What You Need to Know About Developer Cancellation Clauses

The ins and outs of developer cancellation clauses in the Dubai real estate market may seem somewhat complex, yet it is essential to understand your rights and duties. These are clauses, which mostly take the form of a Sales and Purchase Agreement (SPA), and they are meant to protect the developers; however, they also carry major implications for the buyers. Why, when and how might developers cancel an allotment, and what does this mean to you? Let us take a closer look.

Understanding Off-Plan Project Cancellation

Off-plan project cancellation occurs when a real estate development project is halted during its construction phase. These cancellations stem from construction delays or financial and legal constraints. In such situations, developers or relevant authorities, such as the Real Estate Regulatory Authority (RERA), can officially halt the project's progress.

Laws Governing Off-Plan Project Cancellation

In Dubai, RERA is the authority responsible for declaring and managing cancellations of off-plan projects. Let's look at some key laws related to this:

Law No. 8 of 2007

This foundational law requires developers selling off-plan units in Dubai to establish dedicated escrow accounts for each project with DLD-certified financial institutions. Its primary purpose is to safeguard buyer investments by ensuring all payments received from purchasers and project financiers are deposited into these accounts. Funds within an escrow account are strictly earmarked for the construction of a specific real estate project, protecting the buyer's money from potential misuse by the developer or claims by the developer's creditors. The law also outlines developer registration requirements and advertising permit needs, and sets penalties for non-compliance, thereby establishing a secure and transparent financial framework for off-plan sales.

Law No. 13 of 2008

This law establishes the Interim Real Estate Register within the Dubai Land Department (DLD), making it compulsory to record all off-plan property sales and dispositions. This registration ensures the legal validity of such transactions; any unrecorded sale is considered void and invalid. The law outlines developer obligations before commencing projects or selling units, and it permits the resale or mortgage of units registered in this interim register. Notably, it outlines a process for buyer defaults: a developer notifies the DLD, which then issues a 30-day notice to the purchaser. If the default persists, the developer can cancel the contract and repay the buyer, albeit potentially retaining up to 30% of the money paid. This legislation is vital for ensuring transparency and legal certainty in off-plan real estate transactions.

Decree No. 33 of 2020

Decree No. (33) established a powerful new body: the Special Tribunal for Liquidation of Cancelled Real Property Projects in Dubai and Settlement of Related Rights. This dedicated judicial committee, which replaced the previous committee formed under Decree No. 21 of 2013, holds sole and final authority to resolve all disputes, complaints, and grievances related to real estate projects that are either unfinished or cancelled in Dubai. Its wide-ranging powers include mediating settlements, overseeing arbitration decisions, and transferring stalled projects to new developers. With RERA's support, providing detailed reports and advice, this decree significantly enhances the management of troubled projects, ensuring fairness, accountability, and the protection of all involved stakeholders: buyers, developers, and those owed money.

Laws for Buyers if the Developer Fails to Deliver the Project

A developer's entire real estate project in Dubai can face cancellation due to a range of significant issues that prevent its completion. Unlike the cancellation of an individual buyer's allotment (which is often due to the buyer's default), project cancellation is a more severe measure, usually initiated by regulatory authorities.

Reasons for Project Cancellation

Project cancellations usually occur due to fundamental problems with the development, often related to the developer's performance, financial health, or regulatory compliance, or external circumstances. The core reasons for such cancellations include:

Developer's Failure to Deliver: The developer "fails to deliver a real estate project on time or causes significant delays." A project is defined as "uncompleted" if it "has started but has thereafter stopped for reasons relating to the developer, the purchaser or for any other reason" (Decree No. 33 of 2020). This covers prolonged and unjustified delays in construction.

Unjustified Delays or Violations: RERA actively monitors construction progress to ensure timely completion. If a project experiences "significant, unjustified delays" or if a developer "violates rules" or commits other "offences" under various real estate legislation, it can trigger intervention.

Developer's Non-Compliance: This includes specific scenarios where a developer "does not commence construction within six months of the date he was approved to sell off plan without an acceptable excuse" (Article 17 of Law No. 8 of 2007). It also covers developers who commit "any of the offences mentioned in article 16 of Dubai Law Number 8 of 2007" (e.g., submitting false documents, knowingly selling units in bogus developments, or embezzling funds).

Lack of Commencement due to Unforeseen Circumstances: Even if the developer is not at fault, if the project has not commenced work for any reason beyond his control, without negligence or omission on his part, it can lead to project termination.

