Qays H. Zu’bi, Senior Partner, Qays H. Zu’bi Attorneys & Legal Consultants, on protecting real estate investors in Bahrain

Qays H. Zu’bi, Senior Partner, Qays H. Zu’bi Attorneys & Legal Consultants, on protecting real estate investors in Bahrain

 

Since the beginning of the last decade, Bahrain had been ranked very favourably for investment opportunities, particularly in real estate. However, the impact of global economic recession that hit Bahrain late coupled with sectarian civil unrest left prominent blemishes on Bahrain’s until-recently-clean slate. We saw a serious shortage of funds and liquidity, along with security concerns. With particular reference to the real estate market, everyone – from project developers to contractors, workers to investors – came within the grip of misfortune. Many construction projects were halted midway and investors were left without any apparent remedy. We have been approached by a number of aggrieved investors who intend to reclaim investments made in failed or stalled construction projects. In addition, local newspapers are frequently inundated with investors’ complaints and letters to the editor in this respect.

The question that then arises is what legal actions can such investors take against a property developer who has breached his obligations? Well, the remedy lies in the contract that governs the relationship between the investor and the property developer. A civil claim may be filed against the developer for breach of contract, specific performance (that is, to complete the project), recovery of paid instalments and/or damages resulting from the delay in completion. The second question, and perhaps a challenging one, is what if the property developer has no finances available for completing the project or satisfying the investors’ claims. A recovery suit may be filed at the courts in Bahrain, but on a practical note, how would the judgment be enforced if the project developer has insufficient assets and funding? In such a state of helplessness, investors often expect government intervention. But unfortunately, the existing laws do not provide for any mechanism that may come to the rescue of these investors. Times like these demand that perhaps more creative laws be put in place to protect investors’ interest and restore their confidence. A number of options may be made available to allow the government to intervene in the most flexible manner, keeping in mind its own commercial interest and taking account of the circumstances.

Most developers blame the global financial crisis and an inability to secure financing for delays in project completion. These issues, they say, are further compounded by frustrated investors refusing to pay their instalments. Therefore, as a starting point, extensive due diligence should be conducted before approval is granted for construction projects in Bahrain. This should include financial due diligence of the developer and other concerned parties. Approval requirements should necessitate availability of financial resources from inception and for the entire construction cost. An appropriate control mechanism may be implemented whereby a government authority supervises and ensures that all instalments made by the investors are directly applied for the construction of that specific project.

Secondly, the legal costs associated with bringing a case against project developers for breaches of their commitments are unaffordable for some of the investors to bear individually. Hence, there could be a legal requirement that the project developer, its shareholder or parent or associated company, issues a guarantee in favour of the government for injection of capital for completion of the project. In the event of non-completion, the government would be entitled to take legal action against such a guarantor on behalf of investors.

The legislative authorities may also consider promulgating a law to provide the government with an option of voluntary expropriation of incomplete construction projects. This may present a mechanism whereby the government would complete the project and outstanding obligations of the project developer, and commercially benefit from the sale of its units to investors. Of course, this would be subject to a detailed due diligence to assess whether the government would benefit commercially from such expropriation.

We invite the legislative authorities to consider these options, among others, and take a lead in enacting laws for the protection of investors’ interests.

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The Report: Bahrain 2012

Legal Framework chapter from The Report: Bahrain 2012

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The Report

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