Off-plan unit sales are subject to the developer's escrow account regulations

The investment real-estate projects in Iraq have witnessed a noticeable expansion during the last years, and this was accompanied by an escalating reliance on modern financing and marketing methods, foremost among them the sale of units “off-plan” (i.e., “on the plan / on the map”) as a means that enables the developer to provide the liquidity necessary to implement the project, and enables the buyer, in return, to acquire a real-estate unit under phased/instalment payment terms before the completion of construction.

However, this contractual model—despite its economic advantages—raises a set of legal, financial, and practical risks, the most important of which are the possibility of the project’s default/stoppage, the misuse of payments, conflicts of interest, or the weakness of the buyer’s guarantees in confronting delay and breach/non-performance.

In this context, the controls/regulations for maintaining the developer’s escrow account (E-account) have emerged as an organizational/regulatory tool that aims to enhance confidence in the real-estate market and protect the parties to the contractual relationship, through the establishment of a special bank account for the project into which the buyers’ payments or the advanced/provided financing are deposited, thereby ensuring that funds are allocated for development and construction purposes and limiting their commingling with the developer’s funds or their diversion to purposes other than their intended ones.

Hence, the importance of studying the relationship between “off-plan sale” and the “escrow account” is embodied from a legal perspective, in order to understand the nature of the contract and its legal characterization, and the limits of its validity in light of the rules governing the sale of a future thing, and to distinguish it from the traditional real-estate sale; in addition to setting out the mutual legal effects of the developer’s obligations and the buyer’s rights, and the buyer’s obligations and the developer’s rights.

Off-Plan Sale of Units

The Regulations/Controls for Maintaining Escrow Accounts for the Real Estate Developer indicate, in Article (1/Third), the concept of the Real Estate Development Escrow Account (E-account) as being a bank account specific to the real estate project into which the amounts paid by buyers for units sold “off-plan” are deposited, or the amounts advanced/provided by financiers for 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 container/vehicle allocated to the project, to which the cash flows related to sales operations before the completion of construction or during it are directed, in a manner that supports the idea of allocating the funds to the project itself.

As for what is meant by the off-plan sale of units, it means the sale of units off-plan (also called: sale on the map/sale before construction) as an agreement pursuant to 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 at the planning stage or under construction. Thus, the contract is based on the idea of an “incomplete sold item” at the time it is concluded, with a core/essential obligation borne by the seller (the developer), namely:

• Constructing the building in accordance with the conditions and specifications stated in the contract

• Delivering the unit after its completion.

In return, the buyer undertakes to pay the price in instalments, most often according to a time schedule linked to completion/progress stages. When the delivery date becomes due and the condition upon which the contract is suspended is fulfilled—namely, completion of construction—the seller proceeds to complete the procedures for officially transferring ownership to the buyer.

Distinguishing Between the Off-Plan Sale Contract and the Traditional Real Estate Sale Contract

The off-plan sale is distinguished from the traditional real estate sale in that the subject-matter of sale in the traditional form is existing and prepared for immediate delivery or within a short period, whereas the subject-matter of an off-plan sale is in the process of coming into existence and formation; that is, the sold property has not yet been completed. Accordingly, “preliminary/introductory contracts” are usually drawn up to evidence the agreement and include the technical, financial, and regulatory details, such as:

• The unit’s specifications

• Its area

• Its location within the project

• Its price

• The instalment/payment schedule

• The delivery date

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

The contract may also include restrictions on the buyer’s disposition of the unit before final handover, except with the permission of the developer or the supervising authority, with the aim of ensuring seriousness and limiting speculation. Some legislations may also require preliminary registration in order to preserve the buyer’s rights and to confer legal or regulatory force upon this type of sale.

The Extent of the Validity of the Sale of a Future Real Estate Property

The off-plan sale raises a traditional issue related to the sale of a future thing (i.e., a thing non-existent at the time of the contract). The juristic/doctrinal debate in some legal systems tended to the view that a sale presupposes the existence of the sold item or its capability of coming into existence; otherwise, the contract would be exposed to nullity due to the absence of the subject-matter.

However, the modern legislative trend moves toward allowing the obligation to relate to a future thing through explicit statutory provisions. This is what the Iraqi Civil Code No. 40 of 1951 relied upon, as it permitted the subject-matter of an obligation to be a future thing pursuant to Articles (514–129), which supports the soundness of the idea of “selling what will be” whenever it is possible to determine and control it contractually.

