Selling Off-Plan Units Under the Controls for Maintaining the Real Estate Developer’s Escrow Account

The controls for maintaining escrow accounts for the real estate developer, in Article (1/Th), refer to the concept of the Real Estate Development Escrow Account (E-account) as a project-specific bank account for the real estate project, into which are deposited:

• amounts paid by buyers for units sold “off-plan”, or

• amounts advanced by financiers of the project.

It is understood from this definition that the (E-account) is not an ordinary current account of the developer; rather, it is a financial vessel dedicated to the project, to which cash flows related to sales operations before completion of construction or during it are directed, in a manner that supports the idea of allocating funds to the project itself.

What Is Meant by Selling Off-Plan Units?

By selling off-plan units (also called: selling on the map / selling before construction), what is meant is an agreement under which the project owner or the real estate developer undertakes to transfer ownership of a specific real estate unit to the buyer in return for a specified price, provided that the unit is not ready at the time of contracting because it is still in the planning stage or under construction.

Accordingly, the contract is based on the concept of a “non-completed sold object” at the time it is concluded, with an essential obligation on the seller (the developer), namely:

• Constructing the building in accordance with the conditions and specifications stated in the contract, and delivering the unit after its completion.

In return, the buyer undertakes to:

• Pay the price in instalments, most often according to a timeline linked to the stages of completion.

When the delivery date arrives and the condition upon which the obligation is suspended is fulfilled—namely, completion of construction—the seller proceeds to complete the procedures for officially transferring ownership to the buyer.

Distinguishing Between an Off-Plan Sale Contract and a Traditional Real Estate Sale Contract

Off-plan sales differ from traditional real estate sales in that, in the traditional scenario, the subject matter of the sale is existing and ready for delivery immediately or within a short period, whereas in an off-plan sale the subject matter is in the process of coming into existence and formation; that is, the sold item has not yet been completed.

Accordingly, “preliminary / preparatory contracts” are usually drafted to evidence the agreement and include technical, financial, and regulatory details, such as:

• The unit’s specifications

• Its area

• Its location within the project

• Its price

• The instalment schedule

• The delivery date, and

• What may result from delay or breach in terms of penalties or compensation.

The contract may also include restrictions on the buyer’s disposal of the unit prior to final handover, except with the permission of the developer or the supervising authority, with the aim of ensuring seriousness and limiting speculation.

In addition, some legislations may require preliminary registration in order to preserve the buyer’s rights and confer legal or regulatory force on this type of sale.

The Extent of the Validity of Selling Future Real Estate

Off-plan sales raise a traditional issue related to the sale of a future thing (non-existent at the time of the contract). Juristic debate in some systems has tended to the view that a sale presupposes the existence of the sold item, or at least its capability of existence; otherwise, the contract may be exposed to nullity due to the absence of the subject matter.

However, the modern legislative trend tends toward permitting an obligation to relate to a future thing through explicit texts. This is what the Iraqi Civil Code No. 40 of 1951 relied upon, as it allowed the subject matter of an obligation to be a future thing under Articles (514–129), which supports the soundness of the idea of “selling what will be” whenever it can be determined and regulated contractually.

Characteristics of the Off-Plan Sale Contract

A set of characteristics can be derived that give the off-plan sale contract a special nature, most notably:

1. The mixed nature of the contract:
   It is a sale in terms of its purpose (transfer of ownership in return for a price), but it includes a construction element close to contracting / istiṣnāʿ (manufacturing/commissioning) because the seller undertakes to complete the building according to specific specifications, which makes it a composite contract to which the traditional sale model does not literally apply.

2. It relates to a future, incomplete thing:
   This characteristic requires stricter emphasis on the need to define the subject of sale with precise definition (location, area, design, specifications) to avoid dispute. It also creates mutual risks: the buyer pays before final inspection, and the developer faces risks of increased costs or changing circumstances, and defects or shortfalls in specifications may not be revealed except upon delivery.

3. Predominance of adhesion in practical application:
   The developer often prepares a unified standard form of the contract and offers detailed terms, while the buyer’s role in negotiation is limited. This opens the door—upon dispute—to activating rules for protecting the adhering party, interpreting ambiguity in their favor, and invalidating unfair terms when they exceed reasonable limits.

4. Temporal extension of performance:
   The developer’s obligations are deferred until completion of the project, and the period may extend for years. This calls for regulating the effects of force majeure and exceptional/unforeseen circumstances, rescheduling, and mechanisms for monitoring the progress of works, while the buyer’s obligation to pay remains in accordance with the agreed schedule.

5. Multiplicity of related parties:
   In addition to the developer and the buyer, regulatory/administrative authorities, financiers, or subcontractors may be involved. Moreover, the multiplicity of buyers in a single project makes the project’s disruption harmful to all, which justifies the tendency of some systems toward regulatory tools such as escrow accounts and oversight of disbursements.

The Legal Framework of the Off-Plan Unit Sale Contract

Two trends are proposed in the legal characterization of this contract:

1. Treating it as a sale suspended on a condition of creating the sold item, with the provisions of sale being applied where no specific text exists.

2. Viewing it as closer to istiṣnāʿ / contracting (muqāwala) combined with a sale, which requires taking into account the rules of contracting with respect to the obligation to construct.

The most appropriate characterization is to deal with it as a contract of a special nature (unnamed), governed by a blend of the rules of sale and contracting to the extent that achieves the parties’ intent and preserves their rights—especially in light of the absence of a detailed special regulation for off-plan sales in Iraqi legislation, as stated in the text.

Need guidance on escrow accounts and off-plan unit sale contracts? Contact Osama Tuma for Legal Services and Advisory—your law firm in Iraq—to review your contract and protect your rights.