March 1st, 2015

VIEWPOINT: Drafting a new approach

Oxford Business Group: THE REPORT Bahrain 2015

Qays H Zu’bi, Senior Partner, Zu’bi & Partners, on recent legislation affecting the real estate sector

Real estate developers are the main contributors converting ideas and drawings into property, facilitating the creation or renovation of real estate projects. Real estate development projects can be rewarding and highly profitable to all participants if planned, supervised and executed within a well-regulated framework and in a highly professional manner, where distinguished business skills are incorporated with effective marketing strategies, sufficient safety measures and client guarantees. In recent years, Bahrain has seen many high-quality developments that reflected positively on the economy, providing jobs, attracting foreign investment and putting Bahrain on the map as a regional hub.

Despite this, however, Bahrain’s real estate market faces a number of challenges, mainly those arising from the sale of off-plan properties to investors without government approval. Although such projects have brought millions in investment into the country, certain projects were never completed, at times due to improper planning, mismanagement of funds, material breaches of contractual provisions, unforeseen events of force majeure, or violations of the law. On many occasions, delayed completion of real estate projects has left investors out of pocket, without compensation for incurred losses resulting from such delays.

Based on the number of legal claims that have been brought regarding this issue, a draft law concerning real estate development guarantees was passed by parliament, with the aim of protecting investors and restoring confidence in the real estate development market.

Under this draft law, real estate developers may not undertake, market or promote any project prior to obtaining the required licences from the concerned authorities, in particular from the Ministry of Municipalities and Urban Planning, following the submission of all the necessary and supporting documents. Furthermore, completed plans – including the design, artist’s impressions, the start and completion dates, and value estimates – will need to be presented and approved by the Engineering Practices Regulatory Committee. Thus, the current situation of selling off-plan properties will be prohibited, since the developers will only be permitted to sell completed units, unless otherwise approved, following a detailed field assessment.

The draft law also imposes penalties, including imprisonment and fines, on developers who commit violations such as selling from unlicensed, incomplete or unregistered projects; violating the provisions of a granted licence; or knowingly submitting false information to the competent authorities for the purposes of registering the project or obtaining a license. As a guarantee to investors’ rights, developers shall be compelled to deposit project funds into a guarantee account prior to commencing work on the project, and 5% of the sum will be held by the appointed account’s secretary to ensure the settlement of any compensation claims that may arise from suspension of the project. The draft law also grants the buyer and seller the right to terminate a sale and purchase agreement, and claim compensation for losses arising from the termination.

Furthermore, the draft law also addresses the current issue of project suspension. If a project is partially suspended, the developer will be obliged to complete the project or reimburse the investors their paid amounts. If a project has been suspended, the developer will be required to complete the project at its own expense or under the supervision of a different developer, or sell the project and distribute revenues among the investors. The lengthy time frames for the resolution of disputes involving real estate projects has also been considered by the draft law, by providing for the establishment of a committee whose main role is to resolve such disputes within six months.

We believe such legislation is necessary to protect the interests of involved parties when property development issues arise and to provide investors with legal recourse to compensation or damages. Such legislation will not only ensure that Bahrain meets international standards and best practices, but it will also pave the way to a prosperous future for the entire sector.

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