Since the promulgation of the Ethiopian Civil Code in 1960, there has been no distinct or comprehensive legal framework specifically dedicated to regulating real estate law. For decades, matters related to real estate transactions, development, and marketing have been governed primarily through the general provisions of contract law and a handful of rules addressing construction contracts within the Civil Code. This approach left the regulation of real estate largely to the discretion and contractual autonomy of the parties involved.
However, this reliance on general contract principles proved insufficient to meet the unique and evolving demands of the real estate sector. The legal vacuum created by the absence of a tailored legal regime opened the door for widespread practices that often placed buyers at a significant disadvantage. Developers frequently employed pre-drafted, one-sided (adhesive) contracts that left little to no room for negotiation, thereby undermining consumer protection and transparency in the real estate market.
Recognizing these persistent challenges, the House of Peoples’ Representatives has recently enacted a new proclamation aimed at establishing a dedicated legal framework for real estate regulation, Real Estate Development and Real Property Marketing and Valuation Proclamation. This proclamation marks a significant milestone, promising to introduce clearer rules and safeguards governing the operations of developers, the rights and obligations of buyers, and the broader practices of real estate marketing and development. In this article, we delve into the key provisions and implications of the new law, and explore how it seeks to reshape Ethiopia’s real estate landscape for the better.
- Why the proclamation was introduced
Creating a uniform legal framework, a consistent and reliable regulatory structure is essential to foster investment, boost housing availability, and promote efficient real estate transactions.
- Licensing of Real Estate Developers
All developers, whether domestic or foreign shall acquire a Real Estate Qualification License, this license verifies the developer’s financial capacity, project planning, and commitment to compliance.
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- Requirements to be considered as a developer For Domestic Developers: Shall be able to deliver at least 50 housing units, proof of financing and construction capability, submit a detailed project study and timeline. For Foreign Developers: Required to meet the minimum capital investment based on Ethiopia’s investment laws. Shall transfer at least 50 housing units, need to provide a full project proposal and schedule, and comply with other applicable foreign investment regulations.
It remains to be seen how businesses engaged in developing fewer than 50 housing units will be governed under the new real estate proclamation. A key issue that needs clarification is whether there is an explicit prohibition on such businesses from participating in real estate development, or if the law merely excludes them from the scope of its application.
The requirement to build a minimum of 50 units appears to stem from the underlying rationale of the law: to reduce the significant gap between housing demand and supply. Given the legal protections afforded to buyers under the proclamation, it would be more prudent to categorically prohibit developers whose business model involves constructing fewer than 50 units. Otherwise, this exclusion could represent a serious gap in the legislation, one that might open the door to risky and potentially harmful practices in the sector.
- Responsibilities of Real Estate Developers
In addition to compliance with construction and land laws, developers are expected to:
4.1. Avoid transferring homes that are less than 80% complete unless buyers consent, this area requires further regulation. In practice, real estate companies are industry experts who often use pre-drafted adhesive contracts. As a result, the mere inclusion of this obligation in the law could be easily circumvented.
4.2. Refrain from false or misleading advertisements.
4.3. Avoid collecting deposits or registering customers before receiving land and construction permits.
4.4. Register homes accurately, without exceeding land capacity.
4.5. Encourage buyers to form homeowner associations.
4.6. Provide full documentation to buyers, including possession certificates, design details, and legal permits.
4.7. Issue official receipts for all payments made by buyers.
Although these obligations are included in the proclamation, the consequences of infringement are not specified. As a result, additional regulations or directives may be required to address these details. However, this approach raises legal drafting concerns, as it risks being viewed as an amendment to the proclamation rather than a supplementary instrument intended to facilitate its implementation.
- Obligations of Buyers
Buyers are also required to:
5.1. Make payments on time per the contractual agreement.
5.2. Provide all necessary documents and information for processing.
5.3. Support the establishment of homeowner associations to safeguard collective rights and obligations.
- Warranty Protections for Pre-Sales
To protect home seekers during the pre-sale phase, local developers shall meet these warranty conditions:
6.1. Obtain approval from the relevant authority before offering homes through a priority sales strategy.
6.2. Deposit all buyer funds in a closed bank account, regulated by law.
6.3. Ensure ownership certificates for the pre-sold homes are blocked from sale or transfer until construction is complete and homes are handed over.
6.4. Follow regulations for the release of deposited funds, as determined by the appropriate body.
From the perspective of the real estate industry, this is one of the most significant developments introduced by the new proclamation. In practice, presale agreements have often been tied to bank loans, with numerous cases where developers used the presold units as collateral and subsequently defaulted on the loans. From the outset, the legality of using such projects as collateral was questionable, and the new law has explicitly addressed this issue.
However, other pressing concerns remain, particularly the use of price escalation clauses, the practice of referencing foreign currency in pricing, and defaults and remedies post default. These matters also require clear legal guidance.
Yared Siyum