argue that, as they are now allowed to keep the increased unit size without having to pay for it, they should also be entitled to a bigger share of the pooled income. At present, ACW stands to benefit from the increase. Says one anonymous investor: “We benefit only if we sell as we can then charge more for the apartment increase. But nobody will pay this as the return is based on a smaller apartment.”
Scott says: “If I were an investor I don’t think I’d be happy with RERA’s solution. To not have to pay does not address all of the issues.”
Hanover Square investor Yousouf Jhugroo is a compliance expert who set up the Property Investors Consortium to represent aggrieved investors in off-plan schemes around the world. He organised the meetings with RERA and ACW, and says he will continue to fight on the investors’ behalf: “We will shortly be submitting a document to RERA detailing what was agreed in SPAs and what has been delivered.”
In the document, investors will request loss of earnings due to the scheme’s delayed delivery, and a review of the revenue share given the change in unit size, among other points. It is hoped a tripartite meeting can be arranged after Eid Al Fitr.
In the meantime, the story is a warning to investors of the risks of off-plan involvement, while providing some reassurance that the government may intervene if something goes wrong.
“I haven’t bought any off-plan property and I hope I never will,” said one commentator in response to the original story on the Arabian Business website. Hopefully, in time, such negative attitudes can be overturned.
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