Characteristics of the Off-Plan Sale Contract

A set of characteristics may be distilled that give the off-plan sale contract a special character, the most important of which are:

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/work (muqāwala) / istisnāʿ (manufacturing contract) because the seller undertakes to complete the construction in accordance with certain specifications, which makes it a composite contract to which the traditional sale model does not apply literally.

2. Its relating to a future, incomplete thing
   This characteristic requires strictness in the necessity of precisely defining the sold item (location, area, design, specifications) in order to avoid dispute. It also creates reciprocal risks: the buyer pays before the final inspection, and the developer faces the risks of cost increases or changing circumstances, and defects or deficiencies in specifications may not be revealed except upon delivery.

3. The predominance of adhesion in practical application
   The developer often prepares a unified standard form of the contract and presents detailed terms, and the buyer’s role in negotiation is limited, which opens the door—upon dispute—to activating the rules of protecting the adhering party, interpreting ambiguity in his favor, and invalidating unfair terms when they exceed the limits of reasonableness.

4. The extension of performance over time
   The performance of the developer’s obligations is deferred until the completion of the project, and the period may extend for years, which necessitates 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. The multiplicity of related parties
   In addition to the developer and the buyer, supervisory/administrative bodies, financiers, or subcontractors may be involved. Moreover, the multiplicity of buyers in a single project makes the project’s default harmful to all, which justifies the tendency of some systems toward regulatory tools such as escrow accounts and control/oversight over disbursement.

The Legal Framework of the Off-Plan Unit Sale Contract

Two approaches are raised in the legal characterization of this contract:

1. It is considered a sale conditional upon the creation/coming-into-existence of the sold property, with the rules of sale being applied in matters where there is no specific provision.

2. It is seen as closer to istisnaʿ / muqāwala (contracting/works contract) combined with a sale, which requires taking into account the rules of the contracting/works contract with respect to the construction obligation.

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

The Legal Effects of the Off-Plan Sale on the Two Parties to the Contract

Obligations of the Real Estate Developer and the Buyer’s Rights

The off-plan sale contract creates core obligations on the developer, corresponding to rights for the buyer, the most important of which are:

• The obligation to complete the construction in accordance with the specifications as an obligation of result, such that the developer’s liability is not discharged except by completing the construction in conformity with the description, with the buyer being able to demand specific performance or rescission (termination) and compensation upon breach.

• The obligation to deliver the unit on the specified date, and to deliver it fit for use and compliant with the specifications, with the consequences of unjustified delay being the buyer’s right to compensation or rescission, depending on the seriousness of the delay and its effect.

• The obligation to transfer ownership, complete the procedures, and deliver the documents after completing the construction and fulfilling the contract conditions; and the Court of Cassation (Mahkamat al-Tamyiz), in many of its decisions, has settled on the principle that the contract relating to residential units is a valid contract because it is of a special nature and is subject to the Investment Law No. 13 of 2006, and, accordingly, the sale-and-purchase contract concluded between them is considered a valid contract producing its legal effects even if the residential apartment has not been registered at the competent Real Estate Registration Directorate.

  • This entails the buyer’s right to demand delivery of the residential apartment after completing its construction, and the buyer’s delivery to the seller of the full purchase price, and, in consideration of the buyer/plaintiff fulfilling this obligation, it is required of the seller/defendant to deliver the apartment voluntarily; otherwise, he is compelled judicially.

  • This is because the subject of delivering the residential apartment relates to the benefit/utility (manfaʿa) and its taking/receipt, and does not relate to its ownership for the seller or the buyer; and this specific performance related to obtaining the benefit of the real estate through delivery is possible, as long as the contract concluded between the parties is considered valid.

  • As for the request to register the residential apartment that is the subject of the sale-and-purchase contract in the Real Estate Registration Directorate, this matter cannot be accepted and is subject to consideration, because this contract—although valid due to its connection to the implementation of the Investment Law and being among its outputs—cannot result in registering the residential unit at the competent Real Estate Registration Directorate compulsorily against the seller, because the contract for the sale of real estate at the competent Real Estate Registration Directorate is registered only by the will and consent of the seller; if the seller refuses registration, the buyer has the right to request rescission of the sale contract, considering it a valid contract, and compensation if there is a basis for that.

  • This is what the jurisprudence of the Federal Court of Cassation has settled upon in its decisions, including: Decision No. 306 / Appellate Panel – Real Estate / 2023, Decision No. 2055 / Appellate Panel – Real Estate / 2024, and Decision No. 1006 / Appellate Panel – Real Estate / 2023.

