In the first of two articles focusing on recent developments relating to real estate law in Abu Dhabi, Ian Arnott looks at the recent legislation enacted by the Abu Dhabi Global Market (ADGM).
ADGM is the recently established free-zone and international financial centre located on Al Maryah Island, Abu Dhabi. First announced in early 2012, it was legally established pursuant to Federal Decree No. 15 of 2013 and Abu Dhabi Law No.4 of 2013 (the ADGM Founding Law). It is the second such financial free-zone in the UAE following the establishment of the Dubai International Financial Centre (DIFC) in 2004.
On 14 June 2015, ADGM published, along with a raft of other legislation, the Real Property Regulations 2015 (the Real Property Regulations) and the Strata Title Regulations 2015 (the Strata Regulations) which are applicable to real property situated within the ADGM geographical area (which, at present, constitutes the whole of Al Maryah Island).
This follows a public consultation process that began in January this year during which ADGM canvassed the views of industry professionals and interested parties. This has resulted in final real estate related regulations that provide greater clarity on a number of issues that were initially uncertain when the draft regulations were originally published earlier this year.
Application of English common law
In order to attract international business and investors to the free-zone, ADGM has, similarly to Hong Kong and Singapore previously, adopted English common law (including the rules and principles of equity) as the cornerstone of its legal and regulatory framework. In addition, a wide range of English statutes which modify or codify common law are also made directly applicable (these are mostly incorporated in a modified form, primarily to remove UK-specific references).
However, this general approach is subject to the applicability of such common law “to the circumstances of the Abu Dhabi Global Market”. It is also subject to any legislation enacted by ADGM and any general Abu Dhabi laws (where such laws expressly apply to ADGM). In addition, the previous provision in the draft Application of English Law Regulations that judgments of the UK Supreme Court, relating to those elements of English law applicable to ADGM, would be binding on the ADGM courts, has now been removed. Such jurisprudence will seemingly now be viewed as merely persuasive (perhaps to remove the potential difficulty of being bound to follow judgments relating to the unmodified versions of the directly applicable acts).
Although this creates a degree of uncertainty regarding interpretation, overall it seems to be a sensible approach and will allow the ADGM courts to simultaneously apply long established and trusted legal principles under English common law, whilst also having the power to disapply those elements that are not locally appropriate or inconsistent with the principles of ADGM.
The effect of this position on the interpretation of real estate-related matters within ADGM is a little unclear. The consultation paper for the draft Application of English Law Regulations stated that the intention was to create a “stand-alone” legal regime that would follow a “codified approach”. However, despite specific English property-related legislation such as the Law of Property Act 1925 and the Law of Property (Miscellaneous Provisions) Act 1989 being removed from the final list of directly applicable statutes, there is no specific reference in any of the final regulations to the property regulations being self-contained and excluding English common law, which would have been useful to create certainty.
The Real Property Regulations
The Real Property Regulations establish an ADGM land registry (ADGM Land Register) for registering various property interests within the ADGM geographical area. This is to be administered by a registrar given authority under the ADGM Founding Law. Registration of a property interest shall provide conclusive evidence of ownership (unless stated to the contrary on the register). Unlike the land registry at Abu Dhabi Municipality (ADM Land Register), the ADGM Land Register is fully public and anyone may undertake an official search. This is welcome in terms of transparency and will greatly assist with potential buyers’ investigations prior to purchase. However, disappointingly, the ability to carry out priority searches just before completion (i.e. a search of the register that essentially freezes the title for a short period and gives the buyer comfort that no changes will be made to the register before completion of the purchase), although included in the draft regulations, has not made the final cut. This would have been a useful conveyancing tool.
Real estate interests that may be registered include such traditional estates in land established under English law such as freehold, leasehold, easements, co-ownership interests (joint tenancies and tenancies in common) and life estates established by way of trust.
