In a move to modernise the real estate landscape in the Sultanate of Oman, Royal Decree No. 30 of 2018 Promulgating the Law of the Escrow Account for the Real Estate Development Projects ("the Escrow Law") was decreed.Until the introduction of the Escrow Law, developers and their use of funds in off-plan projects were largely unregulated and therefore action was required in order to instil confidence into investors in the Sultanate. Mirroring the already established framework in neighbouring Dubai and Bahrain, the Sultanate of Oman introduced the Escrow Law, which was later followed by Ministerial Decision No. 72 of 2019 Issuing the Regulation of Escrow Accounts for Real Estate Development Projects, which dealt with the implementation of the Escrow Law.
The primary feature of the Escrow Law is regulating the developers use of payments received by purchasers of off-plan property, however the Escrow Law also takes the opportunity to tighten up some of the wider regulation. For example, developers are required to obtain a real estate development licence from the outset, which includes registering with either the Ministry of Tourism or Ministry of Housing, depending on the classification of the project. Furthermore, the Escrow Law imposes restrictions on advertising or marketing the sale of any real estate units without the developers first seeking consent from either the Ministry of Tourism or Ministry of Housing, as applicable by virtue of the nature of the project.
Once the developer has their real estate development licence, they are required to open an escrow account in the name of the project at a local bank. Each project must have its own dedicated escrow account where purchasers shall deposit their funds in line with pre-agreed project completion timelines, and these accounts are to be governed by an agreement between the bank and the developer.
The bank's involvement continues further, with them taking up the position of escrow agent, where they play a crucial role in regulating the developer's access to purchaser funds. In practice this involves the developer having to submit an application for withdrawal of funds, accompanied by certification by the project consultant to verify the developer's request. The same rule applies to any third party mortgage finance that the developer may obtain for the purpose of construction, which also has to be deposited into the escrow account, and withdrawn using the same process as above. It is important that developers are aware of the administrative requirement by virtue of operating the escrow account, which requires the developer to periodically provide the relevant Ministry with a copy of the escrow account banking statement every three months. The developer is also required to register all the transactions of the escrow account and to maintain these for a period of five years from the date of closure of the escrow account, which the relevant Ministry can request at any time.
Whilst funds can be used towards construction, there is a restriction on developers as to how much they can use towards advertising the project for sale, and the Escrow Law restricts this to 3% of the amount deposited by purchasers, which also has to be accompanied by the relevant Ministry's prior approval to the advertising of the project as a whole.
Once development approaches completion, the Escrow Law requires the developers to maintain 5% of the sales value for the units in the project for a period of one year from registration of the unit in the purchasers name. The thought process behind such a requirement is that a portion of funds should be retained for the purpose of remedial works arising in the snagging process, adding a layer of protection for purchasers in the knowledge that their investment is safeguarded during that initial period where defects can arise. Save for this retention, following completion the developer can withdraw all remaining amounts from the escrow account provided that the developer submits a report from the project consultant confirming completion, for the approval of the relevant Ministry.
As we saw with the real estate market in Dubai and Bahrain, the introduction of strong legislation with respect to off-plan properties goes some distance in reassuring investors that their funds are safe with developers. Instilling this confidence will undoubtedly be a force for good in the Sultanate of Oman and provide the real estate sector with that added credibility to go from strength to strength.