Off-plan Sales: The Stalling of Real Estate Projects Necessitates a Comprehensive Legal and Administrative System

Exclusive to "SadaNews": (S.A) thought he had acquired the apartment of his dreams when he decided to purchase a residential property in Ramallah from a well-known real estate development company. However, he was shocked to discover that the owner of the company had gone bankrupt and fled the country to escape his creditors and legal repercussions. This real estate company was executing projects based on "off-plan sales," where payment begins before construction starts. Most importantly, the property was mortgaged to the bank as it had taken out loans amounting to millions of dollars. Naturally, as the properties were mortgaged to the bank, they were subject to legal seizures, leading (S.A) and other citizens to find themselves in a "scam," as they paid for properties but reaped only mirages.

This incident sheds light on the urgent need to regulate buying and selling in this high-risk manner, though it simultaneously has advantages as it offers a smoother payment method for property ownership. What is practically required to protect buyers' rights and their finances, and to limit the potential exposure to high risks?

What do we mean by "off-plan sales"?

The term "off-plan sales" refers to the purchase of real estate units before the construction process begins, relying on pre-prepared engineering blueprints that include site identification, specific specifications, models of the real estate unit, the project execution timeline, and delivery. However, payments commence before the construction begins.

The President of the Contractors Union, Ahmad Al-Qadi, believes in his conversation with SadaNews that off-plan sales represent a good option and are the most popular choice for purchasing apartments and properties in Palestine. He also points out that this type of purchase requires caution as buyers do not purchase a completed property but rather buy something intended for the future, which has not yet been constructed, and must be executed according to agreed plans and specifications between the seller and the buyer.

He adds, "This matter does not only concern the price, but guarantees of ownership, the seriousness of the developer, payment methods, the presence of permits, and approved plans by the municipality concerning the land on which the project will be established. There must also be a clear mechanism for compensation in the event of delays in delivery or breaches of specifications," noting that there is currently no legislative framework in Palestine that regulates the purchase process between real estate developers and buyers. He illustrates that several countries, including Saudi Arabia, have executive regulations that define the rights and obligations of both buyers and sellers, covering ownership, architectural designs, plans, and the deposit of reservation amounts in escrow accounts, with strict oversight on developers who are required to follow specific operational guidelines under state supervision. He pointed out that there is currently thought to prepare a draft law regarding "off-plan sales," imposing guarantees on both the buyer and seller to ensure the rights of both parties.

Al-Qadi states that most contracts are vague and are structured to serve the developer's interests more than those of the buyers. For instance, contracts impose penalties on buyers if they miss certain payments, whereas they do not stipulate penalties for developers if they delay project delivery.

Advantages of "off-plan sales"

Regarding the advantages of "off-plan sales," they are summarized in that the price is often lower than purchasing a ready property. Additionally, it provides the buyer the opportunity for easier installment payment without accruing interest if they opt for a loan, along with enabling the buyer to choose the location, specifications of the apartment, size, and some finishes before the project is completed. Moreover, by the time of delivery, property prices may have risen, thus benefiting the buyer.

However, the downsides of this method include high risks, as the real estate developer may delay due to financing issues, problems obtaining permits, rising material costs, disputes with the contractor on the project, or weak management. Here, Al-Qadi says, "In this case, the buyer feels they have paid a large sum but have not received the residential unit or property on the specified date, along with the risk of changes to the agreed specifications. Thus, the specifications must be detailed in the contract provisions."

He adds, "We also face the danger in this type of purchase of issues related to property ownership and registration. Many times, a buyer learns that the land is registered under someone else's name, or it is improperly registered, mortgaged to the bank, or has encumbrances. In these situations, the developer has no authority to sell, leading to issues related to partitioning and delivery of the apartment; if a dispute arises between the landowner and the real estate developer, the victim is the person who bought off-plan," urging citizens to verify property ownership and the presence of encumbrances or mortgages on the land, and to pay attention to details and finalize contracts through a specialized attorney.

Most contracts are done this way

Al-Qadi asserts that off-plan sales are one of the most significant modern means of financing real estate projects and stimulating investment in the housing sector. However, the success of this system is linked to the existence of a comprehensive legal and administrative framework that ensures a balance between the interests of real estate developers and buyers, providing the necessary protection for buyers' finances, thereby enhancing trust in the real estate market and limiting the risks of project stalling or exploitation.

Estimates from the Contractors Union indicate that most real estate developers and companies conclude contracts through "off-plan sales," which account for around 85% of all sales contracts after the events of October 7, while sales financed by bank loans constitute only 10-15% of total sale contracts.

According to data from the Palestinian Banking Association, the total bank facilities granted for financing properties and construction reached approximately $2.3 billion by the end of the first quarter of this year, and constituted about 25% of the total facilities granted to the private sector. Meanwhile, the facilities granted for residential properties alone accounted for approximately $1.52 billion.

From a legal perspective, Al-Qadi highlights the pressing need for specific legislation regulating off-plan sales, defining the conditions for practicing this activity, licensing procedures for projects, and the legal obligations of the real estate developer, as well as the mandated rights of the buyer. The law should also include provisions obliging the developer to refrain from marketing or selling real estate units until obtaining the necessary licenses and meeting technical and financial requirements, while mandating them to provide bank or insurance guarantees that ensure project completion or compensate buyers in case of implementation failure.

One of the important legal guarantees that have proven successful in many comparative legislations is the establishment of an independent escrow account into which all amounts paid by buyers are deposited. This ensures that the developer cannot use these funds except according to the actual completion ratios of the project, after their approval by an independent engineering entity. This system guarantees that buyers' funds are directed towards the execution of the project itself, minimizing the risk of them being used for other purposes that could lead to project suspension or failure.

He pointed out that regulating off-plan sales requires recording all sales contracts with an official entity, preventing the disposal of the real estate unit to more than one buyer, and ensuring the protection of buyers' proprietary rights. He emphasized that this should be coupled with imposing civil, penal, and administrative sanctions on anyone who violates the law, whether by selling without a license, providing misleading information, misusing buyers' funds, or grossly breaching their contractual obligations.

The need to establish a specialized oversight authority
 
From an administrative standpoint, Al-Qadi believes that the success of the off-plan sales system requires the establishment of a specialized oversight authority responsible for licensing projects, monitoring their implementation stages, and ensuring that developers comply with legal, technical, and financial regulations. An electronic system should also be adopted for registering projects and contracts, and developers should be required to provide periodic disclosures on completion rates and the financial status of the project, achieving the highest levels of transparency and enhancing investor and buyer confidence.

In the Palestinian context, the need to adopt a comprehensive legislative and administrative framework regulating off-plan sales is increasing, given the growing activity in the real estate sector and the absence of specific legal regulation for this type of sale. Issuing a comprehensive law, along with establishing escrow accounts, enhancing technical and financial oversight, and adopting rapid mechanisms for dispute resolution, could contribute to protecting stakeholders, limiting risks, attracting investments, and achieving stability and sustainability in the Palestinian real estate market.