Dubai Law No. 14 of 2008 concerning mortgages in the Emirate of Dubai (the “Law”) was issued on 14 August 2008. The Law is a welcome further addition to the steps recently taken to regulate and clarify real estate activities in Dubai. This note seeks to summarise the main provisions of the Law, and raises a number of questions which will no doubt be answered either prior to the Law coming into force (60 days following its publication in the official gazette), or thereafter, following regulations or clarifications issued by the Land Department.
The Law clarifies the position of developers, borrowers and lenders in the real estate market and introduces new practices in relation to securing borrowing over completed property and property sold “off-plan”. The main change to the current position is the introduction of registration at the Land Department of mortgages over properties sold off-plan. Currently such matters are dealt with contractually between the lenders, borrowers and developers with the developer acting as “registrar” of the mortgage and agreeing not to allow disposition of the mortgaged property without confirmation from the lender that the mortgage has been released.
The provisions of the Law apply both to mortgages of land (and permanent structures erected on land) and mortgages of subdivided parts of land (pursuant to the Strata Law issued earlier this year) as security for debt. The Law applies whether debt is secured by a mortgage over the whole of a property, an undivided interest therein, right “in rem”, or personal right over a Property sold “off-plan”.
Status of lender
The mortgagee (“lender”) should be a bank, company or financial institution that is duly licensed and registered with the UAE Central Bank to provide finance for property in the UAE. It follows that third parties (whether financial institutions or otherwise) that are not so licensed and registered wishing to take a mortgage over property in Dubai will need to make arrangements with a local bank to act as security agent.
Status of borrower
Article 5 of the Law provides that the mortgagor (“borrower”) must be the “owner” of the mortgaged property and in a position to dispose of the same. The use of the word “owner” may require clarification, as the Law is clearly intended to cover off-plan property sales. However, it is unusual that such off-plan property sales transfer “ownership” to purchasers until completion of construction and payment of the purchase price. Article 24 and the definition of “Interim Real Estate Register” may override the requirement for legal “ownership”. Article 24 assists in providing that the purchaser of property that is sold off-plan or is under construction may grant a mortgage over it as security for the debt provided that the property is registered in the Interim Real Estate Register. The Interim Real Estate Register is a register administered by the Land Department in which all contracts for the sale of property and other legal dispositions off-plan are recorded first before being transferred to the Real Estate Register following completion and hand-over.
Article 5 also provides that the property must be shown to exist “ipso facto or ipso jure” when the mortgage is made. Although clarification will hopefully be given in this regard, our view is that this allows a mortgage to be taken over property that does not yet physically exist. This would allow a mortgage over a contract for the purchase of a high floor of a building where the building has not yet been constructed, since such property exists “ipso jure” under the land sale & purchase contract.
Article 5 also provides that a mortgage may only be created over property that is capable of being disposed of. This provision will need further careful consideration. Many master-development plot sale agreements provide that the purchaser may not dispose of the land until completion of construction. There are also currently a number of developers considering prohibiting disposal of off-plan units for a period of time. Clarification will be needed as to whether a mortgage can be granted over off-plan contracts which restrict the onward disposition of property or make it conditional. The implications of recently announced Law No 13 of 2008 will also need to be considered in this regard as it may also contain restrictions on disposing of property.
A mortgage is not valid unless it is registered with the Land Department. Any agreement to the contrary is void. The Law provides that the lender will bear the costs of registration unless otherwise agreed by the parties. The mortgage contract must be signed using the standard form of the Land Department and the Real Estate Register or Interim Real Estate Register, as the case may be, will be updated accordingly. Clarification will be required as to whether the commercial terms of the mortgage arrangement may lawfully be set out in documentation supplemental to the standard form and separately agreed between the borrower and lender.
Ranking of security
The ranking of the mortgage is determined by its date of registration. The Land Department must give the parties a mortgage deed bearing the signature of the competent officer and the seal of the Land Department.
Mortgage must secure a debt
Article 9 of the Law provides that a mortgage must secure a debt that is owed or promised at the conclusion of the mortgage. It will need to be carefully considered therefore whether a master developer could transfer title to a plot of land to a sub-developer, but take a mortgage over that plot to secure the development obligations of the sub-developer. In such cases, a debt would not be apparent at the time of granting the mortgage.
Article 10 of the Law provides that the borrower shall not sell, gift or otherwise dispose of the mortgaged property or create any right “in rem” or personal right over the mortgaged property without the approval of the lender. This provision appears to preclude an owner from granting an occupational lease to a third party without the consent of the lender.
Substitution of security
Article 13 of the Law provides that where loss or damage occurs to the mortgaged property, the mortgage shall automatically attach to substitute assets and the lender may recover his claim from those assets in the order of its priority. Presumably, the phrase “substitute assets” includes insurance proceeds and this Article appears to give lenders a security interest in such proceeds. However, until this is clarified, we would recommend that lenders continue to take separate assignments of insurance proceeds.
