Oman's new Escrow Law – will purchasers' funds be adequately protected?

  • Middle East
  • 01/16/2019
  • Detons

January 15, 2019

In November of last year, Sultani Decree 30/2108 relating to the Escrow Accounts for Real Estate Development Projects (the Escrow Law) was promulgated in a move to regulate real estate developers and to protect funds paid to developers by purchasers of off-plan properties. Until this new law was issued, real estate developers operating in the Sultanate were largely unregulated. The Escrow Law is essentially based on the equivalent legislation in Dubai, which has been in place for 10 years¹.

The Escrow Law applies to developers selling units off plan in real estate development projects for residential, commercial, industrial and tourism purposes (except for projects constructed under special Sultani Decree). The requirements under the new law take effect from 18 May 2019. Whilst the Escrow Law provides the legal framework for the new regime, the regulations to be issued by the Minister of Housing (in co-ordination with the Ministry of Tourism and the Central Bank of Oman) will hopefully contain more detail as to the operational aspects relating to the implementation of the new law.

Developers will need to obtain a licence and enrol on a special register at either the Ministry of Tourism (for integrated tourism complexes) or the Ministry of Housing (for all other real estate development projects).

The main focus of the Escrow Law is the obligation for developers to set up an escrow account with a local bank for each real estate development project it is operating. The Ministry of Housing or the Ministry of Tourism, as appropriate, is to approve the escrow account arrangements. To avoid commingling of funds, all payments received from purchasers of off-plan properties (or their banks if mortgage finance has been obtained) are to be paid into the relevant escrow account. Developers who obtain third party mortgage finance to supplement construction funding from off-plan sales will be required to deposit the loan proceeds into the escrow account. In an effort to ensure that the funds are only to be utilised for the actual cost of construction, the developer will need to submit an application for withdrawal to the local bank, which acts as escrow agent, accompanied by certification of the amount from the consultant engineer for the project. There is also a provision for retention of a yet to be specified amount in the escrow account for a period of one year from the date of registration of a unit in the purchaser’s name to protect a purchaser in relation to any snagging issues.

The Ministry of Housing and the Ministry of Tourism have a monitoring role and the authority to stop payments being made from the escrow account. The Ministries also have the right to step in to try to resolve any issue causing the stoppage of construction. The penalties that can be imposed on a developer for failure to comply with the new rules, including the restriction on utilising purchasers’ funds, are a fine of at least OMR 10,000 and/or a jail term of up to three years, together with de-registration.

The Escrow Law provides some good news for off-plan purchasers. If the escrow accounts are operated as is anticipated, purchasers can at least be assured that their funds are only being utilised to finance construction of the development they have bought into. If, however, the funds in the escrow account are misused, the purchasers simply become unsecured creditors of the developer. Furthermore, whilst the Escrow Law provides some protection in respect of the use of purchasers’ funds, it does not ensure that the real estate development project will be completed on time or indeed at all.

1.Emirate of Dubai Law no. 8/2007