A recent legal dispute between a purchaser and a seller culminated in an Appeal Court decision that is rather disconcerting when analysing the implications thereof. In this particular case, a property’s size as reflected on the title deed was smaller than what was on the initial sale and purchase agreement (SPA). Unhappy with the situation, the purchaser, who bought the property off-plan, wanted to be compensated for the fact the unit was now smaller.
The immediate reaction in this situation is to refer to the relevant laws — and in particular the two provisions in the law that deal specifically with this issue. Article 12 of Law No. 13 of 2008, which regulates off-plan sales, states that “if a decrease in the area occurs, the developer must compensate the purchaser for such decrease unless such decrease is inconsequential”.
Initially, the difficulty with this provision was that “inconsequential” was not defined and this left it up to the courts to decide its meaning. As a result, the Executive Council’s Decree 6 of 2010 clarified the situation and determined in Article 13 (3) that “the developer must indemnify the purchaser if the area of the real property unit is less than the agreed area by more than 5 per cent of the net area of such unit”. However, the wording of this article in itself left the door open as to whether the compensation would be for the entire shortage or only for any excess above 5 per cent.
Once again it was left up to the Dubai Courts and in this latest instance, the Appeal Court to interpret the wording. The Appeal Court has interpreted this provision to mean that the developer is only obliged to compensate the purchaser for any shortage in size above 5 per cent. Thus, if the unit is 6 per cent smaller, the developer is only obliged to pay compensation for 1 per cent. The question of whether this was the intention of the legislation is unfortunately irrelevant as the decision of the Appeal Court stands.
The Executive Council’s Decree further clarifies that the amount of compensation payable to the purchaser, where the percentage of shortage of the net area exceeds 5 per cent, will be calculated based on the price on the contract and goes further to say that the net area of a unit set out in the SPA and the plan of such unit will be taken as the basis for calculating any shortage in the area.
These provisions seem to impact gravely on the purchaser’s already diminished rights as the purchaser will receive compensation based on the initial purchase price and does not take into account any increase in value, despite having already waited a number of years for completion and handover of the unit and possibly having paid service charges calculated in terms of the SPA and not the actual extent set out in the title deed, which reflects the net area of the unit.
Notwithstanding the above, developers also usually include some fancy wording in the sales agreement, which also impact a purchaser’s ability to make a claim, by referring to “gross area”, which may include the walls of the unit and certain unusable areas, while the law refers specifically to the “net area” of a unit, i.e. what you can carpet. Other developers may include provisions in the SPA to the effect that they may amend the size of the unit, entirely at their own discretion, limiting the purchaser’s rights.
It appears that developers can knowingly build smaller units in the knowledge that they are safe from compensation claims if they abide by this 5 per cent rule and are free to manipulate the building structure to get greater advantage and profit by limiting the cost of construction. This should not be the intention of the law and greater clarity should be sought and obtained from the legislature to prevent unscrupulous developers from taking advantage of this situation.
For an average off-plan building with 10 units of 1,500 sq ft each, reducing each unit by 5 per cent would allow an 11th unit measuring 750 sq ft to be built on the same floor, giving the developer an extra unit to sell and not having to pay any compensation to each of the purchasers now being left with units of only 1,425 sq ft each. Now calculate this for a 45-storey building, and it makes one think.
Although the Real Estate Regulator Agency does regulate the advertising of off-plan units, there is no provision regulating the advertised sizes of units, and the sizes of the units can thus be exaggerated by a developer, as the size can be manipulated in the SPA by up to 5 per cent without any accountability on the developer.
It’s important to study the terminology used in SPAs before signing and later being disappointed upon handover of the unit. Also, obtain advice on SPAs from legal professionals to avoid the pitfalls of off-plan purchases.