Article 15 of the Law provides that the lender may assign its rights subject to the consent of the borrower and the registration of such deed of assignment with the Land Department. The lender can, up to the value of his debt, assign the rank of his mortgage to another creditor having a security interest in the same Property.
Article 17 of the Law provides that the ranking of the security is determined by the serial number under which it is registered with the Land Department. Where several applications are submitted at the same time against the same borrower and over the same property, the mortgages shall be registered under the same number and those creditors shall rank equally in the distribution of auction proceeds, although presumably the lenders can agree an alternative ranking between themselves.
Article 18 of the Law provides that a lender may follow the mortgaged property into the hands of any person in possession of it in order to obtain payment of his claim when due according to rank. A person shall be deemed in possession of the property if he acquires title to the property after it has been mortgaged or acquires any other right “in rem” or personal right over the property.
Special Mortgages - Musataha / Usufruct / Long lease
Section Three of the Law covers “Special Mortgages”. Article 21 of the Law provides that the holder of a musataha (basically a development right) may mortgage buildings or plant over the term of the musataha without having the right to mortgage the land that is to be developed unless otherwise agreed in the musataha agreement. Article 22 allows the holder of a usufruct or long term lease for a term between 10 and 99 years to mortgage its interest in the property for the term of the usufruct or long term lease. Article 23 provides that a mortgage over rights of musataha, usufruct or long term lease shall terminate and be deleted from the Land Department register upon expiry of the term of the musataha, usufruct or long term lease. It is often the case that musataha, usufruct and long-term lease arrangements are renewable. Lenders will need to ensure that they are adequately protected in such circumstances.
Execution proceedings on mortgaged property
Article 25 of the Law provides that upon default in payment of the debt when due or the fulfilment of a condition requiring early repayment, the lender must provide the borrower 30 days notice through the Notary Public before commencing execution proceedings. Article 26 of the Law provides that if the borrower fails to pay the sums due within the 30 day period, the execution judge shall, upon the request of the lender order an attachment against the mortgaged property so that it can be sold by public auction in accordance with the applicable procedures of the Land Department. The execution judge has discretion to postpone the sale for up to 60 days if he finds that the borrower will be able to repay its debt if given this period or if the sale of the mortgaged property will cause the borrower “substantial damage”. The law provides no guidance as to what might be considered “substantial damage”. Lenders should therefore accept that a defaulting borrower is likely to argue that foreclosure would cause substantial damage in order to postpone the sale for a further 60 days.
The remedy to the lender is a sale at public auction within 30 days after the end of the relevant period referred to in either article. The Law does not provide a self-help remedy to lenders who may wish to exercise a right to re-possess the property. Repossession is often favoured by lenders where the property is only one aspect of a business over which finance is secured and where the proceeds of the sale of property alone (rather than as part of a business) would not be sufficient to cover the debt e.g. hotels, infrastructure projects. It is of course open to the lender to purchase the property in order to protect its interest in the other assets of the business, although this may cause its own difficulties.
Article 12 of the Law provides that the borrower has the right to administer his mortgaged property and collect its yield and revenue until it is foreclosed and sold at a public auction. Lenders need to ensure that suitable arrangements are in place to cover the period of time between notice pursuant to Article 25 and realisation of the proceeds of sale.
Article 30 provides that the claims of lenders shall be paid out of the price of the property in order of priority. If the sale proceeds are not sufficient to cover the claim of a lender, that lender may claim the difference from the borrower and will rank with all unsecured creditors in respect of such amount.
Property granted by the government to UAE citizens and such-like persons for commercial and residential purposes is excluded under this Law and is subject to the applicable orders and directives of the Ruler and the decisions in implementation thereof.
It appears that the Law does not make express reference to Islamic financing of real estate. Where debt is secured under an Islamic financing, a mortgage is not usually taken over property, but instead (in relation to completed properties) an Ijara structure is utilized by which title to the property is transferred to the financing institution and leased to the customer with an option to purchase / promise to sell at the end of the period of financing. In relation to uncompleted properties an Istisna structure is utilized by which the financing institution makes the payments for the construction of the property on the basis that an Ijara lease will be entered into on completion. However, during the Istisna period, the financing institution could take a mortgage over the property.
Clarification will be required in relation to Islamic financing of property in the context of the Law. In particular, it will be interesting to see whether such arrangements will need to be registered on the Interim Real Estate Register and whether an entity looking to finance property on an Islamically structured basis is required to be registered with the UAE Central Bank in addition to any restrictions on land ownership which may also affect an Islamic financer. Also, in due course further regulation may follow in respect of those developers who offer a similarly structured “in house” finance based on a lease and promise to sale model; as it would appear that such structures currently fall outside the scope of the Law.