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What Is An Escrow Account and How To Open It In Dubai?

Escrow Account In Dubai Real Estate

An escrow account is a financial setup where a neutral third party holds funds or assets temporarily until certain conditions of the agreement are fulfilled. This is often used when there is doubt about whether all parties will fulfill their responsibilities. The assets in escrow can include money, securities, or other items.

In most real estate transactions, escrow accounts are used to protect both buyers’ and sellers’ interests. According to Law No. 8, established in 2007, the use of escrow accounts for home purchases is regulated in Dubai. Both the Dubai Land Department and RERA manage and monitor the escrow accounts to make sure all transactions comply with the regulatory authorities.

However, escrow accounts are not limited only to the real estate sector. They are also used in online transactions, intellectual property issues, mergers and acquisitions, and legal matters. This article explains the escrow account and its importance, as well as the application procedure and working method.

We explain how the escrow account works in the real estate sector of Dubai, offering Now Consultant advisory services in escrow account creation and meeting its requirements.

What Is An Escrow Account In Dubai?

An escrow account in Dubai is a safe place to hold money, where funds are only released when the specific conditions are met. Dubai has specific rules for real estate escrow accounts that are overseen by regulatory authorities, while other emirates have their own.

showing a vector image on how escrow account works

When buying off-plan properties, buyers put money into the project’s escrow account, which is used for project costs like construction, sales, marketing, and land payments. Funds are paid to the project contractor and consultants after each construction phase is completed and approved by qualified engineers.

Importance of Escrow In Financial Transactions

Here are the key reasons why Escrow is important in financial transactions in Dubai:

  • Escrow accounts play an important role in transactions involving large amounts of money.  Escrow accounts allow for monthly payments towards insurance premiums and taxes instead of a single large payment upfront. This setup benefits both buyers and sellers, especially when dealing with expensive items.
  • An escrow agent manages the escrow process, serving as a neutral third-party intermediary to ensure all parties meet the contract’s requirements. This provides assurance and confidence to everyone involved in the transaction. Escrow can be used in various contracts involving money or property transfers.
  • Escrow is a reliable way to reduce risks, protecting against the failure of parties to meet their obligations. It is a tool used in various types of transactions, including joint ventures, leasebacks, share and asset sales, cryptocurrency exchanges, and insurance disputes.

Applications of Escrow Accounts

Below are the applications for escrow accounts in Dubai:

  • The escrow account is utilized in Dubai’s real estate sector. It protects the funds of both buyer and seller in property transactions. The agreement amount is kept in an escrow account until the agreement is completed. It makes the transactions easy and authentic.
  • The loan lender established a separate escrow account to manage taxes and insurance following the purchase. A portion of the lender’s monthly mortgage payment is directed to this account until and unless the tax and insurance payments are paid.
  • However, the escrow account is not only used as a third party in real estate transactions but also for online transactions, intellectual property, taxes, insurance, and legal proceedings.

How To Setup an Escrow Account In Dubai?

Establishing an escrow account for an off-plan project requires specific steps that differ by the Emirate. The following is the process to set up an Escrow account in Dubai:

  1. Visit the “Oqood” portal and locate the “Escrow Account Link.”  
  2. Select the appropriate service and complete the application.
  3. The assigned trustee will review the application and demand that the necessary documents be uploaded and submitted to the TAS system.
  4. The escrow account department will review the application for approval. If approved, the system will update automatically.

This process is applicable only to developers in Dubai. Developers in other Emirates should follow the procedures outlined on the websites of their respective land authorities.

How Escrow Accounts Work In UAE?

For over fifteen years, escrow accounts have been playing an important role in Dubai’s financial landscape, primarily protecting real estate investors. The following is the role of the escrow agent and an explanation of how it works in the UAE.

1. The Role of the Escrow Agent

Mostly, the bank plays the role of an escrow agent under the supervision of the Dubai Land Department and RERA. For that purpose, a bank account is established. The account is set up to benefit the project.

The agreement between the developer and the bank set the conditions for account withdrawal.

