The Dubai Land Department (“DLD
“) as the Emirate`s governing body overseeing property transfers now also allows for registration and execution of so-called deferred sale agreements. Such agreements describe a particular ownership transfer of real estate assets where the ultimate transfer of title remains pending until all deferred considerations as per the contract have been settled. Even though the method of a deferred sale is not tied to the entrepreneurial sphere, a deferred sale is usually the preferred course of action when institutional investors transfer ownership in commercially used, cashflow generating real estate assets.
While the concept is non-specific with respect to the nature of the involved parties or the real estate assets to be transferred, the deferred sale method plays out its strengths especially in situations where complex commercial properties like malls, hotels or office buildings are alienated.
The advantages range from bridging liquidity or valuation gaps to optimising or deferring tax burdens (depending on the jurisdiction).
On the legal side, however, the aforementioned advantages come at the price of a somewhat increased complexity as the Sale and Purchase Agreement is to be complemented by a joint-venture type contract, defining the terms for board representation, dilution rights, buy-sell agreements and the like.
Business or Property?
A deferred sale of properties is particularly useful for the alienation of property assets which are usually embedded into legal entities, the latter having numerous ongoing contracts with third parties (tenants, service providers, banks etc.).
To this extent, the transaction includes a whole business operation within which the property has the function of the central capital asset.
Hence, it is usually favourable to leave the operations side of the property business untouched, so that the deferred sale transaction involves the subsequent transfer of shares in the asset-holding entity.
Frequently, the duration of such transfers is several months to several years, depending on the parties` requirements and agreements.
Procedure and Costs
In Dubai, deferred sales are processed within the Special Registration Unit of the DLD`s Real Estate Registration Service Department, which monitors the settlements as per the contract and in fact acts like a trustee overseeing payments towards the sale of the asset and transfer of shares.
With respect to paperwork, no additional documents are demanded by the Dubai Land Department in order to register a deferred sale. As with any other property transaction in Dubai however, companies owned by a legal entity have to produce the respective holding companies` documents also in order to apply for a transfer.
On the cost side, no extra charges (compared to a standard sale) are levied on a deferred sale, so that the main cost position is 4% transfer fee, typically evenly distributed between buyer and seller. The levied fees and required documents can be found under this link: Dubai Land Department – Sale Services.
Financial and other Considerations
Non-recourse loans to the property business can remain in place or new financing be taken up against the business collateral. If the existent finance structure is amenable to the property investor, no discharge of the existing debt is necessary, thus substantially lowering transaction costs (negotiation with banks, discharge from or registration of new liens).
By means of deferring purchase price payments the investor can – in an optimum scenario – pay substantial parts of the purchase price by rendering future cash flows of the property operation and might thus be amenable to agree to a somewhat elevated (nominal) acquisition price.
The seller in contrast can achieve a higher nominal price by agreeing to parts of the sales proceeds being deferred although as per economical logic, deferred purchase price payments are to be corrected for using a suitable discount rate to calculate the capital value.
Although the purchase of commercial property is generally subject to VAT (5%) in the United Arab Emirates since the beginning of 2018, transfer of an ongoing property business as described above qualifies as a „going concern“ (see also my article “VAT in the UAE – A Guide for Real Estate Investors”
), relieving the investor from the levy of VAT as per the UAE tax law.
The deferred sale concept represents another building block in Dubai`s ambition to continually advance its commercial and real estate laws and procedures with the ultimate goal to increasingly appeal to international institutional real estate investors as well as to attract Foreign Direct Investment (FDI) in general.
Even though the absence of a corporate tax levy in the UAE and Dubai will make one of the scheme`s typically dominating advantages superfluous in most use cases, a number of substantial benefits for institutional investors and the alienation of their properties cannot be denied.
The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on