Dubai’s Court of Cassation has ruled that a mortgage taken by a property developer to finance a project can be considered invalid if the lending bank fails to deposit the loan funds into the project’s designated escrow account, lawyers involved in the case said.
The ruling is based on the UAE’s Real Estate Development Escrow Account Law, Law No. 8 of 2007, which requires banks financing property developments to transfer loan funds directly into the relevant project’s escrow account.
Ahmed Labib, senior associate at BSA Law, said the court’s interpretation makes the requirement a condition for the validity of the mortgage itself, rather than simply a condition affecting its enforcement.
“A mortgage agreement in such circumstances is deemed as if it never existed,” Labib said, adding that the bank could lose its priority claim over the project.
In a recent case, the Dubai court reduced the value of a mortgage from Dh246 million to Dh93 million after lawyers from BSA established that only Dh93 million had actually been deposited into the project’s escrow account.
As a result, the mortgage was enforceable only to the extent of the funds that had been properly deposited into the escrow account.
The dispute took about two years to reach the Court of Cassation. Labib said the duration of such cases can vary depending on their complexity and whether independent experts are appointed to examine the transactions and related evidence.
The ruling places a significant responsibility on banks financing property developments to ensure that loan proceeds are transferred correctly.
Labib said a bank cannot rely on an expectation that a developer will use funds appropriately if the money was not deposited into the designated escrow account. The court’s position means that the bank’s intentions would not prevent the mortgage from being challenged.
Banks must therefore ensure that the full amount of a development loan is deposited into the relevant project’s escrow account, according to Labib. Failure to meet the requirement could result in the mortgage being invalidated or reduced to the amount that was actually transferred into the account.
The case also raises questions about compliance procedures within property finance. Labib said it was unclear whether the shortfall in the case represented an isolated error or reflected a broader issue, but suggested that some banks may not have fully appreciated how strictly the escrow requirement could be applied.
The decision could have wider implications for Dubai’s property market, particularly for off-plan developments financed through bank loans.
Labib said the ruling provides additional protection for off-plan buyers by helping ensure that funds intended to finance construction are channelled through the project’s escrow account.
He described the decision as part of a broader pattern of Dubai courts strengthening protections for investors in the real estate sector, while placing greater emphasis on compliance with rules governing development finance.