The bank takes into consideration the progress and completion of each phase of construction and makes direct payments to contractors based on this verification.

2. Handling Funds in Escrow

When purchasing an off-plan property, a down payment and monthly installments should be deposited into the escrow account. This guarantees that the developer has sufficient funds to cover the total costs, ensuring a secure transaction for everyone involved. In this way, the escrow account reduces the risk of financial discrepancies.

Additionally, it is legally required to maintain a detailed record of all payments, which serves as important evidence in legal situations.

3. Release Criteria for Funds

The funds in the escrow account are reserved for paying invoices from contractors and project consultants. However, specific developer expenses are not permitted. Marketing and general overhead costs are capped at 5%, and funds for land purchases cannot be withdrawn from the account. Developers can only request funds from the escrow account according to the conditions set by the account management authorities.

Escrow Account For Real Estate:

In the UAE, purchasing off-plan properties requires careful consideration, especially for secure transactions. Escrow accounts play an important role as trusted third-party entities that safeguard funds until transactions are completed. 

Here is why escrow accounts are important for real estate in Dubai:

Ensuring Rights Protection: Escrow guarantees fair management of funds, safeguarding the interests of all parties and ensuring smooth transactions.

Safe Transaction Process: An escrow account ensures safe transactions to deposit developers’ funds by expressing buyers’ financial capability.

Assurance of Payment: With independent management, escrow accounts eliminate financial discrepancies, ensuring secure finances for both parties.

Legal Documentation: Escrow accounts keep a formal record of payments, which is important evidence in any potential legal disputes.

Escrow Account For Online Transactions

In Dubai, escrow accounts offer security for online transactions. These accounts hold funds deposited by one party until certain conditions are fulfilled, after which the funds are transferred to another party. The Real Estate Regulatory Agency (RERA) oversees this process, ensuring compliance with the Escrow Law, which sets guidelines for managing real estate escrow accounts.

Guaranteeing Online Protection For Buyers and Sellers

An escrow account plays a fundamental role in providing security for transactions involving both parties, especially in scenarios like buying off-plan properties. In such cases, the buyer’s money is safely held in a designated escrow account assigned to the project, ensuring compliance with rigorous regulatory protections.

These funds are specifically allocated for expenses directly linked to project construction, consulting services, sales, marketing, and land payments. This measure prevents developers from using the funds for other purposes, ensuring they are properly allocated and guaranteeing payment to the seller once all conditions are fulfilled.

Guidelines for Escrow Accounts In UAE:

To set up an escrow account in Dubai, you will need a few documents: approval from RERA, a signed Escrow Account Agreement, details for mortgage escrow, and the required opening forms. Additional documents include:

Additional documents include:

  • Land Title Deed or Sales and Purchase Agreement in the developer’s name.
  • Business or trade license.
  • Commercial Registration and Chamber of Commerce Certificate, or documents for an offshore company.
  • Passport copies of authorized signatories.
  • Cash flow statements or audited project reports.
  • Technical documents for construction and consultancy contracts.

By following these guidelines, both buyers and sellers can ensure safe and transparent transactions. 

Conclusion

Escrow accounts are important in Dubai’s financial and real estate sectors, ensuring transparency and security across transactions from property purchases to online dealings. By adhering to regulatory standards and maintaining vigilant practices through escrow accounts, risks are effectively managed.

Now Consultant offers expert guidance to manage the complexities of escrow accounts, providing peace of mind and confidence in your financial transactions.

FAQs:

Is An Escrow Account Mandatory For Real Estate Transactions In The UAE?

Yes, an escrow account is mandatory for real estate transactions in the UAE, especially in Dubai. According to the Escrow Account Law, developers must open an escrow account for each new residential project.

Can a Buyer Access The Funds In The Escrow Account?

No, buyers cannot access funds in the escrow account. These funds are protected from developer creditors and can only be used for the specific project. Buyers receive a unique reference number for payments.

Can An Escrow Account Be Closed Before The Completion Of The Project?

No, an escrow account cannot be closed before project completion. Closing depends on title transfer, which may occur after the escrow closes.

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