The long awaited ‘Property Law for Dubai’ has now been passed and has been met with a great deal of interest and excitement amongst everybody involved in the real estate sector in Dubai - developers, investors, lawyers, bankers and brokers.

We can trace the roots of the property boom in Dubai back to 2002 with the announcement of His Highness Sheikh Mohammed bin Rashid Al Maktoum that freehold ownership of certain properties in Dubai was available to investors of all nationalities.

Since that time, several projects have been launched and sold to foreigners. These projects include Dubai Marina, Emirates Hills, Jumeirah Islands, the 3 Palm Islands, Dubai Waterfront, Jumeirah Beach Residence, The Meadows, The Springs, Arabian Ranches, the list goes on. In some instances, properties have already been completed and handed over to buyers.

The questions now on everybody’s minds is whether this new Law provides legal confirmation of a foreign investor’s right to own property in these projects and secure registration of his title at the Dubai Land Department. Will the confidence and patience of these investors be rewarded and will it instill confidence in the many more circumspect investors waiting in the wings for a robust Property Law before they decide to invest?

In this article we examine what the new Law achieves and we discuss in further detail some of the provisions of the new Law.

Force and effect of Law No. (7) of 2006

Law No. (7) of 2006 concerning Real Property Registration in the Emirate of Dubai was signed by Sheikh Mohammed on 13th March 2006.

According to Article 29 of the Law, it will be published in the Official Gazette and will come into force as of the date of its publication.

Ownership by UAE and GCC Nationals

According to Article 4 of the Law, both UAE and GCC nationals have the right to own real property in Dubai. No distinction is made between UAE nationals and the nationals of the other GCC countries. They are afforded equal status under the provisions of this Law.

UAE and GCC nationals can own any property right and seek registration of title at the Land Department. This includes freehold ownership, a long lease of up to 99 years, the right of usufruct and the right of musataha.

To explain more fully a couple of the above concepts:

• The ‘right of usufruct’ is a concept that is found in our Federal Civil Code. It is the right to use and exploit property belonging to another person. It is a ‘right in rem’ , in other words, it is a real property right. A lease is very similar. It also grants the right to use and exploit property belonging to another person. But according to our Civil Code, a tenant does not acquire a property right through a Lease, he just acquires a personal right, a right that is enforceable through a contract between himself and the landlord.

• The distinction between the ‘right of usufruct’ and a leasehold right is important in the context of foreigners’ property rights in Dubai and will be discussed in further detail under the following heading. For UAE and GCC nationals, there is really very little practical distinction to be drawn between the ‘right to usufruct’ and a lease: both give a tenant the same rights – the right to use and exploit a property - and both can be registered.

• The ‘right of mustaha’ is similar to the ‘right of usufruct’ – it is the right to use and exploit land belonging to another person – but it is more than this. It is the right to build on the land belonging to another person. It is the right that we commonly see granted to the tenant through a ‘Ground Development Lease’.

UAE and GCC nationals can own property rights in all areas of Dubai. This can be in the new projects that we have seen springing up and offered to all nationalities or in any other part of Dubai – Sheikh Zayed Road, Bur Dubai, Deira, anywhere.

UAE and GCC individuals can own property rights, but so can their companies. This means limited liability companies and private joint stock companies, in which all the shareholders are UAE or GCC nationals. Just because a company is incorporated in the UAE or in any of the other GCC countries does not mean it can own property anywhere in Dubai. If the company has foreign shareholders, it will not be considered a UAE or GCC national for the purpose of owning property.

The only exception to the companies ownership discussed above, is Public Joint Stock Companies, companies such as Emaar and Union Properties that are listed on the Dubai Financial Market. These companies allow their shares to be bought by foreigners but are still considered to be UAE nationals and can own property anywhere in Dubai.

Ownership by nationalities other than UAE or GCC Nationals

According to Article 4 of the new Law, all nationalities other than UAE or GCC nationals can own freehold title, a 99-year Lease or a Usufruct right, in specific areas of Dubai, as determined by the Ruler’s approval.

