The mortgage has to be paid off
Where an owner of property has a mortgage, the bank’s interest is usually protected by way of a charge being registered against the property with the Dubai Land Department (the “DLD”). That then means that the property cannot be transferred without the mortgage first being deregistered. The DLD will effectively prevent any transfer of the property whilst the mortgage remains registered against the title in their records.
So the mortgage has to be paid off for the sale to proceed – but who pays it? The seller invariably doesn’t have the cash to pay off the mortgage (otherwise he probably wouldn’t have needed the mortgage in the first place!). The buyer doesn’t own the property so he is understandably reluctant to pay off the seller’s debt if he runs the risk of not receiving clear title to the property down the line. In other jurisdictions the lawyers come to the rescue. The buyer pays the purchase price to the seller’s lawyer, who gives undertakings on how the funds will be applied. On completion, the seller’s lawyer pays off the mortgage, transfers title to the buyer and pays the balance to the seller.
In Dubai, the process is still managed by the banks, but more recently with the useful assistance of the DLD’s ‘blocking system’. Here, the buyer pays off the seller’s mortgage and simultaneously applies to the DLD for a block to be put on the property to stop the seller from selling it to a 3rd party. The application is supported by a certificate from the bank confirming that the buyer has paid off the seller’s mortgage. During this blocking period the transfer can be completed and the title transferred to the buyer.
But what happens where there is no mortgage involved?
For example, where a developer requires a seller to pay a minimum percentage of the purchase price as a precondition of sale, and the buyer is asked to pay this to enable the transfer to proceed? The blocking system isn’t available, as there is no mortgage and no full title registration, so how can a buyer be protected?
Here we would usually suggest an escrow arrangement as a way in which the interests of both parties can be protected, through the involvement of a registered, regulated, insured (and trusted) law firm. Essentially, the parties can enter into an escrow arrangement under which all funds are deposited with the lawyer by the buyer, along with Powers of Attorney from each of the seller and buyer. The amount required to trigger the entitlement to sell is paid to the developer by the lawyer, who then attends at the Registration Trustee Office on behalf of both parties to process the transfer of the Oqood registration from the seller to the buyer. At that time the proceeds of sale are released to the seller.
In summary, there are practical reasons why a buyer may occasionally be asked to discharge what is the primary responsibility of the seller. In those circumstances the buyer has to take particular care not to leave himself or herself exposed, but there are mechanisms available now that should provide comfort to buyers in these circumstances.