Option agreements have been used by certain developers, particularly when dealing with bulk purchasers in the early phases of large development projects.
Recently, the Dubai Court of Cassation issued a decision in favour of our client (a bulk purchaser) in relation to their claim that an option agreenent for the purchase of property could not be considered to be a substitute to a Sale and Purchase Agreement (SPA).
The Court of Cassation held that as an option agreement cannot be registered with the Dubai Land Department (DLD), it could not be considered a substitute to a SPA.
The Court of Cassation’s decision resulted in the option agreement being nullified and our client being awarded the entire claimed amount plus interest.
This judgment limits the ability of developers to circumvent DLD regulations by entering into agreement for the sale of property without having to adhere to the regulation in place to protect investors.
The Court of Cassation judgment
Option agreements for the purchase of property are an appealing arrangement for certain developers seeking to finance projects using funds from bulk purchasers which requires bespoke terms not typically provided in standard SPAs for real estate purchases.
However, the Dubai Court of Cassation scrutinised the validity of such arrangements in our client’s case and nullified the option agreement in question as it was deemed to contradict, Dubai Law No. 13 of 2008, as amended (Dubai Real Estate Law).
In this case, our client, entered into an agreement for an entire off-plan project. The issue centered on whether this agreement was:
a) an investment agreement, the purpose of which was to obtain an expected profit within a specific period or alternatively to convert the investment into the purchase specific units within a specific notice period; or
b) an agreement for the sale of off-plan property.
The developer initially argued that the agreement was an option agreement that provided the investor with the opportunity to enter into a future SPA which subsequently did not require the registration of specific units with the DLD. They later argued that such an agreement required pre-conditions to be satisfied the obligation to sell off-plan property and related registration requirements were binding. The developer (an LLC) also argued that the agreement was simply an investment agreement (note: LLC companies cannot undertake investment activities as stipulated in Article 11 of the UAE Commercial Companies law).
In this case, we asked the court to focus on and apply Article 129 of the UAE Civil Code which states that:
“The necessary elements for the making of a contract are:
- that the two parties to the contract should agree upon the essential elements;
- the subject matter of the contract must be something which is possible and defined or capable of being defined and permissible to be dealt in; and
- there must be a lawful purpose for the obligations arising out of the contract”.
Article 129 supports the finding that in any agreement there must be a “meeting of the minds” as to the offer, acceptance and consideration between the parties.
We argued on behalf of our client that irrespective of the term used to describe a particular agreement, the basic contract principles should apply, as set out above. Further, there was no specific provision of law requiring a specific form for an “options agreement”.
In determining that the mutual interest of the parties at the time of the offer and acceptance was for the purchase of off-plan units, we asked the court to take into account the specific completed percentage and unit numbers referenced in the agreement.
Moreover, the purchasers’ payment was protected under Article 220 of the UAE Civil Code which states:
“If each of the two contracting parties has the advantage of the benefit of conditionality in commutative contracts involving property and the consideration on both sides has not left the ownership of either of the ‘contracting parties but one then exercises the option to cancel, that property shall not pass out of his ownership and neither shall the property of the other pass into the ownership of the first”, and enforcing the concept of a conditional contract/option agreement would contradict the same.
We further argued that while the parties were generally agreeable to any terms they wished, they were limited to terms which did not contradict any provisions of law or public policy. We highlighted that any agreement for the sale of an off-plan property was subject to the requirements of the Dubai Real Estate Law, which provided that such off-plan units must be registered in the purchaser’s name.
The facts determined by the lower court were that the parties had entered into an agreement ultimately for the sale of off-plan units and cited the completed percentage and unit numbers referenced in the agreement. The lower court also confirmed that the units were not registered in the purchaser’s name.
The Cassation Court considered the facts determined by the lower court and held that the parties intended to enter into an agreement for the sale and purchase of off-plan real estate which is subject to the regulations of the Dubai Real Estate Law, specifically, Article 3 requiring the registration of off-plan units in the name of the purchaser.
The Court emphasised that:
- There is no specific option agreement under UAE law; and
- Under UAE law, any agreement for the sale of off plan property must be registered in the DLD interim Real Estate Register.
In summary, this ruling highlights the risks facing developers who enter into an option agreement under UAE law where a bulk purchaser has invested a certain amount and has been given the option to convert the investment into specified off-plan units.
Option agreements in these circumstances may be nullified by the court, limiting the ability of a developer to circumvent DLD regulations by entering into agreements for the sale of property without having to adhere to the regulation in place to protect investors.