Escrow and Settlement of Transactions

What is Escrow

Escrow is a mechanism in which funds or documents are transferred to a neutral third party (escrow agent) until the conditions of the transaction are fulfilled. It provides security for both parties.

Escrow in the UAE

Escrow for Off-Plan (Law 8/2007)

• The developer is required to open an escrow account in an authorized bank
• All payments from off-plan buyers go into this account
• Funds may be spent only on the construction of the specific project
• Audit: RERA verifies the use of funds
• Partner banks: Emirates NBD, ADCB, DIB, Mashreq

Rules for Disbursement

• Land: paid for from the developer’s own funds (not from escrow)
• Construction: funds are allocated proportionally to progress (e.g., 20% upon completion of the foundation)
• Consultant fees: up to 5% of the project cost
• Marketing: not from escrow

For the Secondary Market

• Escrow is less formalized in the secondary market
• The agent may retain a security cheque (10% deposit)
• Main settlement — manager's cheques at the Trustee Office

Escrow in Europe

UK: Solicitor's Client Account

• The buyer’s solicitor receives funds into a client account
• Upon exchange — the deposit (10%) is transferred to the seller’s solicitor
• Upon completion — the remaining sum is transferred
• Regulated by the SRA (Solicitors Regulation Authority)
• Protection: SRA Compensation Fund + Professional Indemnity Insurance

Germany: Notaranderkonto

• Notarial escrow account
• The buyer transfers funds to the notary
• The notary transfers funds to the seller after the conditions are met (registration of Auflassungsvormerkung)
• Cost: included in notarial expenses
• Alternative: direct transfer (Direktzahlung) — cheaper but less protected

Spain: Notaría

• Notary is present at the signing of the escritura pública
• Payment: bank cheque (cheque bancario) at the signing
• Arras (deposit): usually 10%, if the buyer backs out — is forfeited; if the seller backs out — returned in double amount

Settlement Methods

AML (Anti-Money Laundering) Compliance

All parties to the transaction are required to comply with AML legislation:

• Source of Funds — documentary confirmation of the origin of the money
• KYC (Know Your Customer) — client identification
• PEP screening — check for politically exposed person status
• Suspicious transactions — reporting obligation (SAR — UK, goAML — UAE)

Typical documents: salary certificates, tax returns, bank statements, confirmation of sale of previous property, gift deeds.

Comparative Analysis of Settlement Systems: UAE vs Europe

The key difference between the Dubai and European settlement systems is the speed and level of formalization. In Dubai, transactions are conducted via Trustee Offices (licensed DLD offices) using manager's cheques and can be completed in a single day. In European jurisdictions, a notary or solicitor acts as guarantor, and the whole process takes from 4 to 12 weeks.

For international investors, it is especially important to note that in the UAE there is no cooling-off period after signing the SPA — unlike in a number of European countries (Germany: 14 days for consumer contracts, France: 10 days in VEFA). This means due diligence and legal review of the property in the UAE must be completed before the contract is signed.

Escrow in International Transactions: Additional Protection

With cross-border real estate transactions—for example, when a buyer from Europe purchases a property in Dubai remotely—the role of the escrow mechanism increases significantly. UAE RERA requires that all off-plan payments be deposited into the developer’s escrow account at an authorized bank. However, in secondary transactions the buyer may request that the seller transfer funds via the Trustee Office instead of direct transfer—this eliminates the risk of loss of funds in case of an unscrupulous seller. In the United Kingdom, the solicitor acts as holder of the deposit (10% at exchange of contracts) in their client account—these funds are legally segregated from the agency’s own funds and insured by the SRA Compensation Fund. Spain uses notarial escrow (plica notarial) as an option for non-resident transactions, which also increases buyer protection. Choosing a reliable bank or licensed Trustee Office is a critical element of an international deal and should be discussed with a lawyer before signing any documents.

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Practical Assignments

Assignment 1. A buyer is purchasing an off-plan apartment in Dubai for AED 3,000,000 with a payment plan: 20% on reservation, 30% during construction, 50% on handover. Explain how escrow protects his interests at each stage.

<details> <summary>Solution</summary>

Reservation (AED 600,000): goes to the developer’s escrow account in the bank. The funds cannot be used for other projects. Construction (AED 900,000): paid by milestones (e.g., 10% for foundation, 10% for structure, 10% for finishing). The bank-escrow agent checks progress before releasing funds. If the developer goes bankrupt: escrow funds are protected from creditors; RERA may appoint a new developer. Handover (AED 1,500,000): is paid upon receipt of keys and the completion certificate.

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Assignment 2. An investor from the UAE buys an apartment in London for £500,000. What AML documents will the British solicitor require, and what difficulties may arise?

<details> <summary>Solution</summary>

Documents: 1) passport + proof of address (utility bill), 2) proof of source of funds: UAE bank statements for 12 months, salary certificates or business documents, 3) proof of source of wealth: history of income/investments, 4) if PEP — enhanced screening. Difficulties: bank statements in Arabic (translation required), proof of salary without personal income tax (UAE — 0% tax → no tax returns for confirmation), cryptocurrency transfers (heightened scrutiny).

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