Buying property in Dubai feels like a very straight forward process. The process is structured, the market is transparent, and transactions happen fast. Yet, in all cases, speed should never supersede caution. Legal due diligence is the line that divides a confident investment from a costly mistake.
At its heart, legal due diligence involves the verification of a number of elements relating to a piece of property which you are looking to buy. Those elements include; the fact that the property is legally sound, properly documented, and free of hidden dangers. Whether you are purchasing an apartment in Downtown, a house in Arabian Ranches, or an off plan unit in one of the many new developments being built, legal due diligence provides clarity before you agree to anything.
Key Legal Due Diligence Steps Before Buying in Dubai
Verify Ownership and Title Deed
The first step when carrying out legal due diligence is to confirm that you are buying the property from the person named on the title deed. This includes requesting a copy of the title deed and then verifying that title deed via the Dubai Land Department. The seller’s name has to appear on their ID documents.
In addition, if you are buying from an individual owner, you need to confirm that there are no disputes, mortgages, or other legal claims against the property. Also, if a mortgage does exist on the property, you need to establish that there is a clear process for settlement of the mortgage prior to the transfer of the property. Allowing yourself to carry out the proper legal due diligence prior to signing any agreement is crucial.
When buying an off plan property, you need to check the project’s registration status and confirm that the developer is approved and licensed. Projects must be registered with the appropriate authorities before you can continue with the purchase.
Carefully Review the Sales and Purchase Agreement (SPA)
The Sales and Purchase Agreement, or SPA, outlines your rights and responsibilities. Many buyers will simply read over the SPA and assume that the typical clauses that are included will apply to their situation. Unfortunately, this can be dangerous.
Legal due diligence involves carefully reading and reviewing the payment schedules, penalty clauses, handover timelines, and termination rights contained in the SPA. For example, if the developer is delayed in handing over the property, what recourse do you have? Are the terms of compensation clearly outlined in the SPA or are they vague?
When purchasing a resale property, you need to carefully review the Memorandum of Understanding. In particular, you should examine the deposit terms, the terms and conditions of default, and any special agreements entered into by the buyer and seller. When you complete solid legal due diligence, you can be assured that the SPA reflects exactly what you think you agreed to.
Confirm Developer Credentials and Escrow Compliance
When purchasing an off plan property, the developer becomes the main focus of your attention. Therefore, research the developers past performance. Have they completed previous projects on schedule? Are there any existing disputes?
Another area of concern is escrow compliance. Funds paid for an off plan property must be deposited into a registered escrow account specifically set up for the project. As part of the legal due diligence process, you must confirm the escrow account details and verify that your payments are safe.
If the funds are being diverted to another account, that is a red flag. Any buyer that does not take this step is exposing himself to undue financial risk.
Look at all service charges and community regulation
The service charges can be very expensive over time and can seriously affect the long-term yield of a property for investors. Get a recent breakdown of the service charge and find out what service charge is owed by the seller today.
You should also look through the community regulations for the community where the property is located. Short-term rentals may be prohibited in some areas of Dubai. Additionally, you should check to see if there are any restrictions on renovations of the property. In order to rent or do renovations on the property, you will need to ensure that this is allowed in accordance with the community regulations.
Identify payment structures and hidden costs
There are usually many more costs to pay when purchasing a property in Dubai than just the sale price. As well as the transfer fee, registration fee and trustee fee, you will also have to pay other possible costs such as mortgage related costs.
Before finalizing your offer on a property, it is important that you have determined the total acquisition cost of the property in order to include the costs of purchasing the property within your financing plan. Reviewing the terms of repayment will also help you understand whether or not the terms of the repayment are in line with your financial goals.
For example, if there is an early deadline for payment of a portion of the purchase price of the property prior to closing of the loan used to fund the purchase of the property, you could be experiencing cash flow problems. By identifying these risks at the outset, you can protect your position. Legal due diligence is as much about providing clarity and certainty about the financial aspects of the property purchase as it is about ensuring that there are no legal or contractual risks.
Reviewing Property Condition and Snagging Reports
If you’re buying a finished property, then you’ll want to hire someone to do a physical inspection of the property. When purchasing an almost completed (new) property, you should get a snagging report.
This step in the process seems like a technical detail; however, it has a direct connection to your Legal Due Diligence efforts. Any defects that are discovered before title is transferred, can typically be repaired under the terms of the contract. After title is transferred, it is probable that you’ll have less “leverage” than you would have had prior to title being transferred.
For resale purchases, you should confirm that any unauthorized alterations to the property were permitted and complied with all applicable laws and regulations. Unauthorized structural alterations to a property may create significant issues when attempting to sell the property.
Ensure Property Located In Designated Freehold Area And Due Diligence On Corporation Documentation Is Completed.
As Dubai allows foreign buyers to purchase real estate outright in selected areas of Dubai, you will have to ensure that the property is located within one of these designated freehold areas.
If the property is being purchased via a company structure, you will also be required to verify compliance with the applicable corporate documentation. It is essential for your Legal Due Diligence to verify whether or not your ownership structure is compliant with all applicable laws to avoid any potential administrative issues at a later stage.
Value Added by Professionals in Property Buying Process
Buyers can research the documents on their own but many times they will be unaware of discrepancies or issues that an experienced professional would be able to recognize.
Keyspace Realty and Keyspace Dubai have developed an extensive amount of support for their buyers, to help ensure that every one of their buyers has received a complete legal due diligence check prior to completing their purchase of a new home. The keyspace team reviews all of the documentation pertaining to the title, checks to see if there are any approved plans from the developer and reviews the escrow structure for each buyer prior to closing to make sure their client is aware of all of the compliance issues prior to closing.
Why Legal Due Diligence Protects Long-Term Value
The Dubai property market is constantly evolving. Market prices vary, new developments are launched continually and investor demand fluctuates. In such a dynamic market, the application of disciplined legal due diligence can safeguard both your immediate transaction, and the long-term value of your asset.
By conducting the proper legal due diligence and verifying documentation, confirming compliance and understanding the terms and conditions of your contract, a buyer minimizes his or her exposure to disputes and financial loss. Importantly, the same principles of good legal due diligence enhance resale potential. Potential buyers will also undertake their own due diligence. Documentation and records that are clean and transparent make your property more attractive to potential buyers.
Conversely, ignoring steps may expedite your purchase, but it will create issues in the future. Good legal due diligence creates a solid base for ownership.
Frequently Asked Questions
What is legal due diligence in Dubai Real Estate?
Legal due diligence refers to the process of verifying the ownership of the property, the review of contracts, the confirmation of compliance with the law, and the identification of any financial or legal risks prior to finalizing a purchase of a property in Dubai.
Is legal due diligence required for off-plan properties?
Yes. Off-plan buyers need to verify developer qualifications, project registration and escrow accounts. Legal due diligence is particularly important for off-plan property purchases.
Can I perform my own legal due diligence?
You can review documentation on your own, however, many buyers find it beneficial to have a professional assist in order to ensure that nothing critical is missed.
What happens if I skip legal due diligence?
You risk discovering any unreported liabilities, contractual disputes, compliance issues or financial losses that could have been prevented by proper verification.
NOTE: Pictures used in the advertisement are for illustration purposes only.