The concept ‘freehold’ is a generally well understood concept. In summary, it is the most superior form of private property ownership. A freeholder is considered to be the absolute owner of the land and buildings comprised in his title. He has the right to occupy, use and enjoy his property forever – in perpetuity – or until he transfers his title to a new owner, and his heirs are entitled to inherit his title upon his death.

As regards leasehold and usufruct rights, the new Law provides that the right shall not exceed 99 years. From our discussions with the Land Department we understand that the minimum term is 10 years, i.e. that a lease or usufruct right for a term of between 10 to 99 years can be registered at the Land Department. This is to be confirmed by the Land Department in the Rules that it is authorized to publish pursuant to the new Law.

All of the above is subject to the property in question being located in one of the specific areas of Dubai which the Ruler approves for foreign ownership. We are now awaiting the first of such Ruler’s approvals. The current indications are that this will be issued shortly, and that it will include the expected projects within the portfolios of Dubai Properties, Nakheel and Emaar. Some other large projects may also be included, for example those at Dubailand.

In areas that have the Ruler’s approval, both foreign individuals and companies can own property. The Land Department is imposing no restrictions on this and it will make no difference whether the company is registered in the Cayman Islands, England, Hong Kong or any other foreign jurisdiction – provided that it can prove its lawful existence in its home country.

What will be the status of long leases executed by foreigners in areas that have not been approved by the Ruler?

Long leases are being sold to foreigners in projects all across Dubai, such as Dubai Investments Park and Dubai Silicon Oasis. In these projects it would seem, initially at least, that registration of long leases in favour of foreign investors may not be permitted. This does not make these long leases illegal in any way. They do not offend this Law or any Federal Law. It just means that they are treated in a different way for some purposes:

o Unregistered leases remain personal rights, not rights in rem or property rights
o Unregistered leases are still capable of being inherited
o Disputes arising between a landlord and a tenant of an unregistered long lease will still be adjudicated by the Rents Committee.

Registration at the Land Department

Article 6 of the new Law provides that the Land Department “shall solely, to the exclusion of others, be authorized to register the Real Property Rights and long terms leases as provided under Article 4” . In other words, if this new Law allows for a property right to be registered by a purchaser, the only place that it can be registered, so as to be recognized, is at the Land Department. Any register or other type of database maintained by a developer is not recognized under this Law. This is not to say that the registers that have been maintained internally by developers have no purpose. Up until now, they have served as a very valuable tool to record property sales and they will continue to be a useful internal administrative tool.

However, once we have the Ruler’s approval, the formal process of the Land Department registrations of property in permitted areas can begin. Where property purchases have been completed and physical handover has taken place, the developers’ internal registrations will be replaced by formal registrations in the Land Department. However, in those cases where property is still under construction, developers will no doubt continue to maintain their own internal registers to record Sale and Purchase Agreements up to their legal completion date, when applications will be made to register titles in favour of the purchasers at the Land Department.

It is important to note here that there is a distinction to be drawn between the two phases of buying a property that is still under construction, i.e. off-plan purchases. During Phase 1, whilst the property remains under construction, a purchaser has no ownership rights in his property. He has a mere contractual right arising from the Sale and Purchase Agreement that he has signed. That contractual right cannot be registered at the Land Department by the Purchaser, except maybe on the developer’s title as a third party interest. Once the property has been completed and handed over to the purchaser and the purchaser has paid the full purchase price, we reach Phase 2 and the purchaser becomes the owner of the property and can seek registration of title at the Land Department.

Article 7 of the new Law provides that “A Real Property Register shall be established at the Lands Department” . In fact, the Real Property Register is already established and has been for many years. It now needs to become more sophisticated and detailed, but that process is well under way. What this Law does is bring the current Register under the ambit of the new Law and capable of being maintained in accordance with the new Law and the Rules that the Land Department issues pursuant to it.

Article 7 further provides that “All Real Property Rights and any amendments thereon shall be registered in the Register, which shall have absolute power of evidence against all parties” . Article 9 of the Law provides “All dispositions that may create, transfer, vary or terminate a Real Property Right and all final judgments confirming any such dispositions shall be registered in the Real Property Register. Such dispositions shall not be valid unless they are registered in the Real Property Register” .

