Barclays Plc recently won the UAE's first real estate foreclosure case under Dubai Mortgage Law 14 of 2008; a significant indication that the 2008 mortgage law which sets out rules for default, foreclosures and repossession is being utilised by creditors.
In brief:
On Monday 11 January 2010, Barclays Bank announced it had won a Dubai court order foreclosing a mortgage loan in a landmark verdict.
Each foreclosure case will be heard by the courts on its own facts and circumstances. A judgment issued in one case would not be binding in another.
It is estimated Dubai-based lenders are holding some US$16 billion worth of home loans.
Moody's estimated in September 2009 that 12% of 27,000 residential mortgages would default within 12 to 18 months.
With real estate prices dropping significantly across Dubai and other Emirates, investors who acquired mortgages at a time when prices peaked in the summer of 2008 have no doubt been feeling the pinch.
The majority of expatriates in the UAE rely on the sponsorship of their employer to legalise their stay in the UAE. As a number of expatriates found themselves without employment, some homeowners abandoned their mortgages and fled the UAE. But what of the assets?
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.
Foreclosure now a legitimate course of action
However, on Monday 11 January 2010, Barclays Bank announced it had won a Dubai court order foreclosing a mortgage loan in a landmark verdict. It is understood Barclays Bank had sought to exercise its legal rights in some cases in line with recent real estate law enactments which seek to safeguard lender and borrower interests.
Under Dubai Law No. 14 of 2008 (the Mortgage Law), upon default of a loan, the bank must give the borrower 30 days notice through the notary public before commencing execution proceedings. Courts then review 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.
Yet it must be remembered that the UAE operates a civil law system. As such, each foreclosure case will be heard by the courts on its own facts and circumstances. A judgment issued in one case would not be binding in another. A further consideration is that the Dubai courts don't always publish or report detailed judgements, making it difficult to follow precedent for their persuasive merits.
Some local business commentators suggest that despite this recent landmark ruling, certain banks may be unlikely to foreclose on properties because of a concern that a large number of repossessions may drive real estate prices down, weighing heavily on the market. A large number of mortgaged properties being auctioned at low prices may be a contributory factor to this apprehension.
Comparison of relevant laws
Dubai Law No. 14 of 2008 saves the disputants/applicants some of the hurdles they used to face under the traditional legal path provided in the UAE Federal Law of Civil Transactions which would previously have applied to circumstances of default.
Before the issuance of Dubai Law No.14 of 2008 a mortgagee wishing to express its right of foreclosure had to go through the Civil Substantive 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 i.e. selling the mortgaged property by auction. This process would take several months to reach a favourable conclusion before the property could be sold.
However, the Dubai Law No. 14 of 2008 and the recent foreclosure ruling given by the Dubai Court reduces the time spent on the process and it is envisaged that the 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 should be noted however that this new method, although significantly more effective, is still expected to take some time in the courts before serving the beneficiary/mortgagee, and is not a quick fix solution.
It should also be remembered 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 success of this reported foreclosure therefore is yet to materialise in full, as we await news of the actual judicial sale being properly and expeditiously effected.
Conclusion
A question exists whether the new ruling will actually help the Dubai property market recover from its recent decline. However, the foreclosure order is a sign that Dubai's property market is maturing and developing. Lenders in Dubai may now have an alternative legitimate course of action in recovering assets thereby providing increased confidence in lending and mortgage activities.
By Alan Rodgers and Mohamed Rouchdi
© Hadef & Partners 2010
