As Emirates’ controlling authority for property transfers, the Dubai Land Department (“DLD”) now also enables the registration and implementation of so-called deferred sales agreements. Such agreements represent a particular transfer of ownership of immovable assets where the transfer of title remains pending until all late provisions of the contract are settled. Although the delayed selling approach is not related to business, deferred selling is usually the preferable course of action if institutional investors transfer ownership into commercially utilized immovable cashflow generation assets. Although the concept is not unique to the nature of the parties involved or the real property to be transferred, the deferred sales method is critical when sophisticated commercial properties such as malls, hotels, or office buildings are excessive.
The benefits range from lining liquidity or value gaps to optimizing or postponing tax costs (depending on the jurisdiction). On the legal side, meanwhile, the benefits mentioned above are at the price of relatively greater complexity because a joint venture type contract needs to be supplemented by the sales and purchase agreement, establishing terms for board representation, dilution rights, buy-sell agreements, and so forth.
- Business or real estate?
A delayed sale of the property is advantageous to alienate property, frequently imbedded in legal persons, which have several ongoing commitments with third parties (tenants, service providers, banks, etc.). The deal includes a complete company activity where the property is the critical capital asset. Therefore, the operations side of the property business is usually advantageous to remain unchanged, such that the deferred selling transaction entails the transferring of shares in the asset holding entity. The period of such transfers is often among months and years, according to the requirements and agreements of the parties.
- Costs and procedure
Delayed sales in Dubai are carried out inside the DLD Real Estate Registration Service Special Registration Unit, which oversees settlements under the contract and functions as a trustee supervising payments for the sale of assets and transfer of shares. For documentation, the Dubai Land Department does not require additional documents to record delayed sales. However, like with any other property transaction in Dubai, corporations controlled by legal entities must also present documentation to apply for a transfer for the appropriate holding companies.
No further charges are levied on the cost side (as opposed to a regular sale) so that the high cost is a 4% transfer fee, typically paid evenly among the seller and the buyer. The prices charged and the documentation requested is available under this link: Dubai Land Department – Sale Services.
- Financial and other aspects
Non-recurring loans for the property company may stay in place or may take new financing against commercial collateral. If the existing financing structure is open to the property investor, no debt discharge is required; hence the transaction costs are significantly lowered (negotiation with banks, clearance from or registration of new liens). By delaying purchase price payments, the investor can pay significant parts of the purchase price in an ideal way by making future cash flows in the operation of the property and can therefore accept a somewhat high (nominal) purchase price.
By contrast, sellers may reach higher nominal prices by agreeing to delay sections of sales revenues; however, deferential purchase price payments to use the appropriate discount rate to compute capital value according to economic logic. Although commercial purchases are generally subject to value-added tax (5%) in the United Arab Emirates since 2018, the transfer of a permanent real estate business in the form mentioned above is a “going business” (see my article “VAT in the UAE – a Guide for Real Estate Investors”).
The deported sale concept represents another cornerstone in Dubai’s objective to consistently uphold its commercial and controlling legislation and procedures with the ultimate goal of increasingly attracting international institutional immobilization investors and FDI in general. Despite the lack of a corporate tax in the UAE and Dubai, the program has several significant benefits for institutional investors and the alienation of their assets.