The Federal Mortgage Law, which was established based on a suggestion made by the Minister of Finance, establishes the framework for a new type of non-possessory registered mortgage in the United Arab Emirates (the UAE). UAE Federal on December 15, 2016, the Mortgage Law No. (20) of 2016 on the Mortgage of Movable Property to Secure Debt (the Mortgage Law) became effective in the UAE official gazette (Issue 609), and it took effect on March 15, 2017.
A mortgage, according to the Mortgage Law, can be formed over certain asset categories of “movable” property and will be perfected against third parties after registration in a centralized and publicly accessible register. It is hoped that this will be a step toward more verifiable security packages with greater assurance on enforcement procedures for movable assets in the UAE. The efficacy of the Mortgage Law, on the other hand, will ultimately be determined by the mechanisms put in place to enforce it.
The Mortgage Law, on the other hand, will ultimately be determined by whether or not its measures are implemented in practice. The UAE’s legislature has yet to approve a law defining and regulating the registration system.
The Implementing Regulations, which will provide detailed information on how the register will be run, the registration process, the essential information to be recorded on the register, and applicable fees, are anticipated to be published within six months after the law goes into effect (the Implementing Regulations). Before a complete analysis of the effects of the Mortgage Law may be offered, there are numerous outstanding questions to answer, as well as pragmatic actions that must be taken.
This technical briefing note investigates the current security-over-temporary-moveable-assets regime in the UAE and its key features, as well as what the prospective new legislation might provide to those who want to use it. It also identifies some areas of uncertainty that will require further clarifications from the relevant authorities in the future, as well as interim recommendations for additional action. It will be important for parties to stay vigilant throughout the months ahead, knowing that increasingly time-sensitive actions, many of which have yet to be clarified, will need to be taken in relation to existing security arrangements regarding movable assets as part of the adjustment mechanisms set forth in the Mortgage Law.
To date, movable security in the United Arab Emirates has been provided by way of a possessory pledge under the UAE Civil Code (the Federal Law 5 of 1985 (as amended)), which is supplemented by the UAE Commercial Code (Federal Law 18 of 1993 (as amended)) (the Commercial Code). A possessory pledge is formed when the pledgor takes possession of the movable property. In practice, courts have treated bank accounts as if they were a chattel, and in statutory language, “movable” includes chattels, debts, and cash. For each sort of asset, the creation and perfection standards are generally different, and there have been a number of key difficulties in taking a pledge, particularly because the physical transfer of possession is such an important part of the security’s inception. For example:
It’s not unusual for the parties to a secured transaction to want pledgor to keep possession of the secured property, especially if losing possession would harm the pledgor’s ability to conduct business. The goal of these efforts has been to establish commercial pledges, such as machinery or receivables/debts, where the pledgor keeps the equipment or the instrument representing or evidencing the debt “on behalf of” the pledgee rather than having actual possession. It’s also been typical for lenders to delegate responsibility for assets to a pledgor by naming them as a “bailee.” The UAE courts’ approach to these types of agreements under UAE law is unclear.
Until recently, it has been difficult to obtain effective security interests over future property under UAE law. This has been a major roadblock for local legal security solutions, particularly in terms of the ability to secure bank accounts with a changing balance or fluctuating pool of business assets. For example, the current system recognizes a security interest as a pledge of specified money in the bank account at the time of the pledge rather than a “floating” charge overall money in the bank account from time to time, or a security interest over future monies credited to the account (other than interest or any income earned on the pledged cash) The pledge, in other words, has to be updated if additional cash is credited to the account in order for the security to apply to this new property. This may put a strain on pledgers, especially bank accounts that change on a regular basis.
A possessory pledge must generally be authorized by the court, usually, after the pledgor/borrower applies to the court for permission to sell the secured property, which may be done seven days after being notified of the pledger’s intention to enforce payment. Self-help measures, such as a reduction in the amount of the secured debt or an allocation of the asset to satisfy it, are generally regarded as not permitted under UAE law.
Registered mortgages on certain asset classes, such as aircraft, ships, and cars, are one way to secure movables. In the certain UAE Emirates, commercial mortgages (otherwise known as “Article 49 mortgages,” owing to the Commercial Code’s relevant provision) in favor of banks and financial institutions licensed in the UAE can be registered on the commercial register for some companies’ tangible and intangible assets, but it is time-consuming and costly to do so in practice. Because the future property has not been permitted to be the subject of security under UAE law, commercial mortgages frequently require an “addendum” to be completed and registered by the mortgagor when substantial further assets are added to the mortgaged firm. Notarization, publication, and registration of each addendum take time, effort, and money. Furthermore, all such loans are subject to a five-year re-registration renewal period. In light of the difficulties described above, the Mortgage Law includes a number of ideas that are likely to improve local law security packages and, with effective implementation of the register, offer useful answers to some current problems. However, there are still a number of critical issues with the Mortgage Law that need to be addressed in the future. Please see below for further information (For further remarks, see below.)
A new type of non-possessory registered security over movable assets was created by the Mortgage Law. A general form of registered mortgage to be established over movable property is set out in the Mortgage Law, while a pledge is formed by the conveyance of possession and other existing forms of registered mortgage. Translations of the Mortgage Law use the same words “mortgage” and “pledge,” but there is no distinction between these two terms in the Arab language, which uses the phrase “رهن.”
Key aspects
The Mortgage Law considers the following topics:
The term “movable” assets are defined and appears to include a wide range of assets (Article 3). The Mortgage Law has a broad definition of the many sorts of tangible and intangible “moveable” property that may be subjected to mortgages under the Mortgage Law. The list, which is not intended to be complete, includes the following:
Furthermore, the Mortgage Law states that a mortgage may be taken over any existing or future movable property. This is a significant development because, although it has long been commonplace to put down a “pledge and assignment” for housing in the future – most notably over changing deposit balances in current bank accounts – up until now there hasn’t been a legal basis under UAE legislation recognizing such contracted “assignments” over future property as a security interest. The older requirement to sign a new pledge for any additional property, such as cash credited to the account, has been time-consuming. These difficulties appear to be, at least in part, going away with the new Mortgage Law. However, issues such as whether it will be feasible to register and enforce forms of security agreements that purport to establish a floating charge for the time being persist.
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