Governing Laws and Procedures

The cancellation of an entire real estate project is primarily governed by a robust framework involving the Real Estate Regulatory Authority (RERA), the Dubai Land Department (DLD), and a specialised Special Tribunal.

• Law No. 13 of 2008, as amended by Law No. 19 of 2017: This is the central legal instrument. It established the Special Tribunal for the Liquidation of Cancelled Real Property Projects in Dubai and Settlement of Related Rights, granting it exclusive jurisdiction over all disputes and liquidation processes for uncompleted or cancelled real property projects.

1. This law, particularly as amended, outlines the procedures for developer delays. Article 13 of Law No. 13 of 2008 empowers the DLD to investigate violations and unjustified delays, prepare a report and refer the developer to competent authorities for legal action.
2. Article 11(b) of Law No. 19 of 2017 (amending Law No. 13 of 2008) specifically addresses project cancellation by RERA. It states that where the real estate project is cancelled under a reasoned decision of RERA, the Developer must refund all payments made by the purchasers. This refund is processed in accordance with the procedures and rules stipulated in Law No. (8) of 2007.

• Executive Council Resolution No. 6 of 2010:

1. This resolution reinforces developer obligations regarding handover dates. It also allows the DLD to mediate disputes. While Article 21 states that developers may claim force majeure, the DLD and courts assess each case individually, scrutinising whether the delay stems from developer negligence. This resolution supports RERA's powers in assessing project status for potential cancellation.

• RERA and DLD Oversight:

1. RERA and the DLD maintain ongoing regulatory oversight. RERA actively monitors construction progress and can intervene in cases of significant, unjustified delays. RERA has the authority to impose penalties on developers for violations, including substantial delays, hefty fines, suspension or cancellation of the license.

Project Cancellation Clauses and Measures

When an entire real estate project is cancelled, specific legal obligations and measures are triggered, primarily focused on protecting buyers' financial interests.

• Project Cancellation by RERA (Article 11(b) of Law No. 19 of 2017):

1. Article 11(b) states: "Where the Real Property project is cancelled under a reasoned decision of RERA, the Developer must refund all payments made by the purchasers by the procedures and rules stipulated in the above-mentioned Law No. (8) of 2007. When RERA cancels an entire project, this clause legally requires the developer to refund all buyers. They do this by using the money held in the dedicated escrow accounts.

• Special Tribunal's Authority (Decree No. 33 of 2020):

1. The Tribunal has the authority to review and settle all disputes, grievances, and complaints arising from uncompleted, cancelled, or liquidated projects.
2. Its broad powers include mediating disputes, ordering project completion (if feasible), transferring projects to new developers, or overseeing liquidation and ensuring buyer refunds. The Tribunal's decisions are final and binding.
3. Article 6(a)(10) of Decree No. 33 of 2020 states the Committee may carry out: "any other duties as required to allow the Committee to preserve and protect the rights of all parties in the cancelled or uncompleted real estate project," providing broad authority for resolution.
4. RERA submits detailed reports to this judicial committee for its consideration in resolving and liquidating such projects.

• Developer Deregistration (Article 17 of Law No. 8 of 2007): 

In cases of severe non-performance, a developer can be cancelled from the Register of Developers, including if they "do not commence construction within six months of the date he was granted approval to sell off plan without an acceptable excuse" or violate other provisions related to financial misconduct. 

Why a Developer Might Cancel Your Allotment

Developers include cancellation clauses in agreements to protect their interests and facilitate the smooth operation of their projects. These clauses may be used if a buyer fails to fulfil their contractual obligations.

The core reason a developer can cancel your property allotment in Dubai stems from your failure to fulfil contractual obligations under an Off-plan Sale agreement, as stipulated in Article 11(a) of Law No. 19 of 2017.

This triggers a specific, legally defined process:

1. DLD Notification & Notice (Article 11(a)1, 11(a)2): The Developer must notify the Dubai Land Department (DLD) of your non-performance. The DLD then serves a 30-day notice requiring you to rectify the breach and may mediate a settlement.
2. DLD Official Document (Article 11(a)3): If the breach persists, the DLD issues a document confirming the developer's compliance and the unit's percentage of completion.

Based on this DLD document and the project's completion percentage, the developer may then take specific measures (Article 11(a)4), particularly in cases of payment defaults:

• Over 80% completion (Article 11(a)4a): Developer can claim balance, request DLD auction, or terminate and retain up to 40% of the unit's value.
• 60% to 80% completion (Article 11(a)4b): Developer can terminate and retain up to 40% of the unit's value.
• Less than 60% completion (work commenced) (Article 11(a)4c): Developer can terminate and retain up to 25% of the unit's value.
• Project not commenced (beyond Developer's control) (Article 11(a)4d): Developer can terminate and retain up to 30% of amounts paid.