Therefore, if your right of ownership is capable of registration, register it, otherwise it will not be recognized. The Property Register maintained by the Land Department is conclusive evidence of the existence of all rights of ownership pertaining to a property. An owner may have a contractual right to pursue, but he will not have an ownership right to exert unless it is registered.

Void Transactions

Article 26 (1) of the new Law provides that “Any agreement or disposal made in violation to the provisions of this Law or with the intent to circumvent its provisions shall be null and void” . Article 26 (2) gives any interested third party, the Land Department and the Public Prosecution the right to request the court to declare such a transaction void. This is aimed at so called ‘sham arrangements’ . This provision is not saying, for example, that long leases granted to foreigners in areas that do not have specific Ruler’s approval are illegal – they are not, as they give only personal or contractual rights to a tenant. What this provision is aimed at, are those agreements that purport to give a property ownership right to someone who is not entitled to own it and is not entitled to register it.

What would be void for example, is a Sale & Purchase Agreement for the sale of a freehold right in favour of a foreigner in respect of a property in Deira, as foreigners do not have the right to own freehold property in Deira. That is an obvious example. A more subtle example might be the ‘nominee ownership’ type arrangements that we sometimes see, where a foreigner who wishes to own property will reach an arrangement with a UAE national, wherein the UAE national will hold title to the property at the Land Department, but for all intents and purpose the foreigner considers himself to be the property owner. The best advice to any foreigner wishing to ‘own’ property in a location which is not approved for foreign ownership is to take a long lease of the property. Whilst the lease cannot be registered, the foreigner would at least have contractual rights pursuant to the lease, which can be enforced, and a lease arrangement is not illegal or invalid.

How does a person prove his ownership of a property?

Pursuant to Article 5 of the new Law, “The original documents and judgments under which registrations are made shall be maintained at the Lands Department, and removing them outside the Department is prohibited” .

Article 22 of the Law provides that “The Department shall issue title deeds of Real Property Rights in accordance with the current records in the Real Property Register” .

Article 24 of the new Law provides that “Title deeds referred to under Article 22 of this Law shall have absolute power of evidence to establish Real Property Rights” .

Therefore, the above three Articles provide that if a purchaser considers that he is the owner of a property, the contract or other agreement by which he acquires that ownership is insufficient to prove it. The purchaser needs to take the contract to the Land Department and apply for ownership to be registered in his name. If the application is in order, the Land Department will register his ownership in the Property Register and issue him with a Title Certificate. That is the document which proves his ownership.

If Title Certificates are conclusive evidence of property ownership, what if they have been issued incorrectly or contain incorrect information? Article 7 of the Law allows objections to the data recorded in the Property Register “on the grounds of fraud or forgery” . And Article 13 authorizes the Land Department to correct errors in the Property Register on its own initiative or at the request of an interested party.

In conclusion, it is the Property Register itself, at any point in time, that is the conclusive source of information regarding property rights, and the Title Certificates contain a mirror record of that information, as of the date that they are issued. If some time has passed since a Title Certificate was issued and a party wishes to rely on the information that it contains, he should go to the Land Department and check it against the Property Register. The information may have changed since the Title Certificate was issued, perhaps because the Land Department has rectified the Register pursuant to Article 7 or Article 13. Or maybe subsequent entries have been made in the Property Register without the co-operation of the title holder, and therefore without amendment to his Title Certificate, for example, some form of third party interest or a court judgment.

How does one inspect the Property Register? Provided that you can demonstrate to the Land Department that you have a legitimate reason for enquiry, Article 5 of the new Law allows a third party to inspect a Property Register and to obtain a certified copy of it. Thus a potential purchaser of a property, for example, will be able to make his own enquiries directly with the Land Department and verify for himself who the owner of the property is and what third party rights the property is subject to.

Commonhold Registration (Multi-Owned Buildings)

There is only one Article in the new Law that deals with the registration of individual apartments and offices in a multi-storey building. The reason for this is that the Land Department is working on a new Strata Law which will be issued within the coming few weeks and will fully deal with issues such as ownership and management of the common areas in the building, co-owner’s associations, rules of occupancy and so on.

