Snapshot: real estate financing in United Arab Emirates

Financing

Secured lending

Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?

There are only three types of mortgage over real estate onshore in the United Arab Emirates:

  • a mortgage over land and buildings;
  • a leasehold interest in real property; or
  • a building constructed on leased land.

 

It is possible to register a charge or mortgage over a leasehold interest in real property located in one of the free zones in the United Arab Emirates, depending on the rules and regulations of each free zone. Generally, a free zone mortgage or charge will only prevent the owner of the leasehold interest (ie, mortgagor) from transferring or further encumbering its leasehold interest and will not entitle the mortgagee to request the transfer of the leasehold interest. Transferring a leasehold interest would require a court order.

A ‘mortgage’ is defined in the Civil Code (Federal Law 5/1985) as a contract by which a creditor acquires the right to be satisfied from the proceeds of the sale of the mortgaged real estate in priority to unsecured creditors and other secured creditors of the debtor. To have effect, a mortgage must be registered. The time of registration of the mortgage determines priority among mortgages over the same real estate.

The mortgagor must be the owner of the mortgaged property. It is not essential that the mortgagor be the principal obligor of the debt that is secured by the mortgage; the mortgagor can be a guarantor of the debt.

As real estate can only be mortgaged to a company or a financial institution that has been duly licensed and registered by the Central Bank of the United Arab Emirates (see article 4 of Dubai Law No. 14 of 2008 (as amended) and Law 8 of 2018 and article 32 of Abu Dhabi Law No. 3 of 2015), financing is generally limited to these licensed banks and institutions.

Financing can still be obtained from sources other than licensed banks, such as real estate investment companies. However, this type of financing is normally based on a good business relationship and trust between the parties, as the lender will not have registered security over real estate owned by the borrower.

Leasehold financing

Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?

Generally, ground leases are granted in connection with infrastructure projects, where the ground lease will be in the form of a musataha (a 50-year concession arrangement), a concession agreement (akin to a ground lease of up to 99 years), or a usufruct agreement. The landowner (often a governmental entity) will not permit a mortgage over the land. A lender’s ability to secure its funding will depend on which of the above concession arrangements is given, and the rules and regulations of the land department in the relevant emirate. For example, in Dubai it is possible to register a mortgage over a building (which will be deemed to be separate from the land for this purpose) constructed on land granted under a musataha. However, some of the northern Emirates do not recognise a building constructed on land granted under a musataha as being separate for the land. Therefore, it will not be possible to have a separate mortgage over such buildings.

As a leasehold can only be mortgaged to a company or a financial institution that has been duly licensed and registered by the Central Bank of the United Arab Emirates (see article 4 of Dubai Law No. 14 of 2008 (as amended), Law 8 of 2018, and article 32 of Abu Dhabi Law No. 3 of 2015), financing is generally limited to these licensed banks and institutions.

Financing can still be obtained from sources other than licensed banks, such as real estate investment companies. However, this type of financing is normally based on a good business relationship and trust between the parties, as the lender will not have registered security over the leasehold interest owned by the borrower.

Form of security

What is the method of creating and perfecting a security interest in real estate?

A mortgage is the most common form of security granted over real estate located onshore in the United Arab Emirates. Mortgages over real property must be both in writing and registered with the appropriate real estate authority in each emirate. The registered mortgage deeds are generally pre-printed documents prescribed by the relevant authorities. In the case of registering a charge or mortgage over leasehold interest over real property located in a free zone, although the specific procedure and requirements will depend on the relevant free zone’s rules and regulations, generally this will require:

  • a number of approvals or no-objection certificates from the landlord, the mortgagee and the free zone authority;
  • registration with the appropriate real estate authority in the emirate (if necessary);
  • a charge or mortgage agreement (this may be based on the relevant free zone’s approved format); and
  • payment of a registration fee.

 

Valuation

Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?

Third-party appraisals are generally required by lenders, particularly where the main security interest relates to real estate. It is also not uncommon for the lender to appoint its own experts to value the relevant property. It may also be necessary to have periodic appraisals to ensure that the borrower maintains the required financial covenants under the facility agreement (eg, loan-to-value or loan-to-security ratios).

Valuation companies must be licensed by the Real Estate Regulatory Agency in Dubai. The Dubai Land Department maintains a publicly available register of approved valuation companies on its website for no charge.

Legal requirements

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

Real estate can only be mortgaged to a company or a financial institution that has been duly licensed and registered by the Central Bank of the United Arab Emirates (see article 4 of Dubai Law No. 14 of 2008 (as amended), Law 8 of 2018 (as amended) and article 32 of Abu Dhabi Law No. 3 of 2015). In practice, however, foreign lenders providing financing to UAE borrowers normally appoint a local security agent to hold the UAE-located security on their behalf. It is not common for overseas lenders to appoint local security agents to hold a security interest in real property. This can be a time-consuming and expensive exercise for a foreign lender.

There are no applicable documentary taxes.

Loan interest rates

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?

Large (usually syndicated) financings are generally based on Loan Market Association documentation and will generally use a benchmark rate with reference to LIBOR (or EIBOR for UAE dirham facilities). We have not seen any significant use of the secured overnight financing rate (SOFR) yet. Instead, we note that the use of replacement benchmarks for the screen rate based on a designated, nominated or recommended replacement to the LIBOR screen rate identified by either the current administrator of the LIBOR screen rate or a nominating body, which can include any applicable central bank, regulator or other supervisory authority or a group of them, or any working group or committee sponsored or chaired by, or constituted at the request of, any of them.

