Escrow accounts in Dubai: What they are and why you need one

Planning to buy a high-value property in Dubai and worried about the safety of the deal? And if the property is off-plan, how can you be sure that you won’t lose your money if the developer encounters problems? The UAE financial system is organized in such a way that both parties to the transaction will be protected. There is an escrow account for this purpose.

What is an escrow account

An escrow account is established when two parties in a transaction conclude an agreement with a neutral third party in order to protect funds or assets involved. These money (or assets) are held securely in a bank and released only after specific conditions agreed by the two parties are met. Such agreement ensures that obligations under the contract will be fulfilled and the funds will reach the recipient.

In the real estate market, an escrow account is needed to effectively manage the relationship between the buyer and the developer. By law, the funds in such an account belong to the buyer, not the developer. However, neither party can access the funds, as the bank “freezes” them until the project is completed. Depending on the construction outcome, the funds will either be transferred to the developer or returned to the buyer.

An escrow account in Dubai allows the buyer to control the use of their funds and be more confident that the property will be delivered according to the contract.

Basic uses for escrow accounts

They are widely used in:

• Real estate deals
• Online transactions
• Business agreements

In Dubai, escrow accounts are mandatory for developers and buyers in off-plan property purchases, ensuring transparency and protection for both parties. Additionally, they are used in business mergers, legal settlements, and online transactions to reduce risk.

When a purchase agreement has been concluded, the mortgage lender opens a separate type of escrow account that will be utilized to pay taxes and insurance. Every month a part of your mortgage payment is held in this account and released only when time comes to pay such taxes and homeowners insurance.

Why escrow accounts are important in financial transactions

They offer a layer of security by ensuring that the financial obligations of both parties are met before funds change hands. This helps prevent fraud, disputes, and misunderstandings. They are crucial in transactions where large sums of money are involved or when the buyer and seller do not know each other personally.

How escrow accounts work

Escrow agent

The escrow agent plays the role of an intermediary between the buyer and the seller, ensuring that all conditions of the transaction are met. They manage the funds and documentation, releasing the money only when both parties have fulfilled their respective obligations, such as property transfer or service completion.

The mechanics of an escrow account

For real estate transactions, escrow accounts are opened by RERA Dubai or TAMM Abu Dhabi (if you're buying property in Abu Dhabi).

• First, the buyer signs a contract with the developer for purchasing an off-plan property.
• The contract has to be registered.
• After that the buyer deposits the specified amount of money into the escrow account (according to the payment plan agreed upon by both parties).

The developer cannot use the funds from the escrow account, except for situations related to sales, consulting, construction, marketing, and land payments. Funds will be disbursed to the developer from the escrow accounts only upon the completion of various stages of construction.

The funds are securely stored and are not accessible to either party until the release conditions are satisfied.

Conditions for releasing funds from escrow

The release of funds depends on specific conditions agreed upon by both parties. In real estate, for example, funds may only be released once the property has been inspected and the title transferred. In other cases, funds might be held until goods or services are delivered to the buyer's satisfaction.

Not all expenses can be covered by the developer using the escrow account. No more than 5% is allowed for marketing, and general overhead and expenses for buying land plots are not covered by the escrow account.

Additionally, after the project is completed, the bank holds 5% for a year as a guarantee in case any defects are found.

Escrow in Dubai property market

In Dubai, the use of escrow accounts is mandatory for off-plan real estate transactions. Developers must open escrow accounts to receive payments from buyers, ensuring that funds are used solely for the construction of the specific project. This system protects buyers from potential fraud or project delays and guarantees that their payments are secure.

The DLD (Dubai Land Department) has established a legal framework for escrow accounts, which includes:

• Law No. (8) of 2007 Concerning Escrow Accounts for Real Estate Development in the Emirate of Dubai
• Law No. 7 of 2007 Concerning Land Registration in Dubai that includes several provisions related to escrow accounts.
• Law No. 13 of 2017 Regulating the Real Estate Sector in the Emirate of Dubai that includes provisions on the mandatory use of escrow accounts for off-plan properties.

Responsibilities of buyers and sellers in escrow

Both buyers and sellers have clear responsibilities when using an escrow account.

Buyers ensure that funds are deposited into the escrow account according to the agreed schedule.

Sellers or developers, on the other hand, must meet all obligations, such as property construction or transfer, before they can receive payment.

Escrow in mortgage payments

Banks and mortgage lenders may require borrowers to set up an escrow account where monthly payments are deposited to cover property taxes and homeowners insurance, as well as the mortgage itself. This system ensures that these critical payments are made on time, protecting both the lender and the homeowner.

Escrow accounts for online deals

In the growing world of e-commerce and digital transactions, escrow accounts offer a safe way to protect both buyers and sellers. The buyer allocates funds into such an account, which are only released to the seller once the product or service is delivered and confirmed. This process mitigates the risk of fraud or non-delivery.

Securing escrow account

To open an escrow account in Dubai, certain documents need to be collected and submitted. Specifically, RERA approval and an escrow account agreement are mandatory. Other required documents may include:

• Title deed or sales agreement
• Trade license
• Certificate of registration from the Chamber of Commerce
• Copies of the passports of authorized signatories
• Cash flow statements or audited project reports
• Technical documentation and consultancy contracts.

Popular online escrow services

Several online platforms offer escrow services for various industries. These include PayPal Escrow, Escrow.com, and other specialized services that cater to different types of online transactions. These platforms provide added security and trust for buyers and sellers involved in high-value or international transactions.

Best practices for secure online escrow use

It's important to verify the legitimacy of the platform. Always use reputable services, ensure that the terms and conditions are clear, and avoid sharing sensitive personal or financial information directly with the other party. A well-regulated escrow service will act as a protective buffer for both sides of the transaction.

Common pitfalls and risks of escrow accounts

While escrow accounts provide a high level of security, they are not without risks. Delays in the release of funds due to unmet conditions or slow compliance processes can frustrate both parties. In rare cases, escrow agents may mishandle funds, though this is less likely in well-regulated markets like Dubai.

Recognizing fraudulent activities

Fraud can occur if unscrupulous individuals set up fake escrow accounts or act as fraudulent escrow agents. It is essential to work with licensed professionals and regulated institutions to avoid such risks. In Dubai, developers and escrow agents are required to register with the Dubai Land Department, adding a layer of safety for property buyers.

How to safeguard against escrow fraud

To safeguard against fraud, always verify the credentials of the escrow agent or institution handling the transaction. Ensure that they are properly licensed and regulated, particularly in high-cost transactions such as real estate. Additionally, read all contracts and agreements thoroughly before entering into an escrow arrangement.

The vital role of escrow in Dubai

Why escrow is essential for safe transactions in Dubai

Escrow accounts form an integral part of secure and transparent transactions in Dubai, particularly in real estate and business deals. All the participants of the deal - buyers, sellers, and investors - feel safe and confident, knowing that their funds are protected until all conditions of the transaction are met. This system has become a key part of the financial landscape in Dubai, ensuring compliance and reducing risks in both personal and commercial transactions.

Final thoughts on using escrow for financial and real estate security

The use of escrow in Dubai is a critical tool for ensuring financial security. Whether you are purchasing property, managing monthly mortgage payments, or conducting business online, an escrow account provides a safe, transparent way to handle significant financial transactions. By understanding how these accounts work and the potential risks involved, buyers and sellers can protect themselves and their investments in Dubai's rapidly growing economy.