The banking system in the UAE is invariably connected to the construction and real estate sectors and the global economic recession has significantly exposed this connection. The property prices have come down drastically and the income from the mortgaged property has become inadequate to cover the installments of the borrowers. The lenders have suddenly realized that it might be difficult to secure a sizeable portion of their loans, secured by mortgages.
The above scenario has exposed many banks in the UAE to high levels of credit risk. Constant brainstorming in search of a rapid solution to the problem has brought myriad of ideas to the table. One of such suggestions is to permit the lenders to resort to foreclosure or similar methods, directly and without the intervention of the courts, if a mortgager commits default.
Legal provisions on foreclosure
As per the provisions of the UAE law, the ownership of a real property cannot vest in the mortgagee or the mortgagee cannot sell the property directly, except in compliance with the legal procedure. Consequently, it may not be possible for the lenders to take possession of, or to sell off by auction, the mortgaged property of a defaulting borrower, except through the intervention of the courts.
In view of the above, right to sell off the mortgaged assets belonging to defaulting borrowers, directly and without the intervention of courts, would provide a 'feel safe' attitude to the lenders as they could have recourse to relatively easy modes of recovery. However, the question whether the UAE market is really ready to embrace such a drastic transformation, assumes much significance. Some thoughts on the issue are discussed in this article.
Legality of recovery
One of the most cardinal principles of justice in all mature legal systems is – 'audi alteram partem' -which means 'hear the other side'. In any legal system, resolution of disputes through courts is regulated by well defined procedures and the whole system functions under the supervision of qualified people. A suit for recovery of money, secured by a mortgage, is no exception to this. In court litigation, the borrower would get a chance to defend the case against him and present his version. If the lender's case is not genuine or legal, the court may intervene to provide justice to the borrower. However, if the lenders are empowered to acquire the properties directly and sell them without the intervention of courts, this valuable right may become non-extinct. The chances of influential lenders meddling with the whole process, to expedite recovery are highly likely.
Review by appellate courts
The presence of different levels of judicial forums (3 tier system, comprising of the court of first instance, court of appeal and the court of cassation) with distinct powers is a prime advantage of the current legal system. The higher courts overview the functioning of the subordinate courts and are entitled to review their judgments. If the borrower feels that the judgment of a lower court is erroneous, he is entitled to approach the higher forums to review the same. However, if the lenders are clothed with seamless powers by-passing the courts, this invaluable right of litigators would be lost.
Judging own cause
Though generally applied by the common law courts, the principles of procedural fairness and transparency would require that none should judge his own cause. The contemplated scenario where the lenders may be permitted to decide on the legality of their own case would hamper the impartiality and fairness of the entire judicial process. Any allegations of excesses could hamper the investors' confidence in the entire system.
Role of financial institutions
It is not appropriate to confine the role of financial institutions to that of a sheer commercial institution or a money lender. They owe certain responsibilities to the society and they should follow the best practice standards. Be it providing assistance to big developers in building up townships, or construction giants in laying down the infrastructure of the country, or lending a helping hand to the common men for purchasing a residence, in a way, the financial institutions are substituting the wider role of the government itself.
Legislations governing the sector
In the UAE, there is no federal legislation governing the ownership of real property. Resultantly, the rights of expatriates over real property vary from emirate to emirate. Though Dubai keep abreast of the needs of the real estate market and have somewhat responded with the necessary legal framework to govern the sector, the scenario is different in most of the other emirates.
Further, many of the real estate investors are expatriates. They may not be familiar with the local laws and the federal/emirati distinctions that could have an impact on their investment. On that count too, it may be slightly risky to embrace a sudden transformation.
Comment
It may be premature to permit the lenders in the UAE to resort to foreclosure or similar methods independently and without the intervention of courts. It is also naïve to endorse the view that empowering lenders with unfettered powers would bring about productive solutions overnight. We must bear in mind that any confusion or lack of transparency could harm the exemplary investment climate and the hard-earned reputation of the country.
Likewise, it is inappropriate to ignore the grave crisis faced by the financial institutions across the UAE due to global economic recession. The sustained growth of financial sector is key to the development of any nation and therefore, the government should continue to provide creative support to the sector. Corrective measures must be taken in order to minimize the accumulation of non-performing assets. Such steps could include revising the lending norms, strict due diligence about the creditworthiness of the borrowers and enactment of a comprehensive federal law regulating the real estate sector. Constitution of an exclusive authority having all the trappings of a court to deal with disputes related to mortgage finance in a time bound manner could also be looked in to.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