According to article 76 of the Commercial Code, a creditor is entitled to receive interest on a commercial loan at the rate of interest stipulated in the contract. If this rate is not stated in the contract, it is calculated according to the current rate of interest in the market at the time of dealing, provided it does not exceed 12 per cent per annum.

The limitations for banks are that interest in excess of 12 per cent per annum, compound interest and interest in excess of principal are not enforced. However, these limitations are not usually followed by the Dubai courts, unlike other emirates.

Loan default and enforcement

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

Each emirate has its own rules as to the enforcement of mortgages. In Dubai and Abu Dhabi, to enforce a mortgage the creditor must obtain a court order allowing it to sell the property through public auction (see article 26 of Dubai Law 14/2008 (as amended) and article 53 of Abu Dhabi Law 3/2015). The creditor cannot sell the mortgaged property by any other means.

The registration serial number allocated by the relevant registry determines the rank of a mortgage for liquidation purposes. If more than one mortgage registration application is submitted simultaneously for the same property, all mortgages will be allocated an identical registration number and the creditors rank equally (see article 1425 of the Civil Code, article 17 of Dubai Law 14/2008 (as amended) and article 45 of Abu Dhabi Law 3/2015).

Loan deficiency claims

Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?

If the sale proceeds are insufficient to discharge the debt secured by the mortgage, the mortgagor remains liable for the remaining unpaid debt.

Personal and corporate guarantees are commonly used in the United Arab Emirates. Guarantees must be in writing and specify the amount secured by the guarantee.

Protection of collateral

What actions can a lender take to protect its collateral until it has possession of the property?

UAE law does not recognise the common law concept of ‘self-help’ for secured parties. In Dubai and Abu Dhabi, a mortgagee must obtain a court order allowing it to sell the property through public auction (see article 26 of Dubai Law 14/2008 and article 53 of Abu Dhabi Law 3/2015). A mortgagee cannot sell or deal with the mortgaged property by any other means.

Recourse

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?

Recourse is typically limited to the specific collateral over which the security has been granted. In the United Arab Emirates, there is no general charge over all assets of a company and each type of security interest (eg, pledge over movables, mortgage over real property, accounts pledge, assignment of receivables, etc) must comply with its own legal requirements, including any applicable registrations.

In the event of bankruptcy of the debtor, the court may (at its sole discretion) terminate any agreement to which the debtor is a party (including any security agreement), provided this is in the best interests of the creditors as a whole. Generally, where a security interest is terminated the court may replace it with an alternative security interest of similar value. There is no guidance on how the court would determine the value of the terminated and replacement security interest.

Cash management and reserves

Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?

Lock box banking is not typically required by lenders in the United Arab Emirates.

Credit enhancements

What other types of credit enhancements are common? What about forms of guarantee?

Personal and corporate guarantees are commonly used in the United Arab Emirates. Guarantees must be in writing and specify the amount secured by the guarantee. In the case of guarantees for larger financings, it is not uncommon for the guarantors to maintain certain financial covenants (eg, minimum net worth).

Generally, you can call on a guarantee once the relevant conditions have been satisfied. Otherwise, a guarantee can be enforced through the court.

Loan covenants

What covenants are commonly required by the lender in loan documents?

A borrower typically covenants to do the following:

  • observe and perform all of his or her obligations under the mortgage, and not sell, lease, transfer or otherwise dispose of the mortgaged property;
  • act on instructions given by the mortgagee and not remove the mortgage from registration;
  • promptly provide to the mortgagee any information relating to the mortgaged property; and
  • ensure that the mortgaged property is kept in good repair and condition.

 

Financial covenants

What are typical financial covenants required by lenders?

Common financial covenant conditions are based on borrower or obligors’ net worth, working capital, leverage, loan-to-value ratio, interest coverage and cash flow. They can also include restrictions on issuing debt, further encumbering assets, disposal or acquisition of substantial assets, paying dividends and investing, or impose actions such as the acceleration of debt payments if the specified condition is binding.

Secured movable (personal) property

What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?

To have a valid pledge over movable assets under UAE law, the pledgee must have possession (actual or constructive) over the pledged assets. However, Federal Law No. 4 of 2020 on Guaranteeing Rights Related to Movables (the Mortgage Law) has updated the framework for registering security interest over movable assets located in the United Arab Emirates. The Mortgage Law provides for the registration of a security interest over a broad category of movable assets (this differs from a pledge, which requires a deed of possession and other existing forms of mortgages), including account pledges, assignment of receivables, etc, without the need to take possession (as required under the earlier UAE law). The Mortgage Law also enables the creation of a security interest akin to a floating charge over movable assets. The security interest can be perfected through registration in an electronic security register (the Security Register).

Single purpose entity (SPE)

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?

Other than in the case of non-recourse project financing or aircraft or vessel financing, it is not common for a lender to require a special purpose vehicle to be set up to hold certain of the borrower’s assets and to take security over the shares of that special purpose vehicle. Rather, direct security over the assets is preferred.