In the meantime, dealing very narrowly with the issue of title registration in these multi-owned buildings, we have Article 23 of the Law which provides, “Subject to the provisions of any other law, a multi floor or apartment real property shall be considered as a single Real Property Unit and a folio shall be designated thereto in the Real Property Register. Supplementary folios in the names of the owners of such apartments and floors and common areas shall be added to the original folio” .

Our understanding of how this will work is that the Land Department will open a main register for the building itself, and within this main register there will be a sub-register for each apartment or office. The owner of an apartment or office will be registered as owning the freehold interest in his unit together with an undivided share in the common areas of the building calculated in accordance with his participation quota. Thirty party interests affecting his title will be registered on the sub-register maintained for his unit and he will be issued with a Title Certificate evidencing his ownership.

Registration of Third Party Interests

Article 24(2) of the new Law provides that, “Any conditions, undertakings, encumbrances or any other liabilities related to Real Property Rights shall be stated in the designated folio of the Real Property Unit” .

Third Parties may claim an interest in a property for any number of reasons. A bank may wish to register a mortgage as security for a loan that it has granted to the property owner. A neighbor might have a right of way or other easement over the property. The property owner may have made certain promises, or covenants, in relation to the use of his property, for example, to use it as a residence only or to pay a service charge for certain facilities that the property owner is entitled to use.

These types of third party rights can and should be registered on a property title. They then become binding on the property itself, and not just a personal obligation of the property owner. Anybody to whom the property is transferred will be subject to the third party interest if it is registered. Without registration, the third party interest is enforceable only against the original owner personally through a claim for breach of contract.

Many of the new private communities that we see in Dubai are managed and maintained through a Master Community Declaration and Multi-owned buildings are managed through a Constitution of the Co-owners Association . These two documents contain a number of covenants and easements, the promise to pay service charges and so on. The Land Department has confirmed to us that the third party interests contained in these documents will be registered on the individual property titles. That is good news as it ensures that these private communities and buildings can be well managed and maintained through the years as changes of ownership of the individual properties occur.

As briefly mentioned earlier, there is a possibility of a Sale & Purchase Agreement being registrable on a seller’s title as a third party interest. This still needs to be confirmed by the Land Department, but if it is possible, this will serve to give a purchaser some protection against the seller dealing with his property in any way that is adverse to the purchaser’s interests, before legal transfer of the property to the purchaser has occurred.

Practical issues on Registration

Whilst we have been waiting for the enactment of the Law, developers have in the meantime completed and handed-over several thousand villas and apartments to their new owners. These owners will want to secure registration of their title at the Land Department as soon as possible. Likewise, mortgage companies will want to register their mortgages. We still await publication of this Law as well as Sheikh Mohammad’s approval of the specific areas in which foreigners can own freehold title. Once we have those, the process of registration can begin. We understand that the Land Department will be opening a branch shortly in the Al Barsha area of Dubai to deal substantially with these registrations. The developers will be asked to batch their applications to expedite the process, and appointments will be given to purchasers and their mortgage companies to attend the Branch, to undertake the registration formalities.

There will be a need for the Sale & Purchase Agreements and accompanying scheme documentation to be translated into Arabic, which we imagine the developers will undertake. Over and above this, purchasers will be asked to sign the Land Department’s standard transfer form. Reference is made in Article 6 to the Land Department having its own ‘standard contracts’ . These are not documents that will replace or contradict the Sale and Purchase Agreement already signed by the seller and the purchaser, but these forms are more for the internal use of the Land Department that will capture the details of the parties, the property, the purchase price and so on.

The seller and purchaser will also be asked to pay the Land Department’s fees at the time of title registration. These currently amount to 2 per centof the purchase price, 1.5 per cent payable by the purchaser and 0.5 per cent payable by the seller, although we understand that they are currently under review by the Executive Council and are subject to change.

Dealing with Property Disputes

According to Article 10 of the new Law, “The liability for breaching an undertaking to transfer any Real Property Right shall be limited to payment of indemnity, whether or not such undertaking provides for an indemnity” . Therefore if a seller defaults in his obligations in a Sale & Purchase Agreement and fails to transfer the property to the purchaser, the purchaser can claim damages from the seller for his losses suffered, but cannot force the seller to transfer the property to him. In other words, specific performance is not available as a remedy.

