Guarantee/Escrow Account for Property Developers in Dubai

Law No. 8 of 2006 concerning Guarantee Accounts of Real Estate Development in the Emirate of Dubai ("the Law") was recently passed.

With the enactment of the Law, property buyers can expect greater protection when purchasing new properties from property developers in Dubai.

The Law is applicable to all property developers selling uncompleted properties (including properties under construction) and accepting payments from buyers or financiers before the properties are completed.

Under the Law:

1. All property developer must register with the Land Department in the Register of Developers.

2. Developers need written permission from the Land Department to advertise in both local and foreign media to promote the sale of properties that are under construction.

3. Developers need to establish guarantee/escrow accounts with the Land Department.

4. All payments from buyers shall be deposited into a bank account under the name of the property development in an approved bank in Dubai.

5. Any loans obtained by the developer from the mortgage of the uncompleted development shall be deposited into the guarantee/escrow account.

6. Payments to the developer from the guarantee/escrow account can only be made after a certificate is issued by the consultant of the development describing the completed stage and the requirement of the subsequent stage of construction.

7. 10% of the value of the development is kept in the guarantee/escrow account for 1 year after the certificate of completion has been obtained.

The Law gives more transparency to property transactions involving uncompleted property developments and some level of protection to buyers in the event the property developer goes belly up.

What remains to be seen is if escrow accounts will be made mandatory for all property transactions, whether such properties are completed or not.

Thailand's New FBA - another nail into the coffin?

The latest update is that the draft was withdrawn from Parliament. Another last minute amendment was made to insert a clause to prevent foreigners from having a majority presence on the board of directors, thereby preventing foreigners from controlling the companies that they have invested in.

No direct majority control of the board of directors + no direct majority in shareholding = no control for foreign investors.

The saga continues.

Thailand's New Foreign Business Act - end of the road?

There has been much talk about the amendments that were made to Thailand's Foreign Business Act. The draft is likely to be passed any time soon.

Background

The Foreign Business Act ("FBA") regulates how foreigners do business in Thailand. The Act states what are the activities that foreigners can engage in without the need to have a local Thai shareholder holding at least 51% of the shares in a Thai company. Before the amendments made during the Asian Financial Crisis (1997 to 2003-4), there were virtually no activities that a foreigner could engage in without the need to find a local partner. Foreigners resorted to using what was commonly known as a "nominee scheme" or the "51/49 scheme" whereby a local Thai will hold 51% of the shares of the Thai company in his name, but his voting rights were minimised to the extent that the foreigner holding 49% would control the company. Invariably, the Thai shareholder had no involvement in the day to day management of the company or to profits of the business and was paid a fee to be a nominee. Such schemes were also used to foreigners to purchase land and landed property in Thailand.

There were provisions in the FBA which forbid Thais to abet or assist foreigners to bypass the FBA. However, there was little or no enforcement by the relevant authorities and the 51/49 scheme was never really tested in court as to its legality and viability.

With the amendments during the financial crisis, foreigners could engage in some activities where they could hold almost 100% of the shares in the Thai company legally without the use of a Thai nominee. One such activity was the wholesale and retail of good where the capitalisation of the Thai company exceeded THB100 million. This opened the doors for hypermarts like Lotus and Carrefour to enter the market. The hypermarts' low prices and bulk volume purchases from suppliers ultimately drove many neighbourhood grocery stores to closure as they were not able to compete on pricing nor could these neighbourhood stores obtain volume discounts from their suppliers.

For those activities where foreigners still could not use wholly foreign owned Thai companies to engage in, the 51/49 scheme was still used. Out of 10 Thai companies that were incorporated for foreigners, at least 9 used the 51/49 scheme. These schemes came under scrutiny when the then Prime Minister Thaksin Shinawatra and his family sold their controlling stake in the listed telecommunication company, Shin Corp, to Temasek Holdings, an investment company owned and controlled by the Singapore government. While we will never know if Temasek actually used the 51/49 scheme to hold their shares in Shin Corp, suffice to say, it created so much publicity that PM Thaksin was ousted and now lives in exile. Probes into Thaksin's wealth were conducted by various government agencies under the current military government that seized power in a bloodless coup.

With that, the current government amended the FBA to plug the hole created by the 51/49 scheme, effectively the death sentence for most foreign owned businesses in Thailand and foreigners who owned land and landed property through such schemes.

The New FBA

I had the chance to browse through the draft. With the amendments, any arrangement that allows the foreigner to bypass the FBA, including the use of superior voting rights in shares would be illegal. So what are foreign business owners going to do? It remains to be seen if my learned Thai friends can find some way around this. What is of concern is will the relevant government agencies now audit each and every Thai company that has a foreigner that holds 49% of the shares to ensure compliance with the new laws? It is one thing to have the law and another to actually enforce it. Only time will tell. For now, I guess everyone has to mai pen rai ("Its OK" in Thai) and jai yen yen ("Relax, chill" in Thai).