The Escrow Law protects the Off-plan property purchase

Off-plan property purchases have proved hugely beneficial for buyers in Dubai over recent years, enabling them to lock into low prices in the emirate's booming market and gain large premiums during the course of construction, even prior to delivery.
The benefit to the developer is that it gets to use the instalments paid to fund the building; thereby reducing the reliance on his own borrowed money, lowering his development costs. Buying off-plan, however, can be risky and I have lost count of the number of times I have been asked by potential buyers, "How can you guarantee that the instalments paid during the course of construction are safe' and ‘will the money paid be used for the development or for other purposes'?

We sought to address these concerns by providing ‘development plot sales agreements' for developers to provide bank guarantees to a substantial proportion of the development value as a precondition to offering units off-plan. Along with this, it provided a ‘step in rights' so that it could take over and complete the development if the developer defaulted.

While this provided increased certainty for the buyers, it could have acted as an impediment to the pace of development with most banks requiring full cash cover for guarantees. This made it a catch-22 situation where the cash put up for the guarantee cannot then be used to pay for the development of the property.

Escrow law makes such arrangements mandatory for all off-plan property sales in Dubai with the guarantee account regulated and monitored by the Land Department. But escrow goes even further. Until now, with the exception of some publicly-listed companies, only UAE companies owned 100% by UAE nationals were permitted to undertake real estate activities in Dubai. Developers are first required to obtain the approval of the Land Department.

We understand that the Land Department will permit 100% owned foreign offshore companies to apply for status as a developer under such activity and register with the department under the escrow law. We need, however, to see how this law will be applied and whether it will extend to Dubai joint venture companies.

The documents required for submission to the Land Department for the opening of the guarantee account include the usual corporate and licensing documentation. This includes a copy of the title deed, sub-developers contract with the master developer, architectural designs and drawings approved by the planning authorities, certified financial statements and a copy of the proposed contract. These requirements are not new, but significantly the developer needs to prove the viability of the project and have the necessary approvals to construct prior to offering units for sale off-plan. This may have a timing effect on the release of new projects in the near future.

Another aspect that I think derives from the relatively recent entitlement to title registration is that 5% of the total of the guarantee account has to remain in the account for a year after the completion certificate is issued, and after the units are registered in the names of the buyers. This is a powerful incentive to ensure that the completion certificate is obtained and the titles are transferred to the buyers as soon as possible.

Escrow is a key step forward in ensuring that Dubai's real estate market meets international best practice standards by making the process more transparent and protecting consumers.
I now look forward to being able to give an answer to the question, ‘How do I know my investment is safe?' Simple answer: because we now have the escrow law. Source