The draft Real Property Regulations issued at the beginning of this year created some confusion regarding the issue of freehold and foreign ownership within ADGM due to the draft:
- heavily caveating that all issues relating to freehold ownership would be subject to existing Abu Dhabi law and would be beyond the scope of the regulations;
- containing a provision that in the event that there was any conflict regarding the question of ownership between the ADM Land Register and the ADGM Land Register, then the former would prevail;
- not distinguishing between freehold ownership of land and freehold ownership of property that exists above the surface of the land (e.g. apartments in a residential tower); and
- introducing the concept of mortgageable long leases.
This suggested that the current position regarding the inability of foreign investors to practically register freehold interests in the designated Abu Dhabi investment areas (Investment Areas) would also apply to Al Maryah Island (despite there being an existing law that permits such ownership interests), with ADGM unwilling to register such freehold interests if such registration was not possible at the ADM Land Register. It appeared that any developer selling off-plan residential units within ADGM would therefore have to do so by way of long leases.
The final regulations have clarified the issue. The caveats have been removed and the provision relating to conflict between the ADM Land Register and the ADGM Land Register has been reversed (so that ADGM now has full authority to register freehold titles of land and property within its geographical limits without being concerned as to the position at the ADM Land Register). The regulations generally reflect existing Abu Dhabi law relating to the foreign ownership of property in Abu Dhabi, which is set out in Abu Dhabi Law No. 19 of 2005 and Executive Council Resolution No. 64 of 2010, and provides that:
- UAE nationals may own land anywhere within the Emirate of Abu Dhabi;
- other GCC nationals may own land within designated Investment Areas (of which Al Maryah Island is one); and
- other foreign nationals may, in Investment Areas only, own property above the surface of the land, but not the land itself (this differentiation stems from long-held public policy in Abu Dhabi). They may also be granted renewable 99-year usufruct rights (similar to lease rights but with a “right in rem” that attaches to the land) and 50-year rights of musataha (similar to a ground lease where the tenant develops the land over which it is granted rights) over land in Investment Areas.
The ADGM regulations are in accordance with this law, with the only difference being that the rights of usufruct and musataha are dispensed with and replaced with long leases that may be granted for up to 99 years (renewable but subject to a total aggregate term of 198 years) and which, unlike in the rest of the UAE (but similarly to the position under English law), are considered to be proprietary “in rem” rights that may be mortgaged.
In short, developers will be able to sell off-plan units in developments located within ADGM on a freehold basis to foreign investors. Such investors can then have a high level of confidence that they will actually be registered as the freehold owners of their property in the ADGM Land Register following the completion of construction. This is welcome given the historical problems regarding registration of title within Investment Areas in Abu Dhabi.
Existing musataha and usufruct interests
Primarily due to foreign ownership restrictions, developers of projects on Al Maryah Island have generally, in the past, been granted rights of musataha over land by the master developer, some of which have already been registered at the ADM Land Register. There has been some uncertainty as to how such existing musataha (and usufruct) rights would be dealt with and incorporated into the ADGM registration regime. The Real Property Regulations provide that such rights may be converted and registered in the ADGM Land Register as a long lease, by way of a short-form agreement that omits price-sensitive information. There is a time limit of one year from publication of the regulations for the parties to the original contract to register such lease (unless such time period is extended by ADGM).
The question as to where the registration of the converted short-form lease agreement leaves the original, perhaps already ADM registered, musataha or usufruct agreements does, however, remain uncertain. Although the wording of the regulations (section 11(1)(b)) is slightly ambiguous, it appears that such registration at the ADGM Register would not affect the underlying terms contained in the original contract. However, whether there would also need to be an extinguishing of the ADM registered title is also not clear and holding the property under dual forms of title seemingly remains a possibility. The regulations state that the ADGM courts shall apply general Abu Dhabi law to issues regarding the interpretation of the relevant musataha or usufruct contracts that remain in effect after the date of publication of the regulations.
The regulations also provide a legal framework relating to mortgages similar to that already seen in the corresponding DIFC property regulations. Mortgages may be registered over registered interests (including leases) and lenders have the benefit of a wider array of potential remedies in the event of borrower default than that which has historically been available in onshore Abu Dhabi, such as the power to:
- sell the property by way of private contract (not just by way of public auction, which is the usual method of enforcement in the UAE);
- enter into possession and receive the rents and profits from the property; and
- appoint a receiver.
