April 1st, 2015

A Solid Framework

The Oath: April 2015

Rasha Belbaisi and Noor Al Tareif of Zu’bi & Partners analyze the impact of new real estate development laws in Bahrain

Investor protection law

The Bahrain Development Property Association has been working hard to improve the Kingdom’s property and real estate industry by rehabilitating Bahraini cadres, bringing together developers and professionals and cooperating with international real estate development institutions. So far, they have succeeded in recruiting 18 international real estate companies to take advantage of their expertise to improve the quality of real estate laws and regulations in the country. More recently, the Kingdom’s Cabinet has approved a new law aimed at resolving failed multi-million Dinar investment projects and protecting investors. Bahrain Law No. 28/2014 complements a new law governing new investment projects which has already been passed by the National Assembly and ratified by H.M. King Hamad bin Isa Al Khalifa. That law, amongst other things, requires anyone embarking on a new project to submit complete plans including start and completion dates, designs and artists’ impressions, as well as a valuation estimate for the scheme which has been calculated by an engineering firm and ratified by the Engineering Practices Regulatory Committee. The Municipalities and Urban Planning Affairs Ministry will be the competent authority in charge of real estate development and will take charge of carrying out the provisions of the new law. Developers who break the law could be jailed.

Rationale

Despite recent high quality developments and real estate projects, Bahrain’s real estate market has faced numerous challenges including the sale of ‘off plan properties’ to investors without government approval being obtained, improper planning causing completion delays, fund mismanagement and unforeseen force majeure events. Countless legal claims have been brought as a result of losses incurred, which persuaded the government to provide investors with further guarantees to restore confidence in the real estate development market and assist investors in securing long awaited properties.

Most significant changes

Under the law, main and sub-developers will be prohibited from promoting any off-plan sale of property units either inside or outside Bahrain before completing registration procedures in the relevant Register and obtaining a license from the relevant authorities. The Law also includes substantive guarantees to investors, by allocating a separate project account to be created in the name of each property development project. This account will be exclusively allocated for management, construction and execution payments and will be established following a written agreement between developers, depositors and account trustees. The agreement must clearly define the account operating guidelines and the rights and obligations of the parties. 5% of the account will be held by the appointed trustee so as to ensure any compensation claims which may arise from any suspension of the project are settled.

Impact

By setting a solid framework to regulate real estate projects, the Law will provide further protection to investors by stopping real estate developers from undertaking or promoting any projects without obtaining the mandatory licenses from the relevant authorities and depositing the projects’ allocated funds in the project’s account. As a result, the ‘off plan’ selling situation which has put many real estate projects at risk, will be prohibited, as developers will only be permitted to sell completed units. The current issue of project suspension will also be efficiently regulated under the Law, as a project developer will be obliged to complete the project or reimburse investors with the relevant amounts if the project has been partially suspended. In the case of the project being fully suspended, the developer will be required to complete the project at their own expense under the supervision of a different developer or sell the project and distribute the proceeds of sale among the investors. The developments and guarantees stipulated in the Law will not only re-establish Bahrain on the map as a regional hub for real estate industry but is also expected to attract further foreign investment, which will inevitably have a positive effect on the country’s economy.

New lease law

In a similar area of development, on 7th February 2015 a new lease law, Law No. 27 of 2014, came into effect. This new law is the culmination of many improvements the government of Bahrain has been seeking to implement with respect to property rental. Previously, lease laws were difficult to source, as there was no single consolidated lease law. For over 70 years, the numerous property lease laws in Bahrain were either applicable only to certain municipalities or certain types or purposes of premises. As a result of the laws being scattered, inconsistency issues often arose, along with confusion over which laws to apply. The centralisation of this entirely new law on leases, applicable to all types of properties in all areas of Bahrain, achieves the aim of providing clarity and consistency to an extremely important sector of the region’s legal system.

The previous law

Previous laws divided the country into only two municipalities – Manama and Muharraq. Due to massive booms in property development, and in particular the gradual urbanisation of residential areas, provisions relating only to these areas are no longer sufficient. The Rents Act No. 42 of 1946, as amended, was the primary law related to leases and governed residential and some industrial properties. Again, this law separated the country into only two municipalities. Along with being difficult to enforce in parts, one of the most prominent problems with the Rents Act was that it favoured the tenant. For example, the tenant alone had the right to renew the lease if it expired, thereby severely restricting the rights of the landlord.

Impact of most significant changes

The most significant change is that the lease laws themselves are being codified into one single piece of legislation. Doing so enhances clarity and consistency while still maintaining sections of the core framework. The new rules revoke five previous rent laws, which may be seen by some as a drastic change. However, this measure will ensure uniformity amongst all types of rental premises in all areas of the Kingdom of Bahrain, which can only be seen as a positive development for the property sector.

The new law also brings with it the introduction of a Rent Disputes Committee. All disputes related to any provision of the new law will now be resolved outside of court in a timely manner, resulting in an overall reduction of the burden on national courts.

One entirely new provision that has the potential to impact every leased property is the requirement for the landlord to wait two years from the lease commencement date or the last rent increase date before having the right to increase the rent. The maximum increase is now set by the new law at 5% for residential properties and 7% for commercial and other properties, unless otherwise agreed in writing. A landlord must notify the tenant of his intention to increase the rent at least three months before the lapse of the second year.

One crucial issue that needed resolving was the imbalance of rights afforded to landlord and tenant in accordance with the Rents Act. The landlord’s rights at the end of the lease were disputed due to lack of clarity in previous laws. The new law guarantees the specific rights of the landlord, correcting the perceived inequality of the Rents Act in this respect. As stated above, the tenant was previously favoured in lease renewal circumstances. This is now rectified by the requirement of mutual agreement for renewing a lease in the new law, which balances this and many other rights to apply to both landlord and tenant, resulting in a fairer and more equitable piece of legislation.

In any case, the new lease law is a welcome and long-awaited development in the regulation of the property sector of Bahrain.

 

 

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