The basics of Saudi commercial mortgage regulations

A commercial mortgage is an agreement whereby a debtor or his guarantor allocates transferred money as a guarantee to secure a debt

Riyadh, Saudi Arabia: King Abdullah Financial District. Image used for illustrative purpose

Riyadh, Saudi Arabia: King Abdullah Financial District. Image used for illustrative purpose

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In strictly legal terms, a commercial mortgage is a loan secured on a commercial property and used to acquire, refinance or develop commercial property.

Businessmen or traders often use this option to address financial crises.

In today’s article, we shall discuss the salient features of commercial mortgages from the perspective of Saudi laws.

A commercial mortgage is an agreement whereby a debtor or his guarantor allocates transferred money as a guarantee to secure a debt, and this includes modifications or additions to it.

It is important to understand the terms used in such contracts to avoid any confusion. For example, transferred money refers to an existing or future movable property. It may be in the possession of the party applying for commercial mortgage or the party may acquire it in future or establish from the funds it receives in loan. It also includes movable assets under construction or assets not deemed movable at the time of the contract.

Another term that should be clearly understood is future right, which is a debt a person undertakes to pay to the pledger within a specific period of time, or an uncollected payable debt, including third-party conditional debts or potential debts owed to the pledger.

In such contracts, an escrow agent is also required, who could be a person agreed upon by the pledger and pledgee to hold, preserve, invest or develop the pledged property or collect its revenues.

The provisions of the commercial mortgage law shall apply to all written mortgage contracts signed on movable money as a security for a debt.

This agreement shall include relevant information such as the name of the mortgagor, the mortgagee, and the debtor (if the mortgagor is a guarantor in kind), addresses and means of communication with them, description of the mortgaged money, a general description of the secured debt, its amount, date of the mortgage contract, due date of the secured debt.

A mortgage contract shall be enforceable against third parties by publication or the transfer of possession of the mortgaged money to the mortgagee, in accordance with the provisions of the law of guaranteeing rights with movable property.

The appointed person to handle the money cannot be changed except with the agreement of the parties to the mortgage agreement, and he shall be entitled to demand compensation for any damages resulting from this change.

It is important also to note that the pledged money includes, in addition to the repayment of the guaranteed principal, the expenses related to it, which include preservation expenses, investment expenses, expenses of collecting its revenues and execution expenses.

The mortgagor must be the owner of the mortgaged money upon the conclusion of the contract and is qualified to dispose it of, and if it is found to the contrary after signing the contract, then the mortgagee in good faith may adhere to his right to mortgage a substitute for the mortgaged money by a new contract, or the deadline of the secured debt and demand to fulfill it immediately.

The mortgagee may invest the mortgaged money, manage it, develop it and collect its revenues for the account of the mortgagor, under the authorization of the mortgagor confirmed in the mortgage contract.

• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif

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