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27 May 2020

Off-Plan Developments in Bahrain: A More Resilient Market?

The IMF have predicted a global recession which goes beyond the financial crisis experienced during the previous decade. Bahrain’s skyline is a constant reminder of these difficult times with a number of key projects still incomplete.

Encouragingly, the market is much more equipped today than it was previously. Bahrain introduced a series of welcomed reforms aimed at protecting stakeholders and encouraging investment. These include, the following:

Force majeure is an event that is outside the control of one or both contracting parties that renders the performance of their contractual obligations impossible (or impractical).

The RERA Law and subsequent resolutions (RERA Laws) are noticeably silent in relation to force majeure and RERA has not issued any targeted moratoriums or reliefs for off-plan projects. Whilst the RERA Laws require off-plan sale agreements (Sale Agreements) to include certain provisions, force majeure – perhaps unsurprisingly – is not one of them.

Unless a Sale Agreement includes sufficiently wide and clear force majeure provisions to capture the current pandemic, the parties will need to seek determination by a court in the context of applicable legislation or ultimately, the Bahrain Civil Code.

The RERA Laws do address a breadth of issues that can arise during the life cycle of an off-plan project and, for the most part, provide a process for resolving these. We have considered below some of the key concepts in the RERA Laws which benefit both buyers and developers in the context of the recent outbreak.

A Buyer’s Obligation to Pay 

A Sale Agreement must include a payment plan which is linked to the percentage progress of an off-plan project. Prior to requesting payment from a buyer, a developer must provide both RERA and a buyer with confirmation that a relevant milestone or percentage has been achieved. A buyer must then pay their corresponding instalment within ten (10) business days from the date an approved payment request has been provided.

As such, whilst reliefs for force majeure are not expressly included in the RERA Laws, a buyer’s obligation to pay purchase price instalments is linked to the developer achieving the relevant milestones. Accordingly, if the milestone has not been achieved then the buyer will not be required to pay the instalment.

However, provided that a developer has met the relevant construction milestone, a buyer must comply with its’ payment obligations in the Sale Agreement. If a buyer breaches this obligation, then a developer will be entitled to terminate the Sale Agreement within ninety (90) days from the date a buyer receives notice of breach. In light of the current market, this may not be an adequate relief for the developer.

Using Project Funds for Other Purposes

One of the cornerstones of the RERA Laws is the obligation to establish and maintain a dedicated escrow account for each off-plan project. This requirement was initially introduced in 2014 by the Development Law and seeks to restrict developers from utilising project funds for other purposes. The RERA Laws include detailed processes for withdrawing funds from the escrow account. Ahead of dispersing payments from an escrow account, a developer must obtain either a certificate from its consultant confirm that the payment is properly due for the construction or management of the project; or, obtain RERA’s approval in relation to interim profit payments.

As such, a developer will not be able to off-set any of its other business liabilities by using funds received or allocated for the relevant off-plan project. This provides buyers with a degree of comfort that funds allocated for the project will not be diverted elsewhere and if the project has temporarily stalled due to the current outbreak, the funds will remain in the escrow account until such time as a developer is able to restart works.

Delayed Completion

A developer must keep its buyers informed of the progress of the off-plan project. If a developer anticipates a delay to the estimated completion date of the off-plan project, if must provide a buyer with a notice that details the cause and defines a new handover date.

Interestingly, the RERA Laws do not restrict a developer’s ability to serve this notice or require that certain conditions are met. Therefore, it can be argued that a developer may push back its original estimated completion date without need to invoke force majeure.

If however, a developer has provided a buyer with a handover notice (i.e. confirming that a unit will be handed over on a specific date), but does not achieve handover by this date, then a buyer may serve a notice of default six (6) months after the relevant date. A developer is provided ninety (90) days to remedy the breach before a buyer is entitled to terminate the Sale Agreement.

It is likely that this may have been an oversight in drafting the relevant legislation as the RERA Laws appear to allow developers to delay their estimated handover date indefinitely provided that they have not served a formal handover notice and RERA does not designate the off-plan project as ‘stalled’ as more particularly discussed below.  However currently, this is a key benefit to developers.

If developers do anticipate that, as a result of the current outbreak, it may experience delays to their estimated completion date, we would recommend that developers consider their obligations and duties in the RERA Laws. Developers should understand what options are available to them and take any required steps (such as serving relevant notices) in order to minimise the risk of breach. 

Stalled Projects

If RERA designates an off-plan project as a 'stalled project', the RERA Laws permit RERA to take measures to ensure that the stalled project is completed or for the return of payments made by depositors (i.e. buyers).

The RERA Laws currently do not define the criteria for a stalled project to be designated as such. However, it clearly provides that RERA may apply these broad powers in relation to a project that has stalled "for any reason".

The definition of stalled projects in the Stalled Projects Law widely drafted and subjective. It includes that a project will be deemed as a stalled project if a developer is not "serious about completing the project". New projects will be deemed as stalled where, unless there is a valid reason, work has not commenced despite a developer obtaining a building permit and relevant approvals.

The RERA Law provides that a further resolution will be issued to provide detail in relation to the above. In the absence of these regulations, the RERA Law and Stalled Projects law do not appear to exempt or exclude projects which are stalled due to an event of force majeure.

There is no doubt that in an already challenging market, the outbreak of COVID-19 will likely have a significant impact on off-plan developments. The coming months will likely test the effectiveness of the RERA Laws and RERA's role in regulating the market. We are optimistic that notwithstanding some of the issues identified above, Bahrain's real estate industry is more resilient to weather the current storm than ever before.

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