Off-plan project cancellation in Dubai and what happens to the escrow account

• RERA can cancel a Dubai off-plan project on nine separate grounds, including land withdrawal and government re-planning.
• A developer has seven working days to file a grievance against a cancellation decision, and RERA answers within the same period.
• Where RERA cancels a project, the developer must refund every payment purchasers made, with no retention.
• The escrow agent must refund purchasers within 14 days, and the developer must cover any shortfall within 60 days.

When RERA can cancel an off-plan project

Article 23 of Executive Council Resolution No. 6 of 2010 allows RERA to cancel a real property project on nine grounds. The bylaw has applied since 14 February 2010, and each cancellation requires a reasoned technical report. Four of the nine grounds concern the land or the master developer rather than the conduct of the developer selling the units. Our real estate lawyers in Dubai advise developers and corporate purchasers on cancellation decisions and escrow recovery.

RERA may cancel a project where:

• the developer fails without valid justification to start construction after obtaining all required approvals;
• the developer commits any of the offences listed in Article 16 of Law No. 8 of 2007;
• RERA is satisfied that the developer has no genuine intention to implement the project;
• the land is withdrawn because the sub-developer breached its obligations towards the master developer;
• the land is completely affected by planning or re-planning work by a government entity;
• the developer fails to implement the project through gross negligence;
• the developer states an intention not to implement the project, for reasons RERA accepts;
• the developer is declared bankrupt; or
• RERA determines any other reason.

A sub-developer can therefore lose a project because of a plot dispute upstream, having performed its own obligations in full. Purchasers assessing that risk before payment should verify registration first, which our guide to red flags in Dubai off-plan property explains.

How escrow money is released while a project is live

Law No. 8 of 2007, issued on 6 May 2007, requires a developer selling units off-plan to deposit every purchaser payment into an account opened in the project's name. An escrow agent holds that account, meaning a bank the Dubai Land Department has accredited for the purpose.

Article 9 dedicates that account exclusively to the construction of the project and prevents the developer's creditors from attaching the money in it. Each project must have its own account. Where the developer mortgages the project, Article 13 requires the lender to deposit the loan into the same account.

Article 7 requires a written agreement between the developer and the escrow agent. That agreement determines how the account is managed, and a copy goes to the DLD. The registration and advertising duties that precede any of this are described in our article on RERA developer obligations for off-plan projects.

Article 14 requires the escrow agent to retain 5% of the total value of the account once the developer obtains the completion certificate. The agent releases that 5% one year after the units are registered in the names of purchasers. The retention covers defects that appear after handover. Our article on joint ownership disputes under UAE strata law covers the disputes that start at the same point.

The seven working day grievance window

Article 24 of the 2010 bylaw gives a developer seven working days from notification of a cancellation decision to file a written grievance with RERA.

The grievance must state the grounds of objection. RERA must decide within seven working days of submission. Where RERA admits the grievance, it prescribes the conditions for revoking the cancellation. The developer must undertake in writing to satisfy them. Where RERA rejects the grievance, its decision is final and it proceeds with cancellation.

What RERA must do once the cancellation decision is final

Article 25 of the 2010 bylaw requires RERA to complete four steps once it cancels a project.

• Prepare a technical report stating the reasons for cancellation.
• Notify the developer in writing by registered mail or email.
• Appoint a certified auditor, at the developer's expense, to verify what purchasers paid, what the account holds and what has been spent.
• Instruct the escrow agent to refund those entitled within 14 days of cancellation, or the developer where purchasers paid him directly.

The fourth step captures money that never entered the escrow account. Where a broker collected the price, Article 12 of the same bylaw requires the broker to deposit it into the escrow account. The broker may not deduct commission first.

‍What happens where the escrow account is short

Article 26 of the 2010 bylaw applies where the escrow account holds too little to refund purchasers in full. The developer must pay the difference within 60 days of the cancellation decision, unless RERA extends that period for valid reasons.

Article 27 then requires RERA to take all necessary action to protect purchasers, including referral to the competent judicial authorities.

The refund is a full refund. Law No. 19 of 2020, issued on 24 November 2020, replaced Article 11 of Law No. 13 of 2008. Where RERA cancels a project by final reasoned decision, the developer must refund all payments purchasers made. The same obligation applies where the developer never started work for reasons beyond his control and without negligence on his part. That law repeals contradicting provisions. The 25% and 40% retentions available on a purchaser default do not apply to a cancelled project.

How cancellation refunds differ from purchaser default refunds

Article 11 of Law No. 13 of 2008, in its 2020 form, permits retention only where the purchaser is the party in breach. The amount depends on the completion percentage the DLD confirms.

Which tribunal hears a cancelled project dispute

Decree No. 33 of 2020, issued on 24 November 2020, assigns these disputes to the Special Tribunal for Unfinished and Cancelled Real Property Projects. The Tribunal hears every claim whose subject matter is a cancelled or unfinished Dubai project. The decree superseded Decree No. 21 of 2013 and widened that remit to unfinished projects as well as cancelled ones.

Article 10 requires every court in Dubai, including the DIFC Courts, to refuse such claims and to refer pending ones to the Tribunal. Article 4 excludes projects located inside DIFC boundaries. Article 13 exempts claims before the Tribunal from judicial fees.

Article 7 allows the Tribunal to appoint auditors at the developer's expense and to propose mediation between the parties. It may also order the escrow agent or the developer to refund amounts held in the account or paid directly. Article 6 allows it to hear a developer's grievance against a RERA cancellation and to assign completion of an unfinished project to a different developer. Under Article 11, its awards are final and the Execution Court at Dubai Courts enforces them.

What developers and corporate purchasers should do next

• Confirm that each project has its own escrow account in the project name, as Article 9 of Law No. 8 of 2007 requires.
• Reconcile any amounts received outside the escrow account, because the developer must refund those directly on cancellation.
• Keep a current completion percentage report from a consultant RERA approves, since that figure determines what may be retained.
• Diarise the seven working day grievance window against every RERA notice, because a rejected grievance is final.
• Verify that any broker who collected a unit price paid it into the escrow account.

Corporate purchasers holding units across several projects should also confirm which entity contracted with the developer and whether payments were made from that entity. Our Dubai property law guide for investors and developers covers the wider registration position, and the Dubai Land Department publishes guidance on escrow account queries.

Is your project exposed to a cancellation ground today?

A developer that holds every approval and has not started construction is exposed under the first ground in Article 23. A sub-developer whose plot is withdrawn upstream is exposed under the fourth, whatever its own compliance record. A purchaser who paid outside the escrow account depends on the developer's solvency rather than the account balance.

Legal advice may be required to assess how these obligations apply to a particular project, its escrow arrangements and its sale agreements.

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