The Dubai Court of Cassation has ruled that banks cannot enforce mortgages on development projects if they fail to deposit the financing into the project escrow account, even if the bank acted in good faith.

Ahmed Labib, senior associate at BSA Law, said the ruling is based on the UAE's Real Estate Development Escrow Account Law (Law No. 8 of 2007), which requires banks financing a development to pay the loan amount directly into that project's escrow account.

The court has now made this a strict condition for the mortgage to be valid at all, not just enforceable.

"A mortgage agreement in such circumstances is deemed as if it never existed," Labib said, meaning the bank loses any priority claim over the project.

In a recent case, the Dubai court reduced the mortgage value from Dh246 million to Dh93 million after BSA's lawyers proved that only Dh93 million had actually been deposited into the project's escrow account. The mortgage was therefore only enforceable for that lower amount.

The case took around two years to reach the Court of Cassation, though Labib said timelines vary depending on the complexity of each dispute and whether independent experts are appointed to assess the case.

Labib said it is unclear whether the shortfall in this case was a one-off error or a wider pattern, but suggested some banks may not be fully aware of how strictly the escrow requirement is now being applied.

(Source: Khaleej Times)