Escrow Shortfall on a Delayed Project
A broker, Yusuf, is selling units in a 220-unit project in Sharjah for developer 'Al Noor'. The project's escrow account was opened with a bank, and 40% of units are sold. Yusuf learns from a site engineer that construction is 18 months behind and that the developer has been paying contractor invoices from a second account at a different bank that is not the escrow account. The developer tells Yusuf the second account is 'just for variation orders' and asks him to keep selling and to tell buyers 'handover is on schedule'. Yusuf has already collected reservation deposits from six buyers into his brokerage's client account. The project's escrow account balance, per the last statement the developer showed him, is AED 9 million against an AED 60 million construction budget.
1. What are Yusuf's obligations regarding the deposits he holds and the representations he is making to buyers?
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Yusuf holds buyer money in a client account; that money is not his and must be accounted for and either transferred to the project escrow account or refunded if the sale does not proceed. He must not represent that handover is on schedule when he has credible information it is not - that is a misleading representation and exposes him to disciplinary action. He should stop making the schedule statement, tell buyers the truth as he knows it (construction is delayed), and put reservations in writing with clear conditions. He should also verify whether the second account is an approved escrow account; if the developer is diverting funds outside escrow, that is a serious regulatory matter he must not facilitate. He should report the escrow irregularity to the relevant authority and seek legal advice before continuing sales.
2. The escrow balance is AED 9 million against a AED 60 million budget. Explain the risk to buyers and what Yusuf should require before selling another unit.
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A 15% funded escrow against budget means the project is materially underfunded; buyers' instalments are not protected to the level needed to complete construction, and the risk of non-delivery or a further delay is high. Before selling another unit, Yusuf should require: an updated escrow statement from the escrow bank (not the developer's summary), confirmation that all buyer payments go directly into that escrow account, a construction schedule tied to drawdowns, and evidence the developer has funded the shortfall or has a binding facility. If those are not provided, he should suspend sales and disclose the position to existing buyers. Selling into a known shortfall without disclosure is the core compliance failure.