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Fraudsters could exploit house sale legal loophole

Delays in Sale of Purchase agreements are leaving home owners in a state of legal limbo. The situation means that unscrupulous agents could sell the same property to more than one buyer. Angela Giuffrida uncovers a worrying legal loophole and asks what can be done to ensure investors are protected?

The delayed release of Sale of Purchase Agreements by developers in Dubai could allow fraudsters to sell properties they don’t own.

The legal loophole came to light last week when developer Nakheel issued a public announcement warning homeowners in its developments to inform the company before selling their houses.

Construction Week has learned that it can often take months before a detailed Sale of Purchase Agreement is signed.

But until this happens there’s nothing stopping building owners selling units — and potentially to more than one buyer, according to Jeremy Cama, a partner at law firm Berrymans Lace Mawer.

“When Nakheel sells blocks of development it only issues a short form of contract, not a full document, to the building owner,” he said.

“At this stage, the building owner simply signs a piece of paper confirming their purchase. There tends to be a big time lapse between this and the developer issuing a Sale of Purchase Agreement.

“But until this is issued and signed, the building owner is free to sell — they could argue that they’re not bound by any formal terms.”

“Delays in Nakheel’s administrative processes could be the reason why building owners are getting away with selling units in International City, Discovery Gardens and other Nakheel developments without the company’s authorisation,” added Cama.

The issue was raised in a public notice issued by Nakheel last week and is said to have led to confusion over who actually owns the properties. In the absence of an independent freehold register, the only way to ensure title is by getting consent from the developer who sold the property in the first place. Nakheel currently maintains its own registry of property ownership changes, but because agents are bypassing it, the names of many new buyers slip through the net.

Nakheel’s Sale of Purchase Agreement stipulates the procedure a building owner must follow before selling a property. This includes giving details of the proposed property, the price it’s being sold for and the name of the buyer. The building owner must pay a fee for this to be administered before Nakheel formally agrees to the transaction. Nakheel has the right to terminate an agreement if any clause is breached.

Cama said that developers must tighten the administration of their contractual process with freehold building owners to avoid potentially fraudulent transactions taking place.

“At the moment, there’s nothing to prevent agents selling units four or five times over. “There seems to be a disconnection between the administration of a contract and the provisions laid out in the Sale of Purchase Agreement — which very clearly outlines to the building owner the procedure that must be followed when it comes to selling units to members of the public. This document should be signed on day one.”

There are fears that the problems Nakheel is facing, particularly with the lack of formal laws regulating the industry, could have a negative impact on investor confidence.
“Things like this are indicative of an unregulated market. And it certainly has an impact on the market when it comes to property transactions,” added Cama.

Nakheel issued the notice to raise public awareness of the issue and has recently opened a customer service centre to deal with public inquiries. The notice was also distributed to the company’s key markets abroad.

“Property owners and brokers are contractually obliged to notify the developers if there is a planned change in ownership, so that the master developer can register the new owner and update the registry,” said Nakheel chief executive James Wilson.

“In by far the large majority of cases this happens — breaches of the rules are an exception; this announcement was made, however, in the interest of clarity — both for buyers and sellers.”

Other real estate industry players argue that although Nakheel has raised some valid points, issues such as these are familiar to all emerging markets.

“It is unethical of the agents to bypass the property developer before making a transaction, although it is not illegal. And the person who buys the property is taking the risk of not having an adequate title of the property,” said Ron Hinchey, resident partner at Cluttons.

“But this is an emerging economy; I’m afraid, these things happen. It happened in Spain and Hong Kong and it won’t stop until the government has a chance to put everything in place.”

Hinchey said the industry was confident that the Dubai government would implement its new property law soon.
The law, which will address the relationship between main developers and secondary owners, is believed to be in draft format awaiting approval from the legislative committee.

“We have no doubt that the government is going to put the necessary legislation in place; it’s only a matter of time. Because of this confidence, people are still buying and the volume of sales remains the same.”

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