In brief
- The Mortgage Law and the recent foreclosure ruling given by the Dubai courts reduces the time spent on the litigation process and it is envisaged that the simplified method will encourage lenders to seek foreclosure on mortgaged properties.
- The Mortgage Law only appears to allow judicial sale for conventional banks, and judicial sale is an auction process which may not be the preferred enforcement action of the conventional banks. Islamic financial institutions typically own the assets and can therefore take possession and rent them out or sell them in their own time.
- The Barclays case may have set a precedent to speed up the process of proving the debt but does not necessarily speed up the enforcement process of selling the asset which requires judicial sale.
Introduction
The concept of foreclosure is a common law concept which is not applied in the same way in the UAE as it is in common law jurisdictions. Enforcement of mortgages in the UAE follows the UAE Civil Code and the Civil Procedure Code which govern the procedures relating to sale of mortgaged property by public auction.
In January 2010, Barclays Plc won a court order in its case against
borrowers who had taken mortgages on their real estate assets with
Barclays. The order was based on Dubai Law No. 14 of 2008 (Mortgage
Law) which related to mortgages in Dubai.
Under Mortgage Law, upon default of a loan, the bank must give the borrower 30 days notice through the notary public before commencing execution proceedings. The execution judge then reviews the case and may issue a debt judgment which requires the property to be turned over to the Dubai Land Department for auction. During this period, creditors have the right to administer mortgaged property and collect its yields and revenue until it is sold at public auction.
Foreclosure timeframes
Before the issuance of the Mortgage Law, a mortgagee wishing to
exercise its right of foreclosure had to go through the Civil
Court. The mortgagee had to raise and address the merits of the
claim and then prove the privilege or priority enjoyed by the
registered mortgage (secured mortgage).
In the case of a favourable judgment, the mortgagee would then
apply to the Execution Court to enforce such judgment and mortgage
by selling the mortgaged property by auction. This process would
take several months to reach a favourable conclusion before the
property could be sold.
The Mortgage Law saves the disputants/applicants some of the
hurdles they previously faced under the traditional legal path
provided in the UAE Federal Law of Civil Transactions which applied
to circumstances of default. It is expected that such a simplified
method will encourage lenders to seek foreclosure on mortgaged
properties. It may also prompt borrowers to reconsider their
position and avert default in order to hold on to their assets.
It is widely perceived that the process of foreclosure would take
some two to three months, however, Hadef & Partners understands
the actual process is taking between six to eight months.
It should also be noted that the judicial sale process itself is
relatively untested and the
whole aspect of valuation, achieving best or reasonable valuations,
comparable valuations, setting reserve prices, and the duty of care
involved in properly auctioning the property and remitting the
proceeds to the mortgagee with any excess paid back to the borrower
remains at large. The Barclays case may have set a precedent to
speed up the process of proving the debt but does not necessarily
speed up the enforcement process of selling the asset which
requires judicial sale (auction).
Practical considerations
Lenders are actively applying to the courts to call in their debt and realise their assets, however, the actual execution and realisation of their debts has not been implemented. At the time of writing this article, Hadef & Partners is not aware of many public auctions having taken place up to date. Announcements have been made by the Dubai Land Department that there will be auctioning of foreclosed property, but we await to evaluate how this process is working. Most of the conventional banks have claims and we understand that there may well be around 200 foreclosure cases coming through the courts at the moment.
Although the Mortgage Law has been in effect for three years, its
application and effectiveness is yet to be tested possibly because
the Dubai real estate market is still fairly depressed. The
Barclays case was supposed to 'open a floodgate' for other
similar actions however this does not seem to have been the case.
Furthermore, the reserve price set by the courts in the Barclays
case was not met at auction. The success of the Barclays
foreclosure case is therefore possibly premature to assess in this
current market.
Equally significant is that the law only appears to allow judicial
sale for conventional banks, and judicial sale is an auction
process which may not be the preferred enforcement action of the
conventional banks. Islamic financial institutions are different
because they typically own the assets and can therefore take
possession and rent them out or sell them in their own time.
Conclusion
Until recently, banks and developers tended to be wary of the courts when it came to reclaiming money. Litigation in most instances, and in most jurisdictions, is costly and time-consuming. Out of court settlements have generally been the preferred course of action which has helped investors deal with defaults and banks deal with the amount of bad debt on their balance sheets. In many cases, lenders in Dubai have extended payment periods or restructured loans. Further, given the significant drop in market values in recent years it can be assumed banks are more keen on negotiating a settlement rather than reverting to the courts and obtaining judicial sale through auction.
Other than the Barclays case where the reserve price set by the
courts was not met at auction, there have been no other foreclosed
properties in Dubai. Whilst the Mortgage Law and the recent
foreclosure ruling given by the Dubai courts reduces the time spent
on the process, it is still expected to take some time in the
courts before proving to be useful to the lender and is not a quick
fix solution.
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.
