Dubai courts rule escrow funding required for mortgages

In one recent case, a Dubai court cut a mortgage from Dh246 million to Dh93 million after lawyers showed only Dh93 million had been paid into escrow. The rest was ruled unenforceable, underscoring that the court is treating escrow funding as a strict condition, not a formality.

Ahmed Labib, senior associate at BSA Law, said the mortgage is “deemed as if it never existed” if the funds are not deposited into escrow, meaning the bank loses priority over the project. He said the ruling is part of a broader trend of Dubai courts strengthening investor protections in real estate, and that banks cannot rely on their intent or assumptions about how a developer uses the funds.

The ruling could force lenders to tighten controls on project disbursements and escrow compliance, especially across a market where off-plan sales remain a major engine for development finance. It also gives buyers more comfort that project financing is tied to construction spending, which can reduce completion risk and support confidence in the sector.

For banks, the immediate risk is legal and operational: mortgages that looked secured may now be vulnerable if escrow transfers were incomplete. For developers and off-plan buyers, the ruling should improve oversight, but it may also make lenders more cautious on new financing terms.

The case took about two years to reach the Court of Cassation, suggesting more disputes could take time to resolve as the market adjusts to the stricter reading of the law.