The question arises as to which forum should be utilized for settling disputes arising under this Law? Article 27 of the Law specifically repeals a Decree dated 6th November 1977. That 1977 Decree prevented any property-related disputes from being filed at court unless the case was referred to it by the Land Department. Now that Decree has been repealed, any aggrieved party can now file a claim direct with the Dubai courts or implement any agreed arbitration process.

There is the possibility of the Land Department establishing its own Arbitration & Conciliation Service to assist in the settlement of property related disputes, but no firm decision has yet been made on this.

Finally; a word about unregistered long leases. As mentioned earlier, as these fall outside the ambit of this new Law, the Rents Committee will retain jurisdiction over any disputes arising between these landlords and tenants.

Other Land Department Functions

Article 6, point 7, requires the Land Department to “lay down the rules in connection with the evaluation of Real Properties” . Apparently, the Land Department intends to employ its own expert valuers. The role of these valuers will be two-fold. Firstly, the Land Department’s valuers will be asked to verify a property value in cases where the parties to a transaction have apparently undervalued the property for any reason. This is so that the applicable registration fee can be properly assessed. Secondly, where a prospective purchaser of a property requires a valuation, he will have the option of commissioning this valuation from the Land Department in return for a fee.

In due course, the Land Department will look to establish a register of approved external valuers, who can also provide this valuation service.

Article 6, point 6 requires the Land Department to “lay down rules in connection with regulating and maintaining a register for real estate brokers”. Our understanding here is that real estate brokers will still need to obtain their Trade Licences from the Dubai Department of Economic Development, but as an additional requirement, if they wish to be involved in the sale and purchase of property, they will need to also register themselves with the Land Department. The specifics are still being considered by the Land Department, but it is anticipated that certain criteria will need to be met by a broker as a condition of his registration and that a mandatory Code of Ethics will be imposed upon all brokers dealing in the sale and purchase of property. Breach of this Code of Ethics by a broker will potentially lead to him being struck off the register and therefore unable to lawfully continue his business.

Inheritance

Article 11 of the new Law provides that “Any Inheritance Declaration shall be registered in the Real Property Register if the inheritance includes Real Property Rights. No dispositions by any heir in connection with any such rights shall be valid or effective against third parties unless such dispositions are registered in the Real Property Register” .

This Article is referring to the process here in Dubai whereby the relatives of a deceased person must apply to the Dubai courts for a Declaration identifying the beneficiaries of the deceased. The beneficiaries may then apply to the Sharia´h court to institute succession proceedings, in which the assets of the deceased are ascertained. At the end of that process, the Inheritance Declaration must be registered on the deceased’s title at the Land Department and only then are the beneficiaries recognized as the owners of the property.

But what Law will the courts apply in determining who the beneficiaries are of a deceased foreign national, and will the Will of the deceased by recognized? The Federal Civil Code, Article 17 (5), provides that the Law of the UAE will apply to Wills made by expatriates disposing of their real property located in the UAE. This gave a great deal of concern to foreign owners of property in Dubai as it suggested that Sharia´h Law would apply and override the terms of any Will.

However, a new Federal Law was passed at the end of 2005, the Personal Affairs Law (No. 28 of 2005). Whilst it is not entirely clear, it would seem that as a result of the new Personal Affairs Law, a foreigner can opt for the Laws of his own domicile to apply on the question of inheritance of his property. The Land Department, we believe, supports this view and it is expected that guidelines will be issued by the Land Department to confirm the situation in due course.

In conclusion

In reply to the question on whether this new Law provides legal confirmation of a foreign investor’s right to own property in these projects, secure registration of his title at the Land Department and enforce the owners freehold property rights in Dubai, we believe that this Law does provide the appropriate legal framework that we have been waiting for. However, as this Law itself acknowledges, it is just a starting point and more regulation and legislation is required to meet the needs of a market that is rapidly growing in both size and complexity. In time, this Law will be supplemented by Rules issued by the Land Department related to administrative procedures and property related matters; and other land laws, such as the Strata Law, will be issued.