Given the current economic climate in the UK, some in the real estate sector are exploring opportunities in overseas markets such as the Middle East. The Middle East is a particular area of focus for Eversheds which now has offices in both Abu Dhabi and Dubai in the United Arab Emirates (UAE), as well as Qatar, Saudi Arabia, Jordan and Iraq.
We have advised clients from both inside and outside the region on real estate investment and development in the Middle East. Whilst it is a potentially lucrative market, there are commercial and political risks in some jurisdictions, as the Arab Spring has recently demonstrated. The legal issues and risks that arise can also be quite different from those that are encountered in other parts of the world. Each country within the region has its own legal peculiarities and there is often a significant divergence between law and practice.
It is therefore important to take local advice in each jurisdiction. Nevertheless, we set out below some general guidance on key issues which may be encountered in the context of real estate investment in the Middle East with specific references to four jurisdictions in which we have offices - the UAE, Qatar, Saudi Arabia and Iraq. UK investors are perhaps more familiar with the UAE and Qatar but Saudi Arabia is the major economy in the region and Iraq is, in many respects, the sleeping giant.
In the UAE and Qatar, corporate entities looking to invest in real estate will have to set up as a limited liability corporation (“LLC”). The LLC must have a majority partner (i.e. one owning at least 51% of the company) that is either a UAE or Qatari national or a company wholly owned and based in the respective jurisdictions. Whilst, to some extent, this issue can be overcome contractually (e.g. through a JV or shareholders agreement that adjusts voting rights and profit share in favour of the foreign investor) there are doubts about the extent to which some of these arrangements are ultimately enforceable in the event that a disagreement arises with the local partner.
It is also worth bearing in mind that, in the UAE and Qatar, it is possible for foreign investors to set up without a local partner in certain designated “free zones”. However, if investors set up in free zones, they cannot trade outside of those zones.
The position in Saudi Arabia and Iraq is, perhaps counter-intuitively, more favourable to the foreign investor in some respects. In Saudi Arabia, real estate investors can own 100% of a local LLC provided investment cost in no less than 30 million Saudi Riyals (around £5 million) and in Iraq 100% foreign ownership is also permitted. It is generally advisable, however, to have a local partner in order to take advantage of local knowledge and contacts.
Restrictions on property ownership
Many countries of the Middle East place significant restrictions on the ownership of real estate by foreign nationals. For example, in Dubai a non-UAE or Gulf Co-operation Council (“GCC”) national can only own either a freehold title or “usufruct” in certain designated areas. Usufruct is a type of property interest similar to leasehold in the UK, in that it involves the right to use, enjoy and occupy land or property belonging to another person for a fixed term. The same rules apply to companies, with the further stipulation that, for the purposes of owning real estate in Dubai, a company will not be considered to be a UAE or GCC company if any of its shareholders are foreign nationals/companies.
In Abu Dhabi, non GCC nationals/companies cannot own freehold property at all. The only property rights which they can acquire are usufruct and “musataha” (akin to long term building leases in the UK), and then only in certain designated “investment zones” within the Emirate.
There are similar restrictions in Qatar, although non GCC nationals/companies are permitted to acquire freeholds in certain designated areas. In addition, they can acquire usufruct rights in a number of “investment areas”.
By contrast, both foreigners and GCC nationals are entitled to own land in Saudi Arabia for development, sale or lease, provided they have a legal presence in Saudi Arabia and, in the case of foreigners, have a licence to carry out real estate investment. The one exception is in the holy cities of Mecca and Medina, where only Saudi Arabian nationals can acquire real estate.
Finally, in Iraq, although foreign investors cannot acquire freehold interests, significant incentives are being offered to prospective foreign investors. These include the granting of musataha for terms of up to 50 years which are renewable. These interests are often granted on favourable terms and, in some cases, the land itself is acquired at no cost to the investor.
Enforcement of contracts
Generally speaking in the Middle East, parties are free to negotiate the terms of contracts. When entering into contracts with local entities (including joint venture/shareholders agreements), one of the most important issues to consider is the jurisdiction clause (i.e. the clause which determines where and how any disputes which arise should be resolved). If the wrong option is chosen, the contract can effectively be rendered unenforceable.
There are four main potential options for resolving disputes, namely the local courts, local arbitration (i.e. arbitration which is “seated” in the local jurisdiction), foreign courts and international arbitration (i.e. arbitration with a foreign seat).
Most foreign investors steer away from local courts in the Middle East, due to the perception that they are slow and unpredictable. Proceedings in the local courts are conducted in Arabic which can be a further dissuading factor for Western investors. However, some local courts are better than others and local advice should be obtained regarding the suitability of local courts.
In some jurisdictions, there are now alternatives to the local courts. For example, in Dubai, the Dubai government has set up the Dubai International Financial Centre (“DIFC”) courts, which are conducted in English and presided over by largely common law judges. It was previously the case that only disputes connected with the DIFC (which is effectively a financial free zone within Dubai) could be litigated in the DIFC courts. However, in 2011, this was changed with the result that disputes outside the DIFC can now be adjudicated on in the DIFC courts.
Given some of the issues with local courts, many overseas investors see local arbitration as a preferable option. However, local arbitration can prove to be fools’ gold as it has the potential to be slower and more expensive than local litigation. Even if a party is able to obtain a favourable arbitration award through local arbitration, enforcing the award in that jurisdiction can also be a lengthy process with uncertain prospects of success.
A further option is to have disputes resolved in foreign courts (e.g. in London). Again, this should be treated with some caution because, unless there are treaties in place between the country in whose courts the dispute is resolved and the Middle East jurisdiction in which the foreign investor is looking to enforce, it is likely to be difficult to enforce the foreign judgment in that jurisdiction.
In many cases, the preferred option will be to have disputes resolved through international arbitration. Most countries in the Middle East (with the notable exceptions of Libya and Iraq) are signatories to the New York Convention which is a worldwide convention which provides for the enforcement of foreign arbitral awards in signatory states. Hence, in theory, it should be relatively easy to enforce foreign arbitral awards in signatory states in the Middle East. In practice, the ease of enforcement varies considerably from country to country which emphases once again the importance of obtaining local advice in each jurisdiction.