What is an Escrow account?
When a financial transaction is done between any two parties, the Escrow account is used to hold the funds until the requirements are met by both the parties. Escrow accounts follow the concept in which funds are saved in a third party account on a temporary basis until the entire transaction is done. Money, security, funds and other similar assets can be saved in an Escrow account.
For example, if we take real estate into consideration where a large amount of money is involved, the buyer can secure his funds in the Escrow account before he pays the amount to the seller until he is very sure about the purchase of the property or until his requirements are met. Similarly, with the help of the Escrow account, the seller can make sure that the buyer has enough funds to buy the property.
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How does an Escrow account work?
Escrow accounts got introduced in 2007 by the government of Dubai to ensure a balanced and structured real estate market in this emirate. Escrow law is monitored by the RERA (Real Estate Regulatory Agency) which operates under the supervision of Dubai Land Development. RERA rules and Escrow laws usually work together to make regulated trade transactions in Dubai.
A buyer or the investor who wants to invest or buy a property will save the funds that he is going to pay the developer in an escrow account. The money in this account cannot be withdrawn or disbursed by the developer unless he uses it for the sake of project management, sales, marketing, consultancy, etc.,
The procedure involved in Escrow
- As most of the buyers or investors are showing interest in having an escrow account, the real estate in Dubai has become hassle-free. Coming to the process, escrow is all about the seller, buyer and the third party named the escrow agent who carries out almost, the entire process including the communication with brokers and attorneys.
- An Escrow agent will generally be present from the time when the MOA (Memorandum of Association) is drafted between the buyer and the seller.
- Once the MOA has been drafted, the agent then goes with the escrow instructions. These are the instructions given by the buyer and the seller regarding what they expect the agent to do.
- All these instructions are put at one place by the agent which becomes a drafted document between agent, buyer and the seller.
- The instructions might also include points like what if things don’t go as planned and how things should be dealt with.
- Both buyer and the seller signs this document, they give the agent the Power of Attorney so that the agent can represent them.
- The funds are transferred to the buyer through the escrow agent and once the transaction gets completed, the agent gets registered at the DLD and transfer the funds immediately to the seller, commissions to the broker and the deeds to the buyer or investor.
- Also before transferring funds to the seller, escrow agent makes sure that the seller is a bonafide seller and documentation is valid. A title search of the property is also done as most of the times, the property that is expected turns out to be different than what is being constructed.
Opening an Escrow account in Dubai
Requirements to open an escrow account
Any developer who is planning to bring into the picture a commercial or residential project should apply for an escrow account to DLD (Dubai Land Department)
In order to have a new Escrow account
- You need to have an active project status
- The project file with which you are associated should be ready which is usually taken care of by the Department of Real Estate, Dubai.
- Purpose of the land that has to be developed
- Approved designs and layouts
- Trade license
- Approval letter from the master developer
- A valid copy of the financial report of the past
- Technical report copy that is issued by the Land Department
- A letter issued by the Escrow agent finalizing to open sub-accounts for all the real estate projects.
What happens if the developer doesn’t open an escrow account?
Law 8 of 2007 ( Escrow Account Law)
According to this law, a developer carrying out a commercial or residential off plan project should be having a separate escrow account with a third party escrow agent. All the money paid by the buyers or investors should be moved to this account to utilize it for the development or construction of the project. The amounts that are deposited in the escrow account should only be used for the project construction and settlement of the financing payments related to the project.
If any person tries to steal, forfeits the amount of money in the escrow account will face imprisonment along with a fine of minimum Dh 100,000.
What a buyer can do in this case?
If the buyers come across any illegal activity performed by the developer, they can lodge a complaint against the developers with RERA which usually monitors and regulates the real estate projects in Dubai. It also takes care of developer’s alignment with the laws that are applicable to them.
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Banks that support Escrow account in Dubai
RERA signs an agreement with the banks before assigning them escrow accounts. After assigning escrow accounts to the banks, the banks can provide escrow account to the customers under the supervision of RERA. Here is a list of banks that provide escrow accounts to the customers.
|Banks that support Escrow account in Dubai|
|Dubai Islamic Bank|
|Union National Bank|
|Commercial Bank Of Dubai|
Things to know about Escrow account, Dubai
- All the funds that have to be reached or paid to the property developer should be maintained in an Escrow account before reaching him.
- With the help of Escrow account, the issues related to real estate like delays in the property construction due to unavailability of funds that are to be transferred to the developer are meticulously observed by RERA.
- To get an approval of Escrow, one needs to submit the final project budget, architectural drawings so that the investors will have confidence about the property that they are going to buy.
- According to the law of Escrow, the buyers or investors can hold back 5% of the total account value for a period of one year so that they can cover or modify the flaws that occur to the property during that period.
- Before registering to the Escrow account, the developer should have approval from the Dubai Land Development.
- Every developer should have a RERA license and an escrow account and an absence of which may lead to imprisonment of the developer.
- If the developer, after getting the approval from the DLD, delays to start the project for more than a period of 6 months, he can be deregistered.
- Each approved bank has a special allotted team to monitor the management and process of the Escrow account
- The buyer ought to use a unique number supplied by the developer before the funds get transferred to the escrow account.
Use of escrow is now compulsory in Dubai if someone is interested to invest in a property or construct a property. So, make sure to do it by abiding with all the rules and regulations and also by becoming aware of all the necessary facts, when you open an escrow account for your property in Dubai.