• The warranty against disturbance and eviction (warranty of non-interference and title/eviction), in a manner that prevents disputing the buyer’s right at delivery and thereafter, and the warranty of the integrity of the title deed and that the project is free from restrictions that impede the transfer of ownership.

• The warranty for latent defects after delivery pursuant to the general rules and any additional warranties that may be stated in the contract, with the sanctions varying between rescission, price reduction, or repair, depending on the seriousness of the defect.

In return, the buyer’s rights become evident in:

• receiving the unit

• transferring ownership

• enjoying the warranties

• rescinding and recovering paid amounts with compensation upon material breach or project default

• Resorting to the judiciary to take precautionary/provisional measures when there is risk.

The Buyer’s Obligations and the Real Estate Developer’s Rights

The contract is not limited to protecting the buyer only; rather, it imposes essential obligations upon the buyer, most notably:

• Payment of the price according to the agreed schedule (often instalments linked to completion stages or to fixed time dates), and the contractual sanctions that a breach of payment may entail, such as rescission (termination) and the developer’s retention of a compensatory percentage within the limits permitted by regulation or agreement.

• Taking delivery of the unit once it is ready within a reasonable period after notification, because refusal to take delivery may be deemed a breach that grants the developer protective means and rights vis-à-vis the buyer, in accordance with what is regulated by the contract and the law.

• Compliance with the contract terms and the project’s internal regulations, especially in joint/common projects (service fees, facilities rules, no assignment/transfer before handover except with approval, etc.), in addition to bearing certain fees and expenses if the contract so provides.

In return, the developer enjoys core rights, the most important of which are:

• Receiving the price

• Requesting rescission upon material breach

• Claiming compensation within the agreed limits

• The right to withhold delivery or transfer of ownership until the price is fully paid

• Other reasonable contractual rights that do not strip the developer’s obligations of their substance.

Conclusion

It is evident from the foregoing presentation that the off-plan sale of units is no longer merely a contractual mechanism for marketing real estate projects before the completion of their construction; rather, it has become an integrated legal and financial system based on achieving a precise balance between financing needs on the one hand and the requirements of buyer protection and market stability on the other.

The analysis of the Regulations/Controls for Maintaining the Real Estate Developer’s Escrow Account (E-account) has shown that this account is not an ordinary bank account of the developer; rather, it is a financial container allocated to the project into which the payments coming from buyers and financiers are deposited, in a manner that prevents their commingling with the developer’s other funds, and reinforces the principle of “allocating funds to the project” and reducing the risks of default, mismanagement, or diverting amounts to purposes other than those intended.

It has also become clear that this type of sale raises traditional issues connected with the sale of a future thing; however, the Iraqi Civil Code permitted the subject-matter of an obligation to be a future thing whenever it can be identified and controlled, which supports—in principle—the validity of contracting over an incomplete unit.

At the same time, the off-plan sale imposes characteristics that distinguish it from the traditional real estate sale, the most important of which are:

• The mixed nature of the contract

• The extension of its performance over time

• The multiplicity of related parties

• The predominance of standardized/unified contract templates

These characteristics necessitate stricter standards of disclosure and technical specification, stronger procedural safeguards, and the establishment of clear mechanisms for addressing delay, default, and exceptional/unforeseen circumstances.

At the level of legal effects, the analysis showed that the developer’s obligations revolve around completing construction according to specifications, delivering on time, and transferring ownership upon fulfillment of its conditions, in return for the buyer’s obligations to pay, take delivery, and comply with the project’s regulations.

The jurisprudence established by the Federal Court of Cassation (Mahkamat al-Tamyiz al-Ittihadiyya) acquires special importance in affirming the validity of contracts for the sale of residential units within investment projects and considering them productive of their legal effects with respect to delivery and the acquisition of benefit/utility, while final real estate registration remains contingent upon registration rules and the seller’s will. This opens for the buyer different judicial paths depending on the nature of the request and the means used.

In sum: the success of off-plan sale in Iraq depends on the effectiveness of regulatory tools—foremost among them the escrow account—in controlling financial flows and linking them to completion stages, and on the quality of contractual drafting that eliminates ambiguity and balances obligations, in addition to developing more specialized institutional oversight in this field.

Accordingly, moving toward more detailed regulation of this type of sale—through special rules for disclosure, preliminary registration, refund guarantees, and defining cases of rescission and compensation—constitutes a necessary path to enhance confidence in the investment real estate sector, protect its parties, and support its sustainability.