In the UAE, borrowers who obtain financing from banks or licensed financial institutions or guarantors in rem may grant the lender security over their real estate as collateral for the financing provided. This creates a mortgage contract between the lender (mortgagee) and borrower or the guarantor in rem (mortgagor). Once a mortgage is created and registered with the competent authorities, the mortgagor is obligated to repay the debt secured by the mortgage according to the agreed payment schedule.
If the mortgagor fails to make the required payments, the mortgagee can recover the debt through a court-supervised sale of the mortgaged property, a process known as judicial foreclosure.
Most Emirates have specific legislation governing mortgages and the sale of mortgaged properties in the event of default by the mortgagor. However, any issues not covered by these special laws are governed by the Federal Civil Procedure Law (the "CPL") and the Federal Civil Transactions Law (the "CTL"). It is important to note that these laws apply only to mortgaged properties in mainland UAE, while properties in freezones, such as the DIFC, are subject to their own respective laws.
One such Emirate with special legislation is Dubai, where foreclosure is regulated by Dubai Law No. 14/2008 on Mortgage Insurance (the "Dubai Mortgage Law").
Process of Selling a Mortgaged Property in Dubai
The foreclosure process in Dubai can begin when the mortgagor defaults on payment or when a condition granting the mortgagee the right to early repayment has been fulfilled. Once either of these conditions is met, the mortgagee can commence the procedures for expropriation and sale of the mortgaged property. This process begins with notifying the mortgagor and the person in possession of the property through the Notary Public about the overdue payment and demanding its settlement within 30 days.
If payment is not made within this period, the mortgagee can apply to the execution department within Dubai Courts, requesting that the mortgage contract be granted the power of an execution writ—an enforceable deed equivalent to a final and enforceable judgment—and the seizure of the mortgaged property to facilitate its sale through a public auction.
The mortgagee's application is reviewed by the execution judge, who will assess whether the formalities for a properly registered mortgage have been followed. If the judge is satisfied that both the mortgage and application procedures are in order, they will issue a decision confirming that the mortgage can be enforced. This means that the mortgagee is not required to obtain a separate judgment obliging the mortgagor/debtor to pay the debt; instead, the process is initiated directly before the execution department within the Dubai Courts.
Before auctioning the property, the mortgagee must notify the debtor through Court, giving them 15 days to pay the debt. If the debtor fails to pay, the judge will proceed with the auction.
The mortgagor may exercise their right to seek a postponement of the sale proceedings. Article 288 of the CPL allows the mortgagor/debtor to request such a postponement, which may be granted by the execution judge in the following cases:
- If the property's revenue over five (5) years is sufficient to settle the debt, allowing the creditor to collect the revenue under the judge's supervision.
- If the property's revenue, combined with the debtor's other income, is sufficient to pay the debt in installments within five (5) years, provided the debtor offers adequate guarantees. If the debtor defaults, the sale process will continue.
Additionally, Article 27 of the Dubai Mortgage Law allows the mortgagor to request a postponement of the auction for up to 60 days if they provide evidence that significant harm will befall them if the property is sold, or if they can demonstrate their ability to pay the debt within that period.
If the mortgagor fails to pay the debt within the postponement period granted by the execution judge, or if their postponement request is denied, the judge will schedule auction sessions, including the venue, date and time. Public auction sessions in Dubai are typically held virtually through the Emirates Auctions portal.
Before the auction begins, the judge must appoint an expert, usually the Dubai Land Department, to evaluate the property's value according to the current market price. The expenses for this evaluation are borne by the mortgagee but are recoverable from the sale proceeds.
The execution judge oversees the auction process. Bidders who wish to participate must deposit at least 20% of the evaluation set by the expert. If a buyer offers the highest bid at the first auction session, which must be at least equal to the property's evaluation plus the expenses incurred by the mortgagee, the judge approves the sale. If the bid is lower than the property's evaluation price or no buyer bids on the property, the judge will postpone the auction, reducing the principal price by 5% each time until it reaches a maximum reduction of 25%.
Following the reduction of the property's value by 25% of its initial evaluation, the judge will postpone the auction for three (3) months, necessitating the repetition of the notifications mandated by the CPL. In this case, the property will be sold at the highest bid, regardless of its value, provided it is not less than 50% of the property's initial evaluation.
The winning bidder must pay the balance of the sale price and
expenses within 10 days of the auction session. Once settled, the
auction is awarded to the winning bidder, and the title is
transferred.
If the sale proceeds are insufficient to satisfy the
mortgagee's debt, the mortgagee can claim the shortfall from
the mortgagor through separate legal proceedings.
Common Legal Recourses to Delay Foreclosure
Even if the mortgagee successfully initiates foreclosure, the process can be lengthy, as auction proceedings are often unpredictable and can be postponed, thus, hindering the timely recovery of sale proceeds. Mortgagors may pursue legal recourses to postpone or even cancel the sale proceedings entirely.
Under Dubai's Mortgage Law, the mortgagor may object to foreclosure on the grounds that the mortgagee failed to properly notify them of the debt settlement requirement. This could include a failure to notify the mortgagor through the Notary Public, using the incorrect address, or not providing the mortgagor with a 30-day grace period to settle the debt.
Moreover, mortgagees may encounter additional difficulties in
foreclosing against residential properties, as special approval is
required in some Emirates, such as Dubai.
Despite the overall simplicity of foreclosure proceedings in Dubai,
mortgagees must ensure compliance with all necessary legal
requirements to minimize any obstacles throughout the process. The
imposition of these requirements, alongside the court-supervised
proceedings, safeguards the rights and obligations of both the
mortgagor and the mortgagee during foreclosure, which is crucial
given the significant consequences for both parties.
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.