The Strata Regulations
The Strata Regulations are the first laws relating to a “strata” model of ownership to be enacted in Abu Dhabi. Primarily based upon the system of “strata title” that has been used throughout Australia for some time, and similar to the condominium model prevalent in the USA, this type of ownership structure essentially allows, in its pure form, for land and property to be subdivided both horizontally and vertically and sold to multiple different investors on a “freehold” basis, with the common areas of such developments owned communally in undivided shares. This allows, for example, floors and units in commercial and residential towers to be sold off on a perpetual basis to multiple purchasers. It differs from the landlord/tenant model that has developed historically, and is still prevalent, in jurisdictions such as England. Both models have their pros and cons.
Despite having been contractually rolled out across the wider GCC region in relation to various master developments for the last decade or so, only Dubai (including the DIFC which has its own separate strata laws) has, up until the enactment of the ADGM regulations, developed a legal and regulatory framework seeking to deal with the complexities of strata ownership.
A central tenet of strata ownership is the ability of co-owners to be responsible for, and to freely and actively manage and operate, the common areas of buildings that they collectively own, through a co-owners’ association (an Association). However, across the world, this is both the strength and the weakness of this type of ownership model and, historically, it has proved to be particularly problematic in the GCC. The transposition of a system, which may work perfectly well in jurisdictions such as Australia, on to developing legal and regulatory frameworks seeking to govern vast master planned, mixed use, mega-projects has been difficult. For example, although a sale and purchase agreement entered into between a purchaser and a developer relating to an off-plan unit may contain provisions referring to the establishment of an Association upon completion of the relevant development, practically, it may be impossible to legally establish such an Association. This means that it may be unable to carry out such acts as entering into supply contracts, setting up bank accounts and taking legal action for non-payment of service charges. Some sale and purchase agreements may not even give lip service to such an Association, with the developer retaining ownership of the common areas, creating a unique kind of freehold/leasehold hybrid structure.
Even in Dubai, where there are comprehensive strata laws in place regarding the legal establishment of Associations and restrictions on developers regarding their ongoing control of the development following completion, implementation has been slow.
On the flip side of this, there is the question of whether investors in the region actually want to collectively take on the burden of managing large-scale developments (where establishing a cohesive community can be difficult) and the risks associated with recovering service charge arrears (which is made more difficult as there is no risk of the debtor’s occupation of, or interest in, the property being forfeited as a result of non-payment as there is with a landlord/tenant structure and which may become particularly problematic as potential liabilities for capital improvements increase as the development ages).
The stratification of commercial property in Dubai has also proved to be problematic in that many developers have sought to make short-term gains through selling off floors and units in commercial buildings leaving a scarcity of investment opportunities for institutional investors looking to purchase whole, tenanted commercial buildings.
It is therefore interesting that the Strata Regulations leave it open for alternative “contractual common ownership schemes to be established” whereby investors in units are granted long leasehold interests and the common areas remain within the ownership and management of the developer (which seems similar to an English-style landlord and tenant model). However, it remains to be seen whether any developers would actually seek to adopt such alternative schemes. The concept of freehold ownership of units within towers may now be so engrained in the UAE market that offering anything less than freehold title to investors may put a developer at a competitive disadvantage.
For those developers seeking to implement a standard strata scheme, the Strata Regulations provide that a developer must first submit a “strata plan” detailing the proposed subdivision to ADGM and which, amongst other matters, must also be accompanied by the proposed certificate of incorporation, the first constitution and the relevant bye-laws of the Association. There is a standard set of bye-laws appended as a schedule to the regulations where no specific bye-laws are submitted. Such Association will then be formed as a private limited company, pursuant to the ADGM Company Regulations 2015, with each purchaser of a unit having a proportionate shareholding in such company.
