Qatar has recently introduced Law No 6 of 2014 Regulating Real Estate Development ("the Law"), the first piece of substantial real estate legislation in a decade. The Law is applicable to the construction of multi-storey buildings and commercial and residential complexes where individual units within the development will be sold off-plan. The focus is on four key areas: licensing for developers, financial protections for purchasers, regulatory approval for off-plan sales and property registration.
The Law will be particularly relevant for developer clients, especially those undertaking existing projects who must take immediate steps to comply with Law. It will also be of interest to investors and individual purchasers looking to acquire property at the start of a development but who have until now been discouraged by a lack of appropriate regulation.
The Law is effective from 7 April 2014 and applies to existing and future developments. However there is a significant amount of implementing legislation and regulations still to be issued by various Ministries and Qatar Central Bank. These will be crucial to implementation of the Law in practice.
Real estate development as described above cannot be undertaken unless the developer has the appropriate licence issued by Ministry of Economy and Commerce ("the Ministry"). Requirements differ for Qatari nationals and foreigners as shown below.
- Need at least 3 years' experience
- Registered in the Commercial Register
- If a company real estate development must be a stated activity of the company
- Not have been adjudged insolvent or bankrupt
- If an individual not convicted of a crime involving dishonesty, immorality or injustice
- Need at least 10 years' experience
- A company properly established in a foreign jurisdiction
- Real estate development must be an object of the company
- Completed and have a good reputation for real estate development projects
- Office in Qatar or in another GCC country and be registered in the Commercial Register
The licence for foreign developers will permit real estate development only in the areas where non-Qataris are permitted to own properties - being The Pearl, West Bay Lagoon and Al-Khor Resort. It is not clear whether licenses will also be granted to foreign developers in respect of the 18 Investment Areas where non-Qataris may obtain usufruct rights, although the conclusion drawn from the drafting of the Law is that it will not. If this is the case, then the reality will be that a licence for a foreign developer will be highly restrictive.
Licenses are granted for 3 years and can be renewed for further periods of 3 years. Licensed developers will be included on a real estate developers register to be established at the Ministry.
Developers' general obligations
Developers have a number of obligations under the Law, aimed principally at limiting issues such as delay and default. Developers must start and finish developments on time and ensure technical and size specifications are met. Development must commence within 6 months of the developer receiving approval from the Ministry for off-plan sales and the developer is required to submit progress reports as required by the Ministry.
Subcontracting has been restricted up to a maximum of 50% of the works but developers must obtain the prior approval of the Ministry. It is hoped that this will limit subcontractor default and consequent suspension of the whole or substantial parts of projects leaving incomplete developments - problems experienced with some development projects in the past.
Various financial protections have been introduced aimed at protecting those investing in developments, particularly purchasers making advance and stage payments towards a purchase price and lenders providing project finance or other financial assistance.
All real estate developments where individual units are to be sold off-plan must have a related escrow account to ensure that monies in the account are used only for the purpose of the development. All monies relating to the development, such as advance payments from purchasers and project finance, must be deposited directly into the account; payments made directly to the developer risk not being protected. Payments out of the account will be restricted and will require relevant approvals; they are not permitted at all until the development is 20% complete, and must then be in line with agreed construction milestones.
The bank managing the account must hold a 10% retention or take an equivalent bank guarantee to cover costs of rectifying defects arising post-completion. The Law does not specify the time period for holding the retention and this will need to be addressed in forthcoming regulations.
Financing a development
New controls on financing multi-unit construction projects have also been introduced to ensure there is enough capital in the project to support borrowing. With the Ministry's approval, the developer may borrow to finance the project provided:
- some units within the development must be unsold, which shall be certified by the Ministry of Justice,
- the total value of completed works must be equal to or greater than the amount deposited in the escrow account,
- the value of the loan must not exceed the total value of unsold units.
As an added protection, it is specifically prohibited for the escrow account to be used as security against financing arrangements or debts of the developer.
Approvals for off-plan sales
Before offering individual units for sale on an off-plan basis, the developer must first obtain the approval of the Ministry. The requirements for approval include:
- escrow account must be open,
- land must be registered,
- estimated budget, architectural designs and engineering plans,
- draft form of unit sale contract.
Once the draft form of unit sale contract has been approved by the Ministry, it cannot be changed. This will prevent market based negotiations with purchasers, including crucially those to do with price.
The developer must also submit an application to the Ministry of Justice in respect of the division of the units, which will examine the application alongside the Ministry of Municipality and Urban Planning.
Interim real estate register
The Law provides for the establishment of an Interim Real Estate Register for the registration of the units to be sold off-plan and all rights and subsequent dealings in them. Interim title deeds will be issued for each registered unit. Registered units can be freely sold and mortgaged. Whilst the developer is not legally required by the Law to register units on the Interim Real Estate Register, it is specifically prohibited to sell a unit that does not have the approval of the relevant authorities and any contract purporting to do so will be void.
Main real estate register
Once the development is complete the developer must register the units on the main Real Estate Register within 60 days of the completion certificate, including registering sold units in purchasers' names.
Whilst previous laws have made provision for administrative bodies to establish specific localised registers (for The Pearl, West Bay Lagoon and Al-Khor) the market has experienced on-going issues arising from the lack of formal registration. These changes will help to protect property interests of purchasers and lenders both during and after the construction phase, and create a more transparent and secure system of registration.
The Law sets out various financial and custodial penalties for non-compliance, with maximum penalties of a fine of QAR200,000 and 1 year's imprisonment. Whilst the threat of a custodial sentence for some offences may have more bite, it is far more likely that a financial penalty will be given for all but the most serious breaches. With most breaches subject to a relatively low fine of QAR50,000, it is questionable how much of a deterrent the sanctions will prove to be and it remains to be seen how rigorously the Law will be enforced.
The Law marks a welcome development of real estate law generally but in particular acknowledges and seeks to address some of the problems previously encountered on major development projects. Whilst real estate law in Qatar still has some way to go to establish a sophisticated and trusted regulatory framework which addresses the complexities of a modern real estate market, this Law can be seen as a significant step in the right direction. It is hoped that the Law and its implementing regulations will help to grow investor and financial confidence, encourage better planning and management of developments and provide a higher degree of protection to all involved.