Any significant breach of the Off-plan Sale agreement's terms, such as failure to take possession, non-execution of agreements, dishonoured financial instruments, or breach of established rules and regulations, falls under the general "failure to fulfil contractual obligations" (Article 11(a)) and initiates this DLD-regulated process.

The Procedure for Off-Plan Project Cancellation

The process for cancelling an off-plan project involves several crucial steps:

1. Notification of Cancellation: The developer first notifies all buyers about the project cancellation, clearly stating the reason.
2. RERA Review and Resolution: The developer then reports the cancellation to the Real Estate Regulatory Agency (RERA) to officially update the project's status. RERA then conducts a comprehensive review of the project's status and compliance. If the developer's appeal against RERA's initial cancellation resolution is rejected, RERA's decision becomes final, officially terminating the development.
3. Report Submission: After the final cancellation decision is made, RERA prepares a detailed report. This report explains why the project was cancelled and includes all evidence that led to that decision.
4. Audit Process: An independent auditor verifies the escrow account and all other financial aspects of the project. The developer covers the auditor's fees; this audit critically verifies the proper accounting of all buyer payments.
5. Refunding and Reimbursement: Based on the audit, the developer refunds buyers' payments via the escrow account. If funds are insufficient, arrangements are made for reimbursement, which can extend up to 60 days, allowing for asset liquidation if necessary.
6. Final Settlement: The Special Tribunal for the Liquidation of Cancelled Real Property Projects in Dubai and Settlement of Related Rights (Decree No. 33 of 2020) holds exclusive and final authority in disputes related to uncompleted or cancelled projects. It oversees liquidation, issues binding orders, ensures buyer entitlements, and can penalise non-compliant developers.

The Real Estate Violation System

The Real Estate Violation System (RVS) is a form of critical checks and balances on developer activity that will help ensure buyer rights are not violated. The breach of contract by developers led to serious legal proceedings, such as fines or even the prohibition of business operations. As a buyer, you can make complaints to RERA to be investigated and take further action to safeguard your rights.

The primary objective of such a system is to comply with regulations, protect investors' rights, and encourage a sound, stable, and reliable real estate market in Dubai.

Developer's Fault and Force Majeure

Developers are legally obligated to deliver projects on time, and the law acknowledges that certain unforeseen circumstances can cause delays beyond their control. This concept is known as Force Majeure.

The UAE Civil Code, specifically Law No. 5 of 1985 (Article 273), recognises and outlines the implications of force majeure. Even if a contract doesn’t explicitly contain a force majeure clause, parties can still rely on the UAE laws to excuse themselves from their obligations if such an event occurs. Article 273 addresses the two scenarios: When the entire contract cannot be fulfilled at all (wholly impossible) and when only a portion, or a temporary period, of the performance becomes impossible. The law aims to prevent undue burden on parties facing genuinely uncontrollable events, but it also ensures that parts of the agreement that can still be fulfilled remain valid.

It is essential to note that for a developer to claim force majeure successfully, they must demonstrate that the event was genuinely unforeseen, unavoidable, and directly caused the delay, rather than simply due to internal mismanagement or negligence.

The developer's sole defence for not delivering on time is force majeure, as per Article 273 of the Law. This means that if the developer couldn't observe their contractual obligations due to unforeseen circumstances that couldn't have been anticipated beforehand, then the performance of those obligations is suspended. It's a key legal concept acknowledging situations beyond a party's reasonable control.

Conclusion

Buyers in Dubai need to be aware of developer cancellation clauses. These provisions, incorporated into the SPA, enable developers to process allotment cancellations in the event of a buyer default, which results in penalties. In the event of an off-plan project termination, RERA ensures the protection of buyers by maintaining an escrow account (as per Dubai Law No. 8 of 2007) and establishing a defined procedure for reimbursement in the event of cancellation. The Real Estate Violation System (RVS) helps safeguard buyer rights by overseeing developers. Suppose a developer falls short of the Anticipated Completion Date (ACD) as specified in the Sale and Purchase Agreement (SPA). In that case, buyers can demand termination and compensation for their valuation, as outlined in Article 274 of the Civil Code. Force majeure, however, is another possible defence for the developer in the event of delays. Understanding these legal details can empower buyers when it comes to their place in the Dubai property market.

Contact us today for expert guidance on navigating property contracts and ensuring a smooth, secure purchase.

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