Foreclosed Dubai Homes to go on Auction

Foreclosed Dubai Homes to go on Auction

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A Dubai law firm has reported that the Dubai Land Department (DLD) will recommence property auctions from this month, including foreclosed properties.

“Recent discussions with the Land Department of Dubai indicated that they are now ready to re-commence property auctions, including foreclosed property, as the number of transactions processed daily by the department increases and they see the market stabilising. They hope to hold the next property auction in November,” Nick Clayson, Partner and head of real estate, Middle East, Norton Rose Group, told Emirates 24/7.

According to the firm the auctions are set to present a whole host of legal quandaries and uncertainty, not least because of the lack of information coming from official channels.

Basically, the system has always been as follows: when a court rules that a property is to be auctioned under the Dubai Mortgage Law, a request is sent to the land department that the property be auctioned. The DLD then arranges for a mortgage to be held in accordance with the criteria and rules sent down by the court, although the DLD does have its own set of rules regarding properties auctioned under the mortgage law.

This, some-would-say already complicated system is about to get even more complicated or arguably less so depending on how you look at it.

A formal set of auction rules is about to come into play, according to informed sources this will be in the form of a government auction guideline book.

Under the new system, a property will need to be valued, however, as yet it is unclear who will perform the valuation and based on what measure. However, the biggest risk is that the valuation will be considerably less than the outstanding debt on the property.

Under the Mortgage Law, if a property is sold for less than the debt outstanding, they are entitled to claim the difference from the debtor.

“However, this appears to contradict the provision that any debt may only be covered out of the mortgaged property. Further guidance will be needed from the Dubai Courts and the Land Department as to what actions banks may take against a borrower if the sale proceeds are not sufficient,” said Clayson.

Clayson is also worried about what will happen if a property fails to meet the reserve in the auctions. Under the new guidelines, the department will place any such property into the next available auction. Clayton worries whether this will incur a new valuation, and potentially bring the reserve down even further, leaving the debtor in even more of a bind.

Either way, he believes the restart of auctions will trigger an upsurge in litigation by lenders against debtors. Banks have been cautious in Dubai; negotiating with debtors at the time of default, until the recent cases of Barclays and Tamweel, there had been no foreclosures. It was feared that those cases could become precedents, opening the floodgates for droves of repossessions. If Clayton’s is right, the recommencement of auctions could well increase the likelihood of this scenario.

There is one saving grace: under the Mortgage Law a judge can postpone the sale of a property if he deems that a borrower will be able to repay the mortgage amount in a specified period, or that the sale of the mortgaged property will cause the borrower substantial damage. Determining what the banks deem as “substantial damage” will take time and present banks with uncertainty about initiating proceedings.