Regulating Escrow Accounts and Escrow Account Agents of Real Estate Development Projects

Following the new RERA Law (Law No. 27 of 2017 Concerning the Promulgation of the Real Estate Sector Regulation Law), the Bahraini real estate market has become subjected to additional guidelines that are changing the sector as a whole. This includes regulating escrow accounts of development projects, which came in the form of Resolution No. 3 of 2018 in relation to Escrow Accounts of Off-Plan Sale Projects (Escrow Account Resolution), which was issued by the Real Estate Regulatory Authority (RERA) and Resolution No. 19 of 2018 on Regulating the Activity of the Escrow Account Agent of Real Estate Development Projects (Escrow Agent Resolution), which was issued by Central Bank of Bahrain (CBB).

Opening an Escrow Account

The Escrow Account Resolution mainly relates to off-plan sale projects, whereby it imposes an obligation on the developer of a project to enter into a written agreement with an escrow account agent (Agent) in relation to the operation and maintenance of an escrow account (Escrow Account) for each off-plan development. Notice of this arrangement must be provided to the CBB and RERA.

The Role of an Escrow Account Agent

The Agent must be a retail bank licensed by the CBB according to the Escrow Agent Resolution, accredited by RERA and registered within RERA’s Escrow Account Agents Register in accordance with the Escrow Account Resolution. The CBB has also imposed an obligation on the Agent to provide detailed monthly statements of the revenues and transactions relating to a project’s escrow account to RERA. This clearly demonstrates a more stringent approach on the financial aspect of development projects as RERA is eager to protect end-users from distressed projects. Nevertheless, the Escrow Agent Resolution also protects Agents as it ensures that they are not questioned about any damage caused by the actions of developers or consultant engineers.

The Escrow Account Resolution also requires Agents to maintain a percentage of the project’s structural value for 12 months after the developer obtains a completion certification in relation to the warranty for the repair of any defects that may appear after completion. It stipulates the payments that can be made to and from the Escrow Account.

Conclusion

It is clear that RERA is keen on limiting the number of projects that stall or fail due to financial issues by introducing more robust regulations on both developers and Agents in terms of project funds. These regulations have a more proactive role in ensuring that buyers are protected by ring-fencing their payments and controlling / tracking spending. These regulations also aim to encourage consumer confidence in the market and increase investment into the real estate sector. We anticipate further clarifications may be needed however to address uncertainties and concerns that developers in particular may be facing such as their ability to recover interest / profits over the deposits and the capping of fees charged by escrow agents for their services.