Published October, 2019
In our previous article “Security over movable assets in the UAE” (read it here), we discussed the salient features of Federal Law Number 20/2016 on Mortgaging of Movable Assets as Security for Debts (the Mortgage Law).
While the Mortgage Law became effective on 12th March, 2017, the supporting regulations setting out the procedures for creating, perfecting and enforcing security over movable assets in the UAE were issued in March, 2018. The Mortgage Law has the following three (3) key supporting legislation:
In this Q&A Guide, we answer some of the frequently asked questions relating to the mortgage of movable assets in the UAE and the formalities for creating, perfecting and enforcing security over movable assets in UAE.
Scope of the Mortgage Law
1. Which movable assets can be mortgaged?
The Mortgage Law provides that any current or future movable assets may be mortgaged including:
2. Are there any movable assets which cannot be mortgaged under the Mortgage Law?
Yes. The Mortgage Law does not apply to:
- personal and household items (except where the mortgage is for the purchase of such items);
- entitlements under insurance policies unless these entitlements are considered proceeds of mortgaged movable assets;
- salaries and wages of employees and workers;
- public funds, endowment funds, foreign diplomatic and consular funds and funds of government’s international organisations; and
- future rights arising from inheritance or wills.
3. Is the pledge of shares of a company covered by the Mortgage Law?
No. As stated in response (b) to question 2 above, the Mortgage Law does not apply to movable assets in relation to which dispositions are registered in a “special register” under applicable UAE laws.
Article 79 of the UAE Federal Law Number 2 of 2015 on Commercial Companies Law provides that shares in a company may be pledged and such pledge shall only be valid against the company and third parties on the date it is entered in the Commercial Registry with the competent authority (such competent authority being the relevant Emirate’s Department of Economic Development).
4. Does the Mortgage Law apply to movables located in free zones?
Pursuant to Article 3(2) of Federal Law Number 8 of 2004 on Financial Free Zones, UAE’s civil and commercial federal laws do not apply to financial free zones in the UAE. As such, the Mortgage Law does not apply to movable assets located in Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), which are the only financial free zones in the UAE at the date of publishing of this Q&A Guide.
5. Which other rights can be registered?
In addition to the ability to mortgage movable assets, it is also possible to register an interest over the following rights under the Mortgage Law:
The ability to create interest over the rights set out above will be useful for businesses which heavily rely on operating and financial leases (particularly in the context of project finance transactions).
Validity of a Mortgage
1. What conditions must a mortgage contract satisfy?
The following conditions must be satisfied for a mortgage contract to be valid:
2. When does a mortgage contract become effective?
A mortgage on movable assets is effective between the parties to the mortgage contract upon execution of such contract. However, the mortgage will only become effective against third parties upon its registration in the register (Mortgage Register) established under the Mortgage Law.
Registration of Mortgage Rights
1. Is it mandatory for a lender to register its mortgage right in the Mortgage Register?
No. However, it is advisable for lenders to register their mortgage right for the following primary reasons:
2. Who maintains the mortgage registry?
Emirates Development Bank (EDB) has been tasked with maintaining the Mortgage Register and the mortgage registry (Registry) pursuant to the Register Establishment Regulations.
EDB has established a wholly owned subsidiary called Emirates Movable Collateral Registry Corporation (EMCRC) which currently maintains the Registry. The Registry website can be accessed by clicking the following link https://www.emcr.ae/index.aspx (Registry Website).
3. Who can access the Registry?
The Registry can be accessed by any individual or corporate entity (whether resident or non-resident in the UAE).
4. How can I access the Registry?
The Registry can be accessed by creating an appropriate account on the Registry Website. At present, there are two (2) types of accounts which can be created:
5. What are the fees charged by the Registry?
The Registry does not charge a fee for creation of an account or for undertaking a public search using an inquiry account. However, the Registry charges AED 100.00 (circa USD 27.00) for registering a mortgage right and AED 200.00 (circa USD 54.00) for each certified search. There are other fees payable for using multiple services available on the Registry Website. Fees can be paid by using multiple payment channels.
6. How can I register a mortgage right in the Registry?
Upon confirmation of the registration, the Registry will provide the applicant with a unique registration number that is used to identify the record. The registrant will also be provided with an ‘Access PIN number’ that must be entered if the registrant later submits a change notice of amendment, termination or extension for the initial registration.
7. In what instances is the registered mortgage right ineffective?
A registered mortgage may not be effective if:
A mortgagee is required to discharge the mortgage within five (5) working days from the date of occurrence of any of the above events failing which, it shall be liable to compensate the mortgagor, principal debtor and other third parties for any actual damage suffered by either of them as determined by court.
8. As a lender am I required to obtain physical possession of the movable asset being mortgaged?
No. Unlike the existing movable assets mortgage law contained in the UAE Commercial Transactions Law, the Mortgage Law does not require the lender to obtain physical possession of the movable assets which are being mortgaged.
1. What are the types of searches which can be conducted?
There are two (2) types of searches which can be conducted: (a) a certified search; and (b) an uncertified search.
Rights of a Mortgagee and Execution Formalities
1. What are the rights of a mortgagee?
2. Are there any penalties imposed for breach of the Mortgage Law?
A mortgagor, mortgagee, principal debtor or owner of the mortgaged movable assets (or in the case of corporate entities, its directors, general manager, joint partners or employees) shall be subject to imprisonment and/or a fine of not less than AED 30,000.00 if they are convicted of any of the following:
The enactment of the Mortgage Law’s subordinate legislation and the establishment of the Registry are significant developments in the movable assets mortgage regime as they have provided the necessary framework for lenders and borrowers to take advantage of the Mortgage Law particularly with the introduction of self help remedies together with the ability to take security over current and future property without taking possession.
Adil Shafi, Partner (firstname.lastname@example.org)
Edward Macharia, Associate (email@example.com)
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