Lawyers involved in the case said the Dubai Court of Cassation ruled that a mortgage a developer takes out to build a project is void if the lending bank did not deposit the loan money into the project’s escrow account.
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,” said Ahmed Labib, senior associate at BSA Law. In such cases, the mortgage agreement is treated as if it never existed,” Labib said. This means the bank loses any priority claim over the project.
In a recent case, the Dubai court cut the mortgage amount from Dh246 million to Dh93 million after BSA’s lawyers demonstrated that only Dh93 million had been placed into the escrow account of the project, the report said. The mortgage was thus only enforceable to that reduced amount. Even if the banks trusted the developer would utilise the funds responsibly, Labib said they cannot escape this. It doesn’t matter what the bank’s motive was – if the money didn’t go into the escrow account, the mortgage will be no good in court.
Banks supporting initiatives now have to verify the entire loan amount is transferred into the project’s escrow account, Labib said. If this is not done there is a possibility that the mortgage will be cancelled altogether or limited to the part of the monies that has been paid in lawfully.
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