Defaulters to face auction
Lisa Dale, a partner at Al Tamimi & Company, said: "When a property purchaser in Dubai applies for financing from a bank or other entity and consequently stops paying the instalments, the bank or financial institution will give the mortgagor up to 60 days to pay the arrears. "There is a grace period of up to 60 days given by the judge in order for the mortgagor to be able to demonstrate a reasonable prospect of being able to pay the arrears. Upon the expiry of the 60 days the judge can give an order for the sale of the property by public auction at the Dubai Land Department only."
Meanwhile, a senior official at the Land Department said "no mortgage defaults had so far been recorded".
"As far as we know nothing has been officially recorded," said Assistant Director-General Mohammed Sultan Al Thani.
Ali Al Haddad, Owner and Senior Lawyer at Al Haddad & Associates, also said his firm had not seen any defaults.
"It would be the Dubai Courts and not the Property Court that would handle cases of mortgage defaults in Dubai," he added.
Article 26 of Law No14 concerning mortgages says: "If the mortgagor or debtor fails to pay the mortgage within a period specified, the execution judge shall, upon request of the mortgagee or the creditor, give order for the mortgaged property to be sold in a public auction."
Ashley Painter, Finance Partner at Clyde and Company, said: "The judge can delay the sale for not more than 60 days but only if he is convinced that the borrower will be able to discharge the debt within that period."
Article 27 of the law says the 60-day delay will be allowed only if the judge finds that the sale of the mortgaged property would cause the debtor