Dubai Developer Mortgages Are Void Unless Funds Go Into Escrow, Says Court

(MENAFN- Khaleej Times) Dubai's Court of Cassation has ruled that a mortgage taken out by a developer to finance a project is void if the lending bank did not deposit the loan money into the project's escrow account, according to lawyers involved in the case.

Ahmed Labib, senior associate at BSA Law, said the ruling is based on the UAE's Real Estate Development Escrow Account Law (Law No. 8 of 2007), which requires banks financing a development to pay the loan amount directly into that project's escrow account.

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The court has now made this a strict condition for the mortgage to be valid at all, not just enforceable.

“A mortgage agreement in such circumstances is deemed as if it never existed,” Labib said, meaning the bank loses any priority claim over the project.

In a recent case, the Dubai court reduced the mortgage value from Dh246 million to Dh93 million after BSA's lawyers proved that only Dh93 million had actually been deposited into the project's escrow account. The mortgage was therefore only enforceable for that lower amount.

The case took around two years to reach the Court of Cassation, though Labib said timelines vary depending on the complexity of each dispute and whether independent experts are appointed to assess the case.

Labib said it is unclear whether the shortfall in this case was a one-off error or a wider pattern, but suggested some banks may not be fully aware of how strictly the escrow requirement is now being applied.

Protection for investors

Labib said banks cannot avoid this outcome even if they believed the developer would use the funds properly. If the money was not placed in the escrow account, the mortgage will not hold up in court, regardless of the bank's intentions.

Banks financing developments must now ensure the full loan amount is deposited into the project's escrow account, Labib said. Failing to do so risks the mortgage being thrown out entirely, or reduced to only the portion of funds that was properly deposited.

The ruling gives added protection to off-plan investors by helping ensure that financing is actually spent on construction, supporting the chances that projects are completed on time, Labib said.

He described it as part of a wider trend of Dubai courts reinforcing investor protections in the real estate sector.

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