The Strata Regulations also make it clear that ownership of the common areas of the development will be registered in the name of the Association. They also place restrictions on developers retaining control over an Association and state that, irrespective of what may be contained within the relevant contractual documentation, purchasers shall have the right to terminate any such developer control over the board of the Association by way of ordinary resolution. This must occur not later than the date that is the earlier of one year following the developer ceasing sales of units at the development or the date upon which 25 per cent of the units have been handed over to arm’s-length purchasers. The relevant provision is slightly ambiguous and it is not clear whether this right is then lost if such right is not exercised before the expiry of such timeframes (which seemingly would be harsh considering that it will take time for the Association to get up and running and will not be the immediate priority of purchasers) and it is also unclear as to the status of any long- term management and supply contracts that may have been entered into by the developer prior to the relinquishment of its control.
Aside from this last point, these provisions give comfort to potential investors that there will actually be a properly established Association with its own legal personality upon taking handover of their property which will own the common areas and have the capacity to actively manage and operate the development.
Volumetric subdivision and building management statements
Volumetric subdivision is a form of stratification suitable for mixed-use developments whereby a development can be three dimensionally subdivided into different use components, some of which (e.g. the residential component) will be subject to joint, strata ownership and some of which will not (e.g. the retail or hotel component). Those use components that are subject to strata ownership will have their own separate Associations. However, the structure allows for particular use components to be held within single ownership (usually initially by the developer) which can then be sold to an investor with distinct title. A building management agreement is usually put in place to govern the relationship between the relevant use components dealing with such matters as maintenance, insurance and reciprocal easements. A building management group would then typically be established by representatives of the various use components to manage the development as a whole.
This form of strata titling has proved popular in Dubai and the onshore Dubai strata laws contain relatively detailed provisions relating to both volumetric subdivision and building management statements. Some brief wording has been added to the final form of the Strata Regulations during the course of the consultation period permitting this form of strata structure, but the relevant provisions may need to be expanded and developed further in the future to adequately deal with these issues.
Reinstatement upon damage or destruction
The Strata Regulations provide that, if a building subject to strata ownership is damaged or destroyed, a plan for reinstating the building shall be agreed between the Association, the building insurer, the various owners, the relevant authority with jurisdiction over the site and all other persons who appear to have an interest on the ADGM Register. This is subject to owners of at least 75 per cent of the shares in the Association electing not to reinstate the building in which case the “property” may be sold and the net proceeds of sale distributed equitably between the various owners.
These provisions appear to be problematic and not developed fully for those strata developments within ADGM where, as a result of the unique foreign ownership restrictions applicable in Abu Dhabi, the plot upon which the relevant building has been constructed is owned by the master developer (and subject to a musataha/long lease granted to the developer) with the building itself above the surface of the land owned collectively by the various unit owners and the Association. There is also no reference to what the position would be if the relevant development has been volumetrically subdivided (where only part of the development would be strata owned and thus subject to the remit of an Association – the issue of reinstatement is often dealt with in the building management statement where the owner of one of the use components that has not been stratified is also the owner of the plot).
Neither the various owners nor the Association have any proprietary interest in the land itself. It is therefore difficult to conceptualise what they would actually have to sell in the event that the insurance was not paid out or was insufficient to cover the costs of reinstatement. This is further complicated by the fact that the developer only has a musataha/long lease interest over the plot. Further thought therefore needs to be given to how, in such event, an interest in the plot itself can actually be sold for the benefit of the various owners.
A welcome aspect of the Strata Regulations, in terms of consumer protection, is the requirement that a developer must establish an escrow account as security for its obligations to complete its project before commencing off-plan sales. All proceeds from the sale of units or from financing must be paid into such account. Payments from the escrow account by the ADGM-licensed escrow agent to the developer may only be made in relation to the construction and development of the project and only in proportion to the extent of the progress of the project. Five per cent of the total amount deposited in escrow is retained for a period after completion of the project for the purposes of completing any defective work.
The general approach of ADGM so far and the wide range of considered legislation that has now been issued signals its clear intent to be a major international financial centre. The Real Property Regulations and the Strata Regulations are a good addition to the legal landscape relating to real estate in the UAE. They provide a degree of certainty and investor protection that has, historically, been lacking and should help to boost confidence by attracting occupiers to the island and increasing the vitality of the area.
In the second of these two articles, Ian will examine the recently published Abu Dhabi Law No. 3 of 2015 concerning the regulation of the real estate sector and other recent legal developments in Abu Dhabi.