The Kingdom of Saudi Arabia (the "Kingdom") is at the forefront of real estate activity in the Middle East in line with Saudi Vision 2030, with a host of giga-projects already underway. A vital aspect of Saudi Vision 2030 is to deliver world-class real estate opportunities to the youthful, receptive and expectant population of the Kingdom, but also the ability to attract foreign investment into the Kingdom.

The recent decreeing of Administrative Decision No. Q/M/E/H/8/2024/T/1445 Implementing Regulation of the Law on Off-Plan Sale and Lease of Real Estate Projects ("the New Law") is a watershed moment, as it sets out a legal framework for the delivery of off-plan real estate development projects.

Project licensing and approvals

As expected, the Real Estate General Authority ("REGA") will assume responsibility for oversight of the off-plan real estate market, and will provide a holistic approach to all regulatory aspects from the inception of a new development project, to handover of an off-plan unit. In a bid to implement a strong and robust framework, the New Law will contain a number of regulatory requirements for Developers and third-parties to comply with. Looking at the life-cycle of an off-plan development project ("Development") the New Law requires:

1. Developers to register on a developers register subject to satisfying a baseline criteria; 
2. Project Consultants ("Consultants") to be approved subject to a minimum level of qualified individuals comprising the Consultant entity; 
3. Project Accountants ("Accountants") to be approved; 
4. The issuing of a Project Marketing Licence, including amongst other things, a copy of the marketing contract between the agent and the Developer;
5. The issuing of a Project Licence subject to a number of pre-requisites, including but not limited to (i) a feasibility study and (ii) the design and engineering plan; and
6. REGA to create an off-plan database for Developments to be registered, with certain information to be publicly available. 

Development requirements

Building on the regulatory aspects that Developers will have to comply with in order to commence a project, the New Law sets out a number of requirements that are considered more commonplace, in particular within the GCC. These are important facets that will help deliver the ambitions of the Kingdom in its blossoming real estate market, and without question will provide investors (both institutional and end-users) with increased comfort that the Kingdom is a secure place to invest. 

1. Developers are not permitted to receive more than 5% of the purchase price of a unit as a reservation fee, and this amount must be placed in the project escrow account; 
2. Developers are required to deliver the unit to purchasers in accordance with a unit plan, and in accordance with the agreed design and specification, pursuant to the contractual agreement in place between the Developer and purchaser; 
3. A restriction will be placed on the title deed for the wider project preventing its disposal until completion of the Development or registration of the same at the registry;
4. REGA shall provide template contracts for the Developer to use with third-parties, such as sub-developers, Accountants, Consultants and agents. It is expected that the template contracts will be indicative only, in order to provide a degree of flexibility for the parties to agree otherwise to capture the nuances of a specific Development, subject to approval by REGA;
5. The off-plan sale and purchase agreement ("SPA") must include (i) a payment schedule, (ii) late payment compensation provisions, (iii) compensation on delay of handover, including purchaser termination rights, (iv) a project timeline, and (v) jointly owned property provisions.

Escrow

One of the key aspects that investors and end-users are concerned about in respect of off-plan sales, is the secure and audited use of their funds. The introduction of transparent escrow laws across the GCC has seen a marked increase in the willingness of investors and end-users to part with their funds in projects that are under construction, and the ability of Developers to rely on these funds, has fuelled the level of activity we see in the off-plan market across the region. The New Law sets out the following escrow framework:

1. There must be an Escrow Agreement between the Developer and Bank;
2. The Developer shall only be permitted to receive disbursements from the Escrow Account upon the submission of a disbursement document to the Bank certified by the Consultant and Accountant. For the withdrawal of surplus amounts from the Escrow Account, the Developer must first secure REGA's approval, but this may be refused if the Developer is behind the project timeline, or there is a compromise in the contracted quality;
3. The Developer shall not be permitted to disburse surplus amounts if there are defects in the construction or finishing. REGA will have the authority to extend the retention period, or request an extension bank guarantee, for an additional period of 6 months. If the remedial works are not commenced within 5 days of REGA's notice to repair the defects, then REGA may dispose of the retained amount to repair the defects.
4. REGA shall be permitted to disburse amounts from the Escrow Account in the following circumstances (i) to pay the entitlements of government authorities, (ii) refunding amounts to purchasers, (iii) paying the project parties in the event of lack of cooperation by the Developer, (iv) transferring the Escrow Account assets to a substitute developer, and (v) repairing defects in the project.

With the current unprecedented levels of real estate development activity within the Kingdom, the New Law has arrived with perfect timing. Without doubt there will be institutional developers and private entities that are considering breaking ground, and the framework in place provides a clear and transparent landscape in which they can operate.

The new Law provides a number of other matters for consideration that are beyond the scope of this article, but for any further information please feel free to contact the International Real Estate team at Trowers & Hamlins.