In Dubai, security is taken over real estate and real estate interests (such as usufruct or musataha) by way of mortgage that is registered at the Dubai Land Department (DLD). In order for the mortgage to be registerable, the mortgage document must be in the form prescribed by the DLD and must also fully and accurately describe the relevant property. The mortgage application process can be initiated through a "smart" online portal. Upon registration at the DLD, the DLD issues an updated title deed reflecting the mortgage (either in writing or in electronic form) and the mortgage becomes enforceable against third parties as a result. Following such registration, the relevant mortgagor cannot sell or otherwise dispose of the property without the consent of the financier (as mortgagee).
Only a financier licensed by the UAE Central Bank can have a real estate mortgage registered in its favour. Therefore if a foreign (unlicensed) financier wishes to take security over real property, it is generally-accepted market practice for such financier to appoint a locally licensed security agent to act on its behalf and to be the mortgagee of record for the purposes of any mortgage registration.
Security is also commonly taken over any relevant moveable property associated with the acquisition or development. Federal UAE Law No. 4 of 2020 on Guaranteeing Rights Related to Moveables (and its amendments and regulations, together the ‘Moveables Mortgage Law’) governs how security is taken over certain classes of moveable assets such as accounts, trade payables, equipment and tools, goods and raw materials and agricultural products. The Moveables Mortgage Law provides that security over such moveable property should be by way of written security agreement or mortgage and, contrary to the historical position in the UAE, allows security to be taken over property without demonstrating possession and also allows security to be taken over future property (including bank accounts with fluctuating balances). It is therefore possible to take security over moveable property which is similar in certain respects to an English law 'all assets' debenture (provided that the requirements of the Moveables Mortgage Law are adhered to). In terms of registration, the current applicable security register where such security over movable property is to be registered is held with the Emirates Integrated Registries Company.
We note, however, that the Moveables Mortgage Law does not govern security over all moveable assets, and so care should be taken when securing a particular asset class to ensure that the security is in the correct form. For example, security over ships, aircrafts and vehicles are subject to different laws and regulations in the UAE.
It is possible to take security over the shares in a company, including limited liability companies, public joint-stock companies and private joint-stock companies. The process for taking security over shares will differ depending on which Emirate or freezone the company in which the shares are held has been established, and so care should be taken to ensure that the proper process is complied with.
It is also common in the UAE to see guarantees (corporate and/or personal) provided in the context of real estate financing. Requirements governing guarantees are set out in the UAE Civil Code (i.e. Federal Law No. 5 of 1985, as amended).
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Real estate rights over which security can be granted include:
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It is unlikely that an onshore UAE court would recognise the concept of a trust (as it exists in common law jurisdictions) given that no such concept exists in the UAE. Instead, if a split between legal and beneficial ownership is sought, then the closest possible legal construct to implement would be an agency arrangement which would see an agent conduct certain functions on behalf of a principal or principals. Such agency arrangements are common in the UAE in the context of security sharing, in that when a transaction involves a number of financiers who are seeking to share common security, it is market practice for a security agent to be appointed to hold that security on behalf of the financiers (as opposed to a security trustee, as would be the case in a number of common law jurisdictions).
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It is possible for secured debt (or any debt for that matter) to be traded between financiers. This is typically done by way of assignment, novation or sub-participation. However, this should always be considered on a case-by-case basis (with security reviewed) in order to ensure that the debt or the security interest is not inadvertently discharged or otherwise prejudiced.
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This area is governed by regulations laid down by the UAE Central Bank. Under these regulations, a financier that wishes to take security over real property must be a bank, company or financial institution that is registered with the UAE Central Bank to provide property finance. As mentioned above, it is therefore generally accepted market practice for foreign (unlicensed) financiers to appoint a locally licensed security agent to act on its behalf and to be the mortgagee of record for the purposes of any mortgage registration.
