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What is an Escrow Account?
An escrow account happens to be a third-party funding medium. It is opened by the merchant to receive access to the money transferred by the buyer for an agreement made between them. If the merchant fails to fulfil the agreement, the amount the buyer had deposited is refunded to them.
Escrow Account in the UAE
Escrow accounts have a specific function in UAE real estate. When a developer launches a new residential project, they have to open this account for it. It is a mandatory requirement they have to follow according to the Escrow Account Law in UAE.
If a developer is launching multiple projects, they have to open an individual account for each project. The buyers of units in the said project have to deposit the amount in this account.
How Escrow Account Protect Buyers?
Many people show reluctance when it comes to buying an off-plan unit. One of the major reasons why they have reservations is that they believe that their invested money will go down the drain if the project gets stalled or cancelled. However, this isn’t the case. If a project has been officially declared cancelled by DLD, they can file a petition for compensation by submitting proof(s) of their ownership.
Once their claim has been verified, they will be compensated for their funds. The amount is refunded from this account opened at the time of the launch of the project.
You can read in detail here how to deal with the cancellation of an off-plan project in Dubai.
Benefits of an Escrow Account
Apart from the enhanced protection, it offers to buyers and investors as discussed above, an escrow account can prove to be beneficial in numerous other ways.
Some of its benefits are:
- It limits the chances of frauds from the developers; end as the funds are only released for them after they have completed the promised development phase.
- Escrow accounts allow RERA to closely monitor the funding and the progress of the said project. This ensures enhanced satisfaction and peace of mind for buyers and investors.
- It limits the chances of delays and cancellations as developers know that they are being monitored by the concerned authorities.
- This type of account urges developers to perform well as the project is monitored by RERA. Thus, the project can be cancelled if their performance isn’t up to the mark.
- When a developer has to get an escrow account approved, they are required to submit the architectural drawings and the final project budget. This way, investors and buyers can rest assured that there will be no changes made to the original plan.
Important Things to Know About Escrow Accounts in the UAE
Apart from the aforementioned ones, here are some important things one must know about this type of account in the UAE:
- If a developer proceeds without an escrow account and RERA license, they can be penalised and imprisoned as well.
- An escrow account can only be opened in specific banks and financial institutes. Some of these are HSBC Bank Middle East, Tamweel, Standard Chartered, Amlak etc.
- Each bank or financial institute approved for opening escrow accounts has a dedicated team that evaluates the management of these accounts.
- As per the escrow law, investors have to hold back 5% of the total cost for one year. This practise is adopted to cover any issues or flaws that might arise in the project.
- The developer has to obtain approval from DLD before opening and registering an escrow account.
- As per the RERA Dubai Law, if a developer delays the commencement of their project for the duration of over six months after they have obtained the DLD approval, the project can be deregistered.
- Funds in an escrow account cannot be seized by any creditors of the developers.
- Each buyer is given a unique reference number by the developer at the time of the payment. They must use this reference number only.
In a nutshell, the escrow account in the UAE certainly helps to make investing in the primary market a lot safer. So, make sure to verify the escrow account among other details of a project before selecting it for making an investment or buying a unit.