In a landmark decision, the Dubai Court of First Instance limited the scope of a land mortgage after finding that the financing bank had failed to channel the full loan proceeds into the project's escrow account. The Court ruled that the mortgage executed in favour of a bank over a piece of land is enforceable only up to the amount actually deposited in the escrow account—and dismissed all claims for the remaining mortgage sums. The Court relied on Article 13 of Dubai Real Estate Development Escrow Account Law No. 8 of 2007, Article 9 of Mortgage Law No. 14 of 2008 and precedent from Cassation No. 11 of 2024, holding that the deposit of loan proceeds into the project escrow account is a mandatory condition precedent to mortgage validity.
While the judgment applies the existing framework under Law No. 8 of 2007 (Escrow Account Law) and Law No. 14 of 2008 (Mortgage Law), it significantly clarifies how those statutes interact and, in practical terms, recalibrates the risk allocation between lenders, developers and project owners.
Significance of Judgment
Statutory priority of escrow protections
The Court confirmed that the statutory obligation to channel project-financing proceeds through the escrow account is not merely regulatory; it is an essential condition precedent to the full effectiveness of any mortgage granted to secure such financing. This converts the escrow deposit requirement into a "suspensive condition" under Articles 420 – 425 of the UAE Civil Transactions Law.
Partial enforceability
Rather than invalidating the mortgage in its entirety, the Court adopted a calibrated approach: the mortgage survives but only to the extent of funds demonstrably deposited into—and therefore traceable through—the escrow account.
Judicial deference to expert accounting
The Court relied heavily on the court-appointed expert's reconciliation of bank statements against escrow ledgers, reiterating that trial courts may accept expert findings where their logic is sound (Cassation No. 561 of 2023). Parties should therefore anticipate detailed forensic scrutiny of funding flows in any future dispute.
Alignment with Court of Cassation precedent
The ruling expressly follows Cassation No. 11 of 2024, which characterised the escrow deposit requirement as mandatory and failure to comply as fatal to mortgage enforceability beyond the compliant portion. The First Instance Court's judgment therefore signals a stable position likely to be upheld on appeal.
Implications for clients
Developers
Developers contemplating secured finance must ensure that facility agreements, drawdown mechanics and escrow mandates are perfectly aligned. Any deviation—however commercially benign—can reduce mortgage coverage and expose developers to enforcement risk for the unsecured portion of the loan. Internal treasury teams should implement controls that prevent lenders from sweeping funds to non-escrow accounts.
Lenders and financiers
Banks may no longer assume that a registered mortgage provides blanket security. If they disburse outside the escrow regime, they risk being treated as unsecured creditors for the non-compliant tranche. Lenders should (i) incorporate strict escrow-based disbursement covenants, (ii) build real-time monitoring of escrow inflows, and (iii) condition subsequent drawdowns on evidence of deposit into the escrow account. Transaction documentation should also consider alternative security or guarantees to cover potential shortfalls.
Purchasers of distressed assets
Investors acquiring debt or real estate at enforcement stage must diligence the funding history, not merely the existence of a registered mortgage. The judgment invites challenges to enforcement actions where escrow compliance is imperfect, potentially shrinking the collateral base and altering valuation assumptions.
Contractors and other project stakeholders
As the adequacy of mortgage security can now turn on escrow compliance, contractors and suppliers should revisit payment guarantees and step-in rights. In a scenario where financiers lose security for a significant loan portion, liquidity pressure may cascade through the supply chain.
Conclusion
This judgment decision crystallises the escrow account as the linchpin of mortgage validity for project-finance transactions under Dubai law. Full deposit of loan proceeds into the escrow account is no longer a matter of administrative tidiness but a prerequisite for complete mortgage enforceability. Stakeholders—developers, lenders, purchasers and contractors—must calibrate their risk assessments, compliance protocols and transactional documentation accordingly.
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.
