Real estate development boom in Bahrain

Over the past two decades, Bahrain has witnessed an emergence of a number of large-scale real estate development projects that have had a positive impact on the national economy and created countless job opportunities alongside attracting foreign investment to the kingdom. However, what was to be a carefully supervised and highly profitable market has in fact created an overflow of disputes in the Bahrain courts system, for the most part arising from the sale of properties on blueprints to investors whereby attainment of all the necessary government approvals are usually not required at that point of sale. This gave rise to the issue of developers receiving at least full or nearly full payment for developments from investors but not completing projects as planned.

As the real estate sector was undergoing rapid development, the related legislative instruments in place at the time were not updated to accommodate such developments. In an effort to remedy the congestion of such disputes in the local courts, and to restore investors’ confidence in Bahrain’s real estate market, the legislature enacted the Real Estate Development Law No. 28 of 2014, Decree Law No. 66 of 2014 with Respect to the Settlement of Stalled Real Estate Development Projects and various subsequent orders in support thereof, the most prominent of which is Ministerial Order No. 25 of 2015, promulgating the implementation of Law No. 28 of 2014, collectively referred to as the New Framework. The main features of this New Framework shall be discussed herein.

Blueprint Sales

The New Framework introduces a requirement for approval in respect to the sale of units on plan in property developments, whereby such sales shall be in accordance with a form approved by and under the supervision of the competent directorate. To further combat the above-mentioned cause of disputes, the New Framework also prohibits conclusion of any sale contract before obtaining the requisite development licence, and further provides that contracts executed in violation of this provision shall be null and void. New requirements are outlined for obtaining a development licence, including the opening of a project account with specific stipulations on the amount to be held in escrow.

New Disputes Framework

The New Framework establishes a more realistic two stage expedited mechanism for resolving disputes relating to stalled real estate development projects. Under this system the Ministerial Committee for Reconstruction and Infrastructure was established by the Cabinet in early 2015 and tasked with the sole responsibility of investigating stalled projects and referring them to the Committee of the Settlement of Stalled Real Estate Development Projects, hereafter referred to as “the Committee”, the main role of which is to resolve disputes within a constrained timeframe of 18 months, of which four to seven months are dedicated to allowing the developer to reach an agreement for amicable settlement with the stakeholders, which the Committee shall then choose to accept, amend or dismiss.

If settlement cannot be amicably reached within the specified period, the Committee is entitled to decide on the settlement within a maximum period of 18 months from the date of the project’s referral, thereby legally limiting the maximum period in which a dispute of this nature is required to be resolved. The Committee is entitled to take all urgent provisional measures and to take all procedures deemed suitable to remove the reasons for the stalled project or to settle such projects, including but not limited to offering the project to a new developer for completion or selling the project in auction and returning investors’ money from sale proceeds through the courts’ treasury.

Project Accounts

The New Framework also requires that each property development project shall have an independent project account for which a project account trustee is appointed. Such a trustee is required to submit to the competent directorate regular statements of the revenue and payments related to the project account. As a guarantee for investors, prior to the commencement of each phase of the project, the developer is required to deposit into the account 20% of the estimated value of the project, including the value of the land, as well as the amount of any loans in the event that the developer has mortgaged the project and all other amounts provided by the developer and depositors. Furthermore, the New Framework establishes that the percentage of an investor’s payment of instalments for each phase of execution of a project shall be proportionate to the percentage of completion at 20% increments, unless the developer and buyer have agreed to different percentages of instalments. Also, in order to ensure proper completion of projects, trustees are required to retain 5% of the constructional value of the project after the developer obtains the completion certificate, and such funds shall not be paid to the developer until expiry of a period of one year from the date of obtaining such certificate.

In this regard, the Central Bank of Bahrain (CBB) has circulated a draft ministerial order regulating the activities of trustees. Moreover, the draft order establishes a register of project account trustees registered with the CBB. This newly introduced feature, as well as the proposed order, is mainly intended to safeguard and protect all investors’ rights in such large projects, thereby restoring investors’ confidence in the region.

Default By Developers

In the event that a developer unjustifiably defaults on delivery of a unit beyond the period prescribed in the contract of sale, the buyer may, after providing both the developer and the trustee with 90 days’ notice, file a request with the Committee to terminate the contract and claim compensation. Any requests by individual claimants with regards to stalled real estate projects under examination by the Committee will not be heard until a decision is reached regarding the stalled development.

The New Framework considers a developer who has ceased to complete the project for any reason to have temporarily ceased to execute the development project. In this case, the competent directorate may, in consultation with the trustee, take all necessary measures to protect the investors’ rights and ensure completion of the project or return of the funds to their owners. Furthermore, in the event that the developer continues to cease execution of the project for a period exceeding one year after commencement, despite the above mentioned intervention by the authorities, then the Committee may be approached to order the execution of the project at the developer’s cost or to order the sale of the project and distribution of sale proceeds to the investors if the completion of said project is deemed not feasible.

Conclusion

The New Framework has helped to generate considerable stimulation and restoration of activity in the real estate market, where, recently, stalled projects have, after being referred to the Committee, re-commenced. In addition to rehabilitating the real estate market, the guarantees provided by the New Framework are hoped to boost investor confidence and re-establish Bahrain as a regional centre for real estate. These recent positive steps also encourage and promote sustainable economic growth in the kingdom.