Dubai investors claim they are being short-changed

Trinidad Times Friday 15th May, 2009

Damac Properties, one of the largest developers in the Middle East is drawing ire from investors in its Lake View project in Dubai’s Jumeirah Lakes.

Damac took deposits and commenced receiving payments in 2004, yet the property is only just being completed now. The scheduled completion date was December 2007. Contracts with investors provided for compensation to be paid for late delivery. The interest was to be calculated quarterly in accordance with the ruling LIBOR rate (London Interbank Offered Rate). The contracts owners signed provided for the thrust of the agreement but the wording of the clause is ambiguous. Calculation of the interest rate for each quarter was to be in accordance with the applicable Libor rate on the last day of each quarter. The Damac contracts however are worded in a way that they could mean the Libor rate on the last day that compensation was due.

The wording of the documents does appear to be an error as it would be inconceivable that a floating rate (the Libor rate) would be adopted for use as a fixed rate for a period extending over two years. Damac however has seized on the wording of the clause to advise owners of the 536-apartments tower that they are only entitled to an interest rate for the two years that was set on 9 February 2009 when Damac says it completed the tower. Coincidently the interest on that date of 1.41% per annum, until that time, was around the lowest it had been for the previous two years.

Conversely Damac has openly applied fixed rates for penalties applied as a result of late payments. In structuring the agreements Damac used the floating Libor Rate for the compensation clause, however in relation to late payments it fixed a rate of 2% per month, or 24% per annum. So the situation investors are now facing is they are getting compensation of 1.41% per annum for the building being late, but if they have made late payments themselves they are having to pay 24% per annum to Damac.

To compound the issue Damac has only just issued late payment demands, notwithstanding many of them relate to periods going back a number of years.

Whatever its thinking behind all this, Damac has upset hundreds of investors. The developer refuses to budge on the issues which is holding up handovers to investors. What is exacerbating that process too is Damac’s insistence investors sign a comprehensive release before they are handed the keys to their apartment, discharging any claim they might have against Damac, and releasing the developer from any action for damages in the future.

For Damac the issue is shaping up as a public relations disaster as the bitterness against it spreads through Internet sites and blogs. The 40-storey waterfront Lake View tower itself should have been a winner for the developer, but ugly arguments over the compensation and penalty issues, coupled with a previous failed attempt by Damac to slug owners increased prices for their apartments on the basis they turned out to be bigger than the plans allowed for, has left investors with a sour taste in their mouth.

While the numbers are not huge, when multiplied by 536 (the number of apartments in the tower) the move by Damac would have generated some useful cash flow – but at what cost?

For its part Damac says it is simply following the contracts. Construction Week in an interview with Damac CEO Peter Riddoch this week asked if the company had a special team dedicated to scrutinising contracts and coming up with loop-holes to take advantage of?

"That’s not the case," replied Riddoch. "The contract is a two-way thing. Both parties to the sales and purchase agreement have rights and both have obligations. And just as we can’t say all we want is our rights and want to ignore our obligations, similarly the other party to that contract, who is the customer, can’t say I want all my rights but I should be able to walk away from my obligations."

"If it turns out with the passage of time, that a new law says that the aspects of either parties rights or obligations have to be modified, changed, added to, deducted from or removed, then so be it," said Riddoch. "Once that’s done we will respect that and we expect the other party of the contract to respect that too."