The issue with developing off-site plan real estate in Oman
Non-Omanis can purchase property in Integrated Tourism Complexes (“ITCs”) in Oman pursuant to the Law on Ownership of Real Estate within Integrated Tourist Complex by non-Omanis (promulgated by Royal Decree 12 of 2006, as amended) (the “Real Estate Law”). The ITCs formed pursuant to the Real Estate Law are: The Wave Muscat; Muscat Hills Golf and Country Club; Jebal Sifah; and Saraya Bandar Jissah.
It is within these complexes that off-site plan purchases are made by non-Omanis. The question which is often asked is whether the purchasers of such properties are sufficiently protected. The need for comprehensive legislation and protection appears imminent given the real estate crash that Dubai experienced in 2008 with particular regard to off-site plans. This article highlights certain risks which such purchasers are potentially exposed to due to lack of comprehensive legislation.
The importance of having a sustainable real estate market
After the financial crisis of 2008 and the property crash that ensued, there is now an increased emphasis on the importance of having a sustainable real estate market. Oman’s real estate sector can ensure its success and growth if it examines the steps that have been initiated by other GCC states such as Dubai. Dubai has specifically ensured development of its regulatory and legal framework to provide clarity and legal protection that property ownership and investments require.
The Escrow Law as a means of protection
Dubai and a few other developed nations have introduced Escrow Laws for the purpose of providing legislative protection to purchasers in off-site plan transactions. Dubai implemented an Escrow Law under Dubai Law 8 of 2007 with the intention to reduce purchasers’ uncertainty when their instalment payments are paid in line with construction progress, to regulate developers and to safeguard purchasers’ money. It applies to all developers of property who sell units in an off-site plan and receive payments from buyers or financiers prior to completion of the development.
Dubai’s Escrow Law provides that the purchasers’ funds should be secured to the extent that they should only be used for the development of the project to which they relate and they may not be attached for the benefit of the creditors of the developer. A further element of protection is the Trust Accounts Regulation Law 8 of 2007 which provides that money can only be released from an escrow account in accordance with the provisions of the Regulations. Additionally, under Article 404 of Federal Law 3 of 1987 (the Penal Code), it is a criminal offence for a party who has been given funds on trust for a specific purpose to use them for another purpose, for which a range of criminal penalties exist.
In Dubai, escrow account payments and the construction loan are deposited in one trust account, and the trustee releases 95 percent of the trust account funds to the developer before the units register in the name of buyers. As a result, there is less financial incentive for a developer to meet the completion date as stipulated in the contract which is disadvantageous to the investor. Despite this, there has still been a significant improvement compared to the situation prior to the introduction of this law as there was considerable uncertainty among property buyers who paid their instalment payments to developers but had no guarantee that their payments had been, or would be, used towards the construction of their property.
Key recommendations for securing the payments made for off-site plans
- Implementation of laws similar to Dubai’s Escrow Law.
- Establishing an escrow regulatory agency which should embed time scheduling in construction progress with respect to the completion date of the project to ensure timely completion of construction.
- Forming a regulatory authority which amongst all other activities register and issue licenses to developers who are capable of carrying out real estate development activities. The authority should also ensure implementation of an escrow law.
- An interim real estate register should be created to record all transfers of off-plan real estate units which should supplement the financial protection granted to the purchasers under the escrow law and help to ensure contractual protection.