A Dubai investor has won the right to cancel her Ijara agreement – a Sharia compliant mortgage – for an off-plan villa in Al Furjan after the developer, Nakheel, failed to register the property with the Land Department.
In a decision that could have wider implications, the Court of First Instance ordered Islamic financial institution Tamweel to return more than AED1.4m ($391,000) worth of undated cheques that had been signed by the investor and were to be used to pay 33 instalments under the agreement.
Unlike a standard mortgage, under an Ijara agreement the financial institution purchases the property from the developer and essentially rents it to the investor with a promise to transfer ownership after an agreed period.
The court found that while the wording of the Ijara agreement describes it as a lease, the intention was a contract of sale and Tamweel was obliged to provide the property for rent from October 31, 2010.
The investor, a Finnish woman, arranged the Ijara agreement for an AED2.92m villa in Nakheel’s Al Furjan development near Jebel Ali in June 2008.
The villas were due to be completed by October 2010 but the real estate market collapse caused the project to be delayed. Nakheel, owned by the Dubai government and famous for projects such as The Palm and The World, was one of the hardest hit developers in Dubai.
Construction still was yet to start when the woman initiated court proceedings in early 2012, seeking to have the Ijara agreement annulled due to the delays. Last month, Nakheel said it had handed over 95 percent of the villas.
However, on April 21, the court found Nakheel had failed to register the off-plan property at the centre of the case with the Interim Real Estate Register, a Dubai Land Department initiative introduced after the property market crash to make off-plan investments more secure.
The court ruled that because the property was not registered the Ijara contract was void, leaving Tamweel liable for the purchase of the property.
The plaintiff’s lawyer, Fareya Azfar, partner at The Legal Group, told Arabian Business the judgement could have wider implications for off-plan property purchases under an Ijara agreement.
Until now it was believed the end-user, who has no contract with the developer, had no legal avenue if the property was delayed or not registered.
Meanwhile, it could place extra burden on the financial institution.
“The judgement clarifies where each party in an Ijara form of financing would stand in the event that financed properties are not delivered,” Azfar said.
“It allows the investors a way forward [if the property is delayed or not completed]. The parties’ relationships would not be left open-ended; an event of non-delivery or non-registration could be grounds for cancellation of an Ijara agreement with the financial institution.”
The decision also leaves the door open for Tamweel to sue Nakheel over lost earnings from the cancelled contract.
A spokesperson for Tamweel said it intended to appeal the decision and would not comment further.
Nakheel did not respond to requests for comment.