Off-Plan Project Payments Outside the Escrow Account
A developer is selling 60 off-plan units in a BHD 12 million project. The project account was opened, but the developer has been routing buyers' booking fees of BHD 2,000 each and 20% stage payments into its general operating account to cover construction cash-flow, promising to transfer funds to the escrow account at handover. The escrow account currently holds BHD 400,000 against BHD 2.4 million collected. The project is 40% complete and six months behind schedule. A buyer asks the broker whether her payments are protected and whether she can rescind. The broker also learns the developer has not lodged the required insurance bond or bank guarantee for the project.
1. Assess the escrow and guarantee position and explain the risk to buyers.
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The arrangement is fundamentally non-compliant. Off-plan buyer payments must be paid into the designated project escrow account and released against certified construction progress, not diverted to the developer's operating account. Here BHD 2.4 million has been collected but only BHD 400,000 sits in escrow, meaning roughly BHD 2 million has been used outside the protected structure.
Consequences: buyers' money is no longer ring-fenced and is exposed to the developer's general creditors. If the developer fails, buyers rank as unsecured creditors for the diverted sums. The escrow release mechanism also loses its purpose, because funds are not tied to verified milestones.
The missing insurance bond or bank guarantee removes the second layer of protection intended to cover completion risk. Without it, buyers have neither segregated funds nor a surety to fall back on.
The six-month delay and 40% completion against funds collected is a serious warning sign of cash-flow distress, and the diversion may be the cause rather than the effect.
2. What must the broker tell the buyer, and what should the broker and developer do now?
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The broker must be honest and not reassure the buyer that her money is protected when it is not. He should explain the escrow requirement, that payments appear not to have been deposited, and that the guarantee is absent, and advise her to obtain independent legal advice on her remedies, including potential rescission, refund, and complaint to the regulator.
The broker must not conceal the position to protect the developer or his commission. Concealment would expose him to conduct and possibly AML liability, since diverted client funds and distressed cash-flow are risk indicators.
Developer actions: immediately stop collecting outside escrow; reconcile and transfer all diverted buyer funds into the escrow account; lodge the required bond or guarantee; and report the position to the regulator and the escrow bank, with a credible recovery and completion plan.
Broker actions: notify his compliance officer and the regulator, document what he told the buyer and when, review his own marketing materials for misstatements about payment protection, and consider whether continued marketing of the project is appropriate until the structure is regularised.