A recent ruling ordered a Dubai real estate developer to discharge its contractual obligation by way of specific performance. The developer was to delivery a property that conforms with the exact same plans and specifications under the contract, including a floor-to-celling window with unobstructed from the apartment, the absence of which was held to be a fundamental breach of contract that reduced the property’s commercial, aesthetic, rental and resale value.
Introduction
Dubai property market has evolved into the era of absolute modernization. The quality of real estate developments is high-end and nothing short from the quality of top spot real estate cities around the globe including London and Monaco. When things go wrong, it is important to realize that disputes over ultra luxury real estates have special features in terms of claims; classification of contractual terms; the unique gravity of breaches; special nature of losses and damages; remedies; and addressing valuation issues with a stable and predictable approach to quantum.
Are we ready to deal with the economics of High-End Real Estate Law?
A recent case won by TLG encourages us to believe that we might just be ready to recognize that the demand and pricing of luxury real estate is not determined merely by its size and the right to rescind contracts is not based only delivery and completion dates.
Pricing of high-end real estate markets (which Dubai is now an integral part of) is an art; it combines intangible factors that attract the eye of the investors and goes with their lifestyle. The method of appraisal is far more sophisticated today; experts and appraiser weigh and put a dollar value on these factors such as the view, the need for privacy, light and status. For example, the absence of an agreed panoramic view of Central Park in Manhattan from a high-end real estate apartment is likely to be classified as a material breach justifying rescission of the contract.
I represented an investor who purchased an off-plan luxury property, which turned out to be significantly different from the purchased property in terms of size, specifications, architectural and structural plans, fixtures, fittings, views and floor level. In particular the purchasers claimed the following:
- The architectural plans, development scale model and contract specifications showed 180-degree views of Downtown Dubai, Boulevard, the fountains and the iconic Burj Khalifa. However, when the development was finished the buyer found that the developer did not construct the floor-to-ceiling windows that the apartment without its promised views
- Walls erected on podium level, entirely blocked the view from balconies
- That the apartment was located on a lower floor level as a result it ended up being located on the podium level
- Fixtures and fittings installed were of a much lower grade
- The size of the living area was around 24% smaller than the dimensions agreed under the specifications.
The judge ruled that if upon the review of the contract all of the above was a part of the developer’s obligation towards the purchaser and if factual evidence proves that these obligations have been breached then the purchaser is entitled to compensation or any other adequate remedy that the law allows to be granted.
Engineering Expert and technical evidence
The judge appointed an engineering expert to provide factual evidence if the actual property is in fact that fundamentally different from the agreed plans and specifications. The expert was also requested to provide a technical opinion on whether the rectification of structural related differences could be rectified without undue burden on the developer and whether it was practical to do so.
As per the expert’s opinion the outer walls of the living room were extended as much as possible due to the retail units in front of the building due to which it was not possible to modify the structure. The Expert further pointed out that the Architectural drawings, which were approved by the authorities also showed a window, thus providing no factual justification for developer’s failure to construct in accordance with the plans approved by the authorities and agreed with the purchasers.
Appraisal and assessment of damages
As the law has not laid down any fixed criterion for the assessment of the amount of each element of damage
An expert was also appointed to appraise the reduction in the market value of the property and the loss of rental income (if any) as a result of absence of the view, reduced size of living area, change in floor level and low quality fixtures and fittings.
The expert determined that the average market value and rental income of comparable properties without the promised view was 15% lower than the market and rental value of properties with the views similar to those promised to the purchasers. The expert opined that the rental value to be directly influenced by the sale value, which was depreciated.
Judgment
- The Tribunal agreed with the Expert’s findings that the completed property is significantly different from the purchased property.
- The Tribunal agreed with the Expert’s conclusion that the modifications to the property has reduced its rental and sales value; and that such rental and sales value would be higher if the property has the views, windows and larger living room.
- The Tribunal also concurred with the Expert technical opinion that it is not feasible to request the developer to fix the property and bring it back to the specifications as originally agreed.
- The Tribunal awarded a monetary compensation for replacement of fixtures and fittings
- The Tribunal ruled that the above breaches are significant and reduce the commercial value of the property.
- The Tribunal made an order of performance of the contract, ordering the developer to perform the contract by delivering a real estate unit with the exact same plans and specifications, a larger living room, floor-to-ceilings windows, unobstructed views and located at least one level above the existing floor.
Commentary
The judgment is certainly liberal and welcoming. It is encouraging to see that judges are assessing the importance of terms and conditions according to the parties’ intentions at the time of signing contracts.
As Real Estate appraisals agree that views may be the single most valuable amenity in the real estate markets right now – a pre-dominant requirement in all major real estate markets. It is only logical to place significance on clauses related to promise views from off-plan units. The judge placed importance on the value of an unobstructed view because he objectively ascertained the parties’ intentions at the time of contracting.
The courts also uphold the importance of approaching cases in light of its context. In Dubai Court of Cassation, 41/2007 ruled that Notwithstanding that the trial court has jurisdiction over the understanding of the facts of the case, and the interpretation of contracts and agreements and documents and the disputed conditions, nevertheless it is a precondition of that that it must do so in a manner most conducive to the intention of the contracting parties, drawing guidance in that from the facts and surrounding circumstances of the case.
A study published by Savills World Research/Wealth-X that Ultra High Net Worth Individuals (those with $ 30m plus in assets) have a combined real estate holding of $ 5.33 trillion and 4.3% of the Real Estate Holdings of these UHNIs is in Dubai and Abu Dhabi.
This calls for an adjustment in the approach and outlook of the legal system. The most pressing concern is that although the required laws and legal remedies are available, their application and use is very scarce.
In recent years, courts rarely grant orders to rescind a real estate contract, unless and until the contractual breach committed by the Seller or Developer is non-delivery of the property. Courts threshold of tolerance for contractual breaches has reached so high that a developer who charges for a penthouse with high-ceilings, marble floors and private elevators can get away with the delivery of a ceramic titled, unfinished, remotely luxurious property – as long as it has delivered it on or close to the completion and delivery date. It is encouraging seeing that it is being recognized that there is a lot more involved to the rights and obligations involving real estate other than completion dates and delivery.
Finally, the judge appreciated the law grants him significant discretion and numerous options in deciding the remedy that best suits the circumstances: cancellation, orders for performance, compensation and multiple combinations of the same.
As matters of real property the intention is long-term investment returns and that the computation of the loss of long-term profits and opportunities is too speculative, thus deploying the remedy of specific performance as damages could not adequately compensate the purchasers in this particular case.
It is important that the approach of judges and arbitrators is adjusted according to the context of the real estate transaction. When things go wrong, lawyers, arbitrators and judges must approach the matter and interpret the contract, the disputing parties’ intentions and their rights and obligations, in the context of the market of the transaction– the ultra-luxury real estate market and the intentionS of disputing parties who are members of that club.
FAREYA AZFAR | LAW BLOGS 