Mixed response to direct escrow account payments

16 July 2014

Some Dubai real estate developers are paying firms directly from escrow accounts

Companies bidding for work in Dubai have mixed views on real estate developers including terms and conditions in their construction contracts that state contractors will be paid directly from a project’s escrow account.

Some construction companies welcome the direct use of escrow accounts, which are set up to protect investors’ deposits, as it will prevent owners from wasting funding. Others voice concerns about possible funding issues, the security of the accounts and added bureaucracy.

“It is a good thing,” says a Dubai-based contractor. “We are looking at a few tenders for deals recently that will pay contractors directly from escrow accounts. Basically it means they have the funds from the buyers channeled into an escrow account held by a third party and they actually release that cash directly to the contractor, preventing an owner from running off with the cash and not building the property.”

Some contractors are already working with deals where they are being paid from escrow accounts. “So far it has worked well,” says an international contractor. “It depends on the bank you are dealing with, but we have found that payments have been made promptly and possibly even better than if dealing directly with the developer.”

Another international contractor is more sceptical: “If payment is made directly from the escrow account, it suggests the developer can’t pay from its own accounts, which means funding could be an issue.”

Other firms say funds in escrow accounts are not entirely secure. “In theory, escrow accounts are a safe place, but we have seen escrow accounts that have been emptied and the developer has fled,” says a regional contractor. “How did they do that?”

Another complication is the additional layer of bureaucracy makes litigation over non-payment more difficult. “If the escrow account has been emptied and I want to sue for non-payment then I have to get the bank involved,” says the regional contractor. “It is much easier if you are dealing directly with the owner.”

Dubai introduced escrow account legislation in 2007 to safeguard investors. The law requires all developers that sell off-plan properties to hold payments from buyers in escrow accounts, which can only be used to develop a specific scheme.

The escrow account can be used to make payments for land, contractors, consultants and marketing activities, although there may be limits for certain expenditures. For example, only 5 per cent of total sales can be used for marketing the project.

The law applies to all developers in Dubai without any exception who sell properties off-plan in the emirate, and in return they receive payments from the buyers or financiers.

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