Tuesday, March 24, 2009

New Law Alert: Real Estate Sector

Omani government officials are considering a new law governing the real estate sector. It is expected that the new law will address potential problems in the real estate industry arising as a result of the global financial crisis.

Although the law has not been published yet and few details are publicly available, we understand that it will include provisions requiring the establishment of escrow accounts for the sale of property by developers. The escrow accounts would protect buyers of property from developers that go bankrupt or abandon a project before it is complete by requiring the following:

  1. The developer must establish an escrow account into which the proceeds of a sale of off-plan property must be deposited;
  2. The developer may use the money in the escrow account only for developing the project;
  3. The developer must show completion certificates issued by government-authorized consultants in various stages of the project before the money in the escrow account will be released; and
  4. An escrow agreement between the developer, the government, an escrow agent and any other relevant parties will govern the management of the escrow account.
In addition, it is expected that the new law will include provisions that restrict developers from advertising or marketing the sale of units before obtaining written approval from government authorities. This restriction would allow the government to ensure that a development has sound financials before properties are offered to the public.

The new law may mean great news for buyers and, hopefully, it will help protect buyers from losing money on properties that are not completed.

However, some developers are claiming that the new law could make it more difficult for them to undertake and deliver projects. Developers’ main concern involves obtaining payments from escrow accounts for internal infrastructure. The internal infrastructure - including internal roads, lighting and sewage treatment - can represent up to one-third of the cost of the project, and the new law, as proposed, focuses solely on the development of the units themselves.

Similar laws were passed in Dubai to respond to problems with developers failing to deliver projects. Oman’s experience with these problems is so far very limited, and the new law will attempt to keep it that way.