The UAE has issued the new Federal Law No. 20 of 2016 on Mortgaging Moveable Properties as Surety for Debts (new mortgage law), which was published in the latest issue of the Federal Official Gazette (number 609) on 15 December 2016 and is intended to come into effect 90 days from the date of publication.
The new mortgage law is a welcome development for both lenders and borrowers looking to enter into secured lending arrangements in the UAE and addresses some of the more cumbersome aspects of taking security. In addition, the law helpfully provides a legislative basis for taking security over a wide variety of moveable property, removing some of the uncertainties to date in relation to how the creation and enforcement of security operate in the UAE.
What has changed under the new mortgage law?
Taking security over moveable property in the UAE has predominantly been governed by the UAE Civil Code No. 5 of 1985 (Civil Code) and the Federal Commercial Transactions Law No. 18 of 1993 (Commercial Code). These laws adopted the most traditional method of creating an effective security over moveable property by requiring possession of the moveable property to be delivered to the secured creditor. While this approach was developed to ensure that the world is put on notice that a pledge over the secured property has been created, it is often not particularly practical and prevents a debtor from being able to utilise fully all of its assets for the purposes of security. Although the Commercial Code does provide for a statutory mortgage over commercial businesses without the requirement to deliver possession, this form of security can be cumbersome in practice given the notarisation and registration requirements and the practical limitation that only a bank licensed in the UAE can take this sort of security.
By contrast, the new mortgage law introduces the possibility of creating security without the need to deliver possession of the secured asset. Instead, security may be created by the parties entering into a written agreement which complies with the requirements of executive regulations which are to be introduced (Executive Regulations). The security interest will be effective against third parties upon registration on an electronic register (to be established).
There is currently no requirement under the new mortgage law for a secured creditor to be a licensed UAE bank (as compared for example to Dubai Law No. (14) of 2008 concerning mortgages in the Emirate of Dubai). It will be interesting to see whether this restriction appears in the Executive Regulations or indeed is required as a matter of practice in order to register a security interest. It would obviously be helpful for international lenders who are lending on a multijurisdictional transaction (and looking to collateral from a UAE security provider) if there is no such restriction.
The new mortgage law provides that any moveable assets (including future assets and intangible assets) may be secured in the above manner, expressly including:
- Accounts and bank deposits
- Bonds and title deeds transferable by way of delivery or endorsement
- Equipment and work tools
- Goods ready for sale or lease and raw materials and commodities
- Movable property which is affixed to real property but capable of division
- Other moveable property provided that applicable laws permit these assets to be secured
In common with other recent security laws which have been developed recently (such as the Australian Personal Property Security Law), certain moveable property is excluded such as personal goods (other than by way of consumer finance) and salaries.
The express reference to future property as property which may be secured is particularly significant and will particularly assist lenders and borrowers looking to secure future payment streams. In addition, the previous uncertainty in relation to taking security over bank accounts with fluctuating balances is also clarified and should provide comfort to lenders seeking to take this type of security and should remove the need for lenders and borrowers to enter into periodic supplemental security agreements in an effort to overcome these limitations.
In addition, the new mortgage law clarifies that a secured creditor who has registered its interest will have a secured right in the proceeds over a secured asset. This is particularly important in relation to a business which is relying upon the disposal of secured assets in order to generate the revenue to repay the secured indebtedness. The Law requires registration of this new security interest "unless the Parties otherwise agree" which would suggest that the Parties can contract out of this provision.
On the face of the new mortgage law, it falls short of introducing a security interest equivalent to the English law concept of floating charge, but it should enable security to be taken over a much wider class of movable property.
Perfection of security interest
In addition to the registration requirements mentioned above, it will also be necessary to notify any possessor of the secured property of the security if the relevant property is not in the possession of the security provider.
Priority of security interests
Article 17 of the new mortgage law states that registration of a pledge will protect the secured party by giving the pledgee priority over other creditors. According to this Article, priority shall be determined in accordance with the date of registration of the relevant pledge (unless the pledgee waives its priority in writing and registers such waiver in the register in accordance with Article 24).
It should be noted that priority of security interests that predate the new mortgage law (which are registered in accordance with Article 44 of the Law) will be determined in accordance with the date of creation of that security interest.
It is not clear who will be able to access the Register and this is to be clarified in the Executive Regulations. Given the certainty that a register is able to provide in establishing whether or not an asset is secured, it will be helpful if the Executive Regulations provide for third parties to be able to freely access the Register.
The new mortgage law also introduces the concept of self-help remedies in relation to certain types of security (for example, set-off of secured bank accounts is expressly permitted). Whilst enforcement of security would previously require a court order that would be both in the court's discretion and would require the underlying debt to be proven, Articles 28 to 33 of the new mortgage law provide additional mechanisms that allow the secured party to enforce its security interest without requiring a public auction through the courts, although the court has the power to set a minimum limit to the sale price or decide on the method of sale. This has the potential to provide creditors with an efficient and cost-effective method of enforcement and it will be interesting to see how the practice develops.
The new mortgage law will come into force 90 days after its date of publication and the law contemplates that the Executive Regulations will be promulgated within 6 months of the law coming into effect. It is not clear when the Register will be effective although it is to be hoped that it will be in operation when the Executive Regulations are announced.
Like all new developments, the new mortgage law poses quite a few questions as to how it will operate in practice. While the Executive Regulations will be crucial for the purposes of ascertaining what form the security instrument should take and the method for registration (including any associated fees) and the ability to search the register, there are other aspects of the new mortgage law which will need to be considered and no doubt, the market will develop in the next few years in this respect. However, the new mortgage law is an important and encouraging step in the development of a regime which should prove much more efficient for borrowers and lenders alike. From a borrower's point of view, we would expect it to promote investment and the availability of credit by enabling a larger pool of assets to be used to collateralise such credit together with a more cost-effective process for the creation and perfection of security interests. From a lender's point of view, the new mortgage law provides some much needed comfort in relation to which assets may be secured, the process for doing so and a clearer set of priority rules between creditors.