The real estate and construction sector serves as a backbone for any economy, and hosts of industries depend on it to grow and prosper. Saudi Arabia has always enabled this sector to develop and flourish.
At the same time, the activities covering real estate and construction must be properly regulated to protect the interests of all stakeholders. Besides addressing the need for residential, commercial, and industrial space, the sector plays a significant role in attracting investment, boosting investment activities, and developing and sustaining infrastructure.
Matters covering real estate & construction encompass transactions from the simple leasing of a property for a fixed period to complex and complicated transactions combining different components stretching from the leasing of real estate and development; these transactions can involve factors including project finance, securitization, mortgages, and debt instruments.
These complex transactions require an in-depth analysis both from commercial and legal perspectives. In fact, legal factors weigh quite heavily in all transactions covering real estate development, especially projects wherein multiple parties get involved.
It can be challenging for some legal practitioners to guide their clients in protecting their interests and stakes in such complex projects. These issues require a thorough knowledge of the principles of contract and the regulatory framework under the jurisdiction covering a myriad of issues, and a deeper insight to foresee the problems that may crop up during the implementation phase and address them.
All through the phases of preparatory and drafting work, a legal team will need to determine different aspects of the project and come up with strategies that will not only protect its client but also be acceptable to all other parties to the contract.
At the same time, the proposed solutions must be fully compliant with the regulatory regime. Properly detailing the scope of works for each party and statement of rights and obligations of parties, contractual and legal remedies for breaches, termination & consequences of termination, and choice of law and venue ensure smooth enforcement of the contract through all the stages.
What might sometimes look like a straightforward leasing or acquisition of a property can become complicated for various reasons. For instance, one of the issues that may crop up during a real estate transaction could be changes in land zoning regulations covering the subject property, issues ensuing from concessions granted on the property for the public good, challenges to the title by a public or private entity, disputes related to mortgages and lien attached to the property, or inability to obtain a mortgage on the property.
Similarly, while it is common for parties to agree to compensation or damages in case of breach by any party or failure by a party to fulfil its obligations, enforcing them may become burdensome if the relevant provisions are not drafted bearing in mind the regulatory regime and foresight as to how courts or arbitrators would view such provisions.
Besides being capital intensive, the rights & obligations covering some transactions may run into years and even decades. Therefore, structuring such transactions requires deeper insight, planning, and legal prudence.
One of the challenges posed by contracts spread over several years is risk coverage in view of any of the parties to the contract becoming insolvent or failing to fulfill its financial obligations. Adequate coverage of these risks requires legal foresight to build different scenarios and determine what protections and legal remedies will be available to the client.
Here, the legal team would need to review the relevant sections in the bankruptcy law to see how it could provide a cushion and structure the transaction in a manner where the rights of its client will have priority over other debtors or the possibility of seeking attachment to assets of the defaulter in its favor.
It could develop provisions requiring negotiable and non-negotiable instruments or guarantees to cover these adverse situations.
The Real Estate and Construction Industry has evolved universally, and several new concepts and structures are being deployed for different types of projects.
Covering risks for these innovative solutions may become difficult from a legal perspective. As no precedents or case law cover disputes resulting from such innovative transactions, legal practitioners may find it hard to predict outcomes or build arguments before courts.
In all cases, one of the core issues which may require extensive deliberations during contract drafting is how differences or disputes would be resolved. Although arbitration is usually considered appropriate for resolving construction-related disputes, as it allows parties to appoint engineers or legal practitioners with construction law backgrounds as arbitrators, it often serves the interests of parties to opt for judicial courts.
In Saudi Arabia, besides different courts that are empowered to handle disputes covering real estate and construction, judicial committees are tasked to hear such disputes. The matter becomes complex when transactions combine real estate development with project financing or real estate development involving lease and construction works.
When a dispute ensues in these issues, the legal practitioner’s first task is determining the proper court to raise a lawsuit or an objection while defending its client. Choosing the wrong venue would result in delays and increased legal costs for the client.
Regarding contracts covering construction works, the addition of a practitioner with an engineering background or experience in handling engineering or construction disputes helps the team immensely. Many times, in construction transactions, besides the main contractor, subcontractors become prominent in the execution of works. Hence, the role of subcontractors and the obligations of all related parties must be addressed while drafting the contracts.
Similarly, while enforcing rights, the role of sub-contractors vis-à-vis other parties could be assessed in preparing arguments before the court.
Quite aware of the limitations of courts in evaluating technical issues, the courts’ procedural law and the Law of Evidences empower courts to appoint experts to evaluate such issues and provide their opinion to the court. The Law of Evidences also allows parties to agree beforehand that they will be obliged to accept the conclusion or opinion of the expert, and the court will enforce it.
Whether a transaction is simple or complex, it is always advisable to have an attorney involved in the drafting, revision and finalization of its contract to ensure that the rights are all well protected, and the provisions are legally compliant.
Approaching an attorney only when you are entangled in a dispute or enforcing provisions of a contract is never a good strategy as many times, there is nothing that an attorney could do in view of the non-enforceability of the contract or in view of inadequate protection in the contract or provisions being legally unenforceable.