The issuance of the new mortgage law (the Mortgage Law) for the Kingdom of Saudi Arabia on July 2, 2012, has, in the words of many commentators, the potential to be a "game changer". It is unusual that the adoption of a specific law or regulation has the possibility of being transformative in nature, however, the Mortgage Law is such a case. It is broadly anticipated to be the catalyst for the further, accelerated development of the Saudi real estate sector and will address critical economic and social objectives of the Kingdom.
The Mortgage Law is more specifically a collection of five laws: the real estate mortgage law (the Real Estate Mortgage Law); the real estate finance law; the finance lease law; the law on supervision of finance companies; and the execution/enforcement law. It is also understood that policies, implementing regulations and other arrangements are being developed to further regulate the mortgage and mortgage financing markets.
The following is a discussion of certain key provisions of the Real Estate Mortgage Law and is not intended to be a comprehensive summary. This article is based on an unofficial translation of the Real Estate Mortgage Law.
Mortgagee (Creditor) Rights Over the Mortgaged Property
The real estate mortgage establishes for the creditor an in rem right over the real estate which is the subject of the mortgage, which must be duly registered to be valid, and thereby provides the creditor with priority over all ordinary and subsequent creditors. The real estate mortgage confirms that the mortgage shall be limited to the debt specified in the mortgage agreement.
The debtor (mortgagor) shall bear the costs of the mortgage contract, registration and renewal, and unless otherwise agreed, such costs shall be included in the mortgage debt. If the property to be mortgaged is registered under the provisions of the law governing in rem real estate registration, the registration of the mortgage shall occur in accordance with such law. If the law governing in rem real estate registration is not applicable however, the registration of the mortgage shall occur by having the record thereof endorsed by the competent court of notary public.
Characteristics of the Mortgaged Property, the Mortgage and the Mortgagor (Debtor)
For a real estate property to be mortgaged it must be:
- tangibly existing or potentially existing property that can be sold; and
- identifiable and detailed in the mortgage agreement or subsequent agreement (and such property may be sold independently through public auction if in default as per the Mortgage Law).
The mortgage arrangement should be a fixed debt promised to be amortized or an item guaranteed under the debt or outstanding debt tied to a future debt yet to be stated in the mortgage agreement as a guaranteed debt or maximum limit of the debt. Unless otherwise agreed, the mortgaged property shall serve as guarantee for all the debt and the debt shall serve as guarantee for the mortgaged property.
In order to mortgage a property, a debtor must be the owner of the mortgaged property and have the right of disposition over such property. The mortgagor may be the debtor or a real estate guarantor offering a property mortgaged for the interest of the debtor (even without his permission).
Management and Use of the Mortgaged Property
Returns from a mortgaged property are for its owner, as are the related costs, and the owner may continue to make returns from the mortgaged property until such ownership is taken from the owner by force (of law). However, the debtor/owner shall use the mortgaged property in such a way that does not prejudice the rights of the creditor. Furthermore, the debtor shall ensure the integrity of the mortgaged property until the date of settlement of the debt and the creditor may object to all such acts that reduce the value of the mortgaged property or expose it to defects (and may take all necessary measures to safeguard the creditor's right and refer expenses back to the debtor).
The mortgage status shall be determined by the registration number and date, and such status shall be maintained until it is proven in writing that the registration has expired. A creditor may waive the priority of his mortgage in favour of another creditor of the same mortgaged property in accordance with the rules governing the assignment of rights.
If a property is owned in part by a debtor, the mortgage shall not apply to the whole property. Instead, only the part owned by the debtor is made the subject of the mortgage. The mortgage can only apply to such portion of the property to which the creditor has rights, and to the extent that there are any discrepancies, such discrepancies will be assessed and registered by order of a court.
Invalid Terms and Conditions
If a mortgage agreement includes terms or conditions stipulating that:
- the benefits of the mortgaged property shall be for the interest of the creditor or that the creditor may, with the approval of the debtor, collect the returns of the mortgaged property but may not benefit from it, or
- the creditor shall own the mortgaged property if the debtor fails to settle the debt in time,
- then such terms or conditions shall be deemed to be invalid and, therefore, severed, although the mortgage shall continue to be valid.
Mortgagor (Debtor) Obligations to the Mortgaged Property
In addition to the obligation on the debtor to ensure the integrity of the mortgaged property until the settlement of the debt, the debtor shall, with respect to the mortgaged property, provide warranties relating to the devaluation and the defect thereof, such that:
- if the debtor acts with negligence or misconduct, the creditor can obligate the debtor to increase the mortgage in such amount that equals the decrease in value, or the debtor may agree to a subsequent mortgage to replace the original, or to have the debt paid in accordance with the early payment rules of the law governing mortgage finance companies; or
- if the devaluation or defect is a result of matters beyond the debtor's control, then what remains of the property will be the subject of the mortgage.
If the mortgaged property is not registered pursuant to the law governing in rem real estate registration, the debtor shall stipulate in the mortgage agreement the primary or subordinate in rem right to the mortgaged property. However, if other rights emerge relating to the mortgaged property, the debtor shall indemnify the creditor for any damage sustained. Furthermore, if the debtor acts with ill intent, criminal remedies may be filed pursuant to applicable laws.
Mortgagee (Creditor) Rights of Recourse
If work occurs on the mortgaged property which may result in devaluation or defect or render the mortgaged property insufficient for the guarantee, the creditor may ask a court to suspend such work and take the necessary measure to prevent the occurrence of any devaluation or damage according to the rules of the court.
The creditor's rights reside with the mortgaged property and the creditor may pursue his rights against the mortgaged property regardless of the holder (subject to his class/priority). If the mortgaged property is transferred, the obligations of the mortgage remain with the debtor.
Mortgagee (Creditor) Right to Transfer Mortgage
Subject to the rules and regulations applicable to the settlement of debts, a creditor may transfer to others his right to settle the debts relating to the guaranteed mortgage, unless otherwise agreed.
Mortgage Settlement or Termination
Subject to warning the debtor and owner of the mortgaged property as per the applicable rules, a creditor who is a party to a registered mortgage can seek the compulsory eviction of the mortgaged property and the sale thereof if the debtor fails to settle the amounts due on time.
The registered mortgage shall be discontinued or terminated if:
- all of the debt associated with the mortgage is settled;
- the mortgaged property is sold in a compulsory manner pursuant to the law with the proceeds paid to the creditor(s);
- mortgage rights (i.e., creditor's rights) and the ownership rights (i.e., to the mortgaged property) reside with one party, whether through the transfer of the ownership of the mortgaged property to the creditor or the transfer of the creditor's right to the debtor; or
- the creditor waives his rights as mortgagee under the mortgage pursuant to a written waiver.
However, in circumstances where the debtor is deceased or becomes impaired, his heirs or successors shall succeed the debtor's obligations.
This article is a preliminary overview of certain key provisions of the Real Estate Mortgage Law and is limited to the letter of the law. A key test for the Mortgage Law and, more particularly, the Real Estate Mortgage Law, as well as the broader goals behind the implementation thereof, will be whether the provisions are adopted in practice in a manner that results in a broadly beneficial system, with the rights of creditors, debtors and guarantors (and other stakeholders) adequately protected. We will continue to monitor these developments.