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The following fees are payable with respect to the granting of security over real estate:
The following additional fees are payable with respect to the enforcement of security over real estate:
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A new Federal Law by Decree No 32 of 2021 (UAE Companies Law) has been introduced and has come into force on 2 January 2022. Pursuant to UAE Companies Law, it is not possible for a public joint-stock company (PJSC) target, or any of its subsidiaries, to provide any financial aid (such as loans, guarantees or security) that will assist a purchaser in acquiring its shares. Companies licensed by the UAE Central Bank to engage in financing activities may provide loans to any person to enable him to own any Securities issued by these companies, provided that the loans granted do not include any preferential terms that they do not grant to their other clients, and in a manner that does not conflict with the legislation and regulations in force at the UAE Central Bank.
The UAE Companies Law restriction on 'financial assistance' does not appear to apply to limited liability companies as the restrictions on financial assistance is only referred in the provisions specifically applying to public joint-stock companies (PJSC).
We also note that, as a matter of good practice, all companies would be advised to demonstrate that there is a corporate benefit to the company in granting any particular security or guarantee.
Pursuant to UAE Commercial Companies Law Federal Law No. 2 of 2015 (as amended), it is not possible for a public joint-stock company (PJSC) target, or any of its subsidiaries, to provide any financial aid (such as loans and guarantees) that will assist a purchaser in acquiring its shares. However, limited liability companies are exempt from such restrictions under Ministerial Resolution No. 272 of 2016 on the Implementation of Certain Provisions of the PJSC to LLCs.
We also note that, as a matter of good practice, all companies would be advised to demonstrate that there is a corporate benefit to the company in granting any particular security.
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At present, a foreign lender is not restricted on receiving repayments under a security or loan document, other than with respect to the following restrictions imposed by the UAE Central Bank:
We also note that the UAE Central Bank may from time to time amend existing restrictions and/or impose additional restrictions.
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If a security interest must be registered, the date of registration generally determines its ranking. The types of security interest that must be registered include mortgages over real property, where failure to register equates to failure to create the mortgage. If two or more applications to register a mortgage against the same property are made at the same time, the mortgages are registered together and rank equally in the distribution of auction proceeds.
If it is not registerable, it will rank in order of the date of creation, but the laws relating to priority are largely untested.
A lender may assign the ranking of its mortgage to another creditor having a security interest in the same property, and this may be effected contractually though a deed of priority. However, the consent of the borrower may be required if a lender wants to assign its rights (rather than its ranking) to another lender.
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As a general rule, the principle of lex situs would apply in the UAE to assets or property located in the UAE and the creation of security interests in those assets would therefore need to be carried out under local law.
UAE law recognizes the principle of freedom of contract, which theoretically also extends to choice of law provisions. In practice however, UAE courts are reluctant to recognize the choice of a foreign law as the governing law of an agreement on grounds of public policy. Even if a UAE court is prepared to recognize a choice of foreign law, that law must be proven as an issue of fact and might still be ignored by the UAE court. On this basis, it is likely that a UAE court would apply UAE law in any action brought before it.
If a foreign judgment was obtained in relation to a document governed by foreign law, when it comes to enforcement of foreign judgments in the UAE, a judgment of a foreign court may be enforced by a UAE court if a relevant treaty arrangement exists or in circumstances where:
As a matter of practice, however, a UAE court is likely to apply these provisions restrictively and it is therefore unlikely that a judgment given by, for example, an English court in relation to a loan would be enforced or recognised by a UAE court. A UAE court would therefore consider the matter afresh.
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The security holder would be treated as an unsecured creditor and would rank equally with the other unsecured and unsubordinated creditors.
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Typically, a lender would not be liable. Environmental laws in the UAE are not particularly detailed but the relevant authorities will ordinarily pursue the party responsible for causing the environmental harm. If there are any remedial costs associated with rectifying the damage, the law provides that the lender may 'take whatever legal action is necessary to protect its rights and recover the costs from the borrower'. In addition, the mortgage will typically contain indemnities in favour of the lender in the case of pollution or other harmful environmental acts caused by the borrower.
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A lender is entitled to satisfy the debt from the mortgaged property when the debt falls due, provided that the mortgage has been registered at the DLD. Failure to register a mortgage renders it void pursuant to Law No. 14 of 2008 Concerning Mortgages in the Emirate of Dubai (the ‘Mortgage Law’).
If the value of the property is insufficient to satisfy the debt, the lender may have recourse to the borrower's other assets as an ordinary (unsecured) creditor, but it must look to enforce its rights against the property first. The lender must follow the statutory procedure and if the mortgage document attempts to circumvent this procedure then those provisions are void.
The Mortgage Law sets out the enforcement procedure for mortgages. Upon a default in payment by the borrower, the lender must give 30 days notice through a Notary Public before commencing execution proceedings.
If the payment is not made within such 30-day period, an execution judge shall, upon the request of the lender, order an attachment against the mortgaged property, enabling it to be sold at public auction in accordance with the DLD's auction rules.
The execution judge may decide to postpone the sale by public auction for up to 60 days (and such postponement can only be made once) if he finds that the borrower will be able to repay the debt during this time or the sale would cause the borrower 'substantial damage'. It is not clear exactly what would constitute substantial damage in this context.
Orders have been made for attachment and sale by public auction using the provisions of the Mortgage Law. This is a quicker route of enforcement than the Civil Code enforcement provisions, which in practice may take considerably longer.
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The UAE Bankruptcy Law (Federal Law No. 9 of 2016, as amended)) came into force in December 2016. The provisions do not include any private, out of court pre-insolvency procedure for companies which have not yet entered into insolvency. The law does however introduce a court procedure for companies in financial difficulty but which are not yet technically insolvent, referred to as the Protective Composition Procedure (PCP).
The procedure commences with a debtor applying to the court for a PCP which will lead to the court appointing an expert to report on the financial condition of the debtor and whether it has the funds to cover the PCP. If the court grants the PCP, a moratorium on creditor action immediately applies. The moratorium does not prevent the enforcement of secured claims (such as mortgages) which may still occur with the permission of the court. The PCP is made public and proofs of claim are invited for the purposes of voting on the compromise by a claims bar date. During the process, the debtor still operates its business but under the supervision of the officeholder (appointed by the court). The officeholder has wide powers regarding the preservation of assets and the continuation of the debtor's business. The debtor is given time to form a restructuring plan under the officeholder's supervision and the proposed implementation period of such plan cannot exceed three years from the date of ratification of the plan. The court must review the plan and then convene the debtor's creditors to vote on it.
Please note that as the Bankruptcy Law is still relatively recent, a number of its aspects remain largely untested, and so any consideration of these provisions would need to be done on a case-by-case basis.
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The Bankruptcy Law sets out the circumstances where a transaction (including transactions relating to security interests) entered into by an entity may be ruled by a court to be void if that entity later becomes insolvent.
The court can reverse transactions that occurred up to two years prior to the commencement of bankruptcy procedures that are harmful or prejudicial to creditors, including the following:
The Bankruptcy Law does, however, provide a defence to reversal if it can be demonstrated that the insolvent entity provided the security in good faith with the purpose of carrying out its business and that there were reasons to believe that the security would benefit the business.
Again, please note that as the Bankruptcy Law is relatively new, a number of its aspects remain largely untested, and so any consideration of these provisions would need to be done on a case-by-case basis.
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If a debtor is insolvent, secured creditors are paid before unsecured creditors, and if there is more than one secured creditor over the same real estate asset then the creditor with the higher ranking will have priority. Under the Mortgage Law, the ranking of a registered mortgage relative to other registered mortgages is determined by the serial number provided by the DLD at time of registration (which is interpreted to mean a registered mortgage will have priority over another mortgage which is subsequently registered over the same real estate). If several secured parties register their mortgages over the same real estate at the same time, those creditors are to be regarded as being of equal rank upon distribution once the real estate is sold.
It is worth noting that the Bankruptcy Law sets out the order of priority of payment of certain categories of debt owing by an insolvent entity in a bankruptcy procedure. Such categories of debt include:
The categories of preferred debts which are paid prior to the claims of general unsecured creditors include (in order of priority):
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Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?
It is possible for secured debt (or any debt for that matter) to be traded between financiers. This is typically done by way of assignment, novation or sub-participation. However, this should always be considered on a case-by-case basis (with security reviewed) in order to ensure that the debt or the security interest is not inadvertently discharged or otherwise prejudiced.
Last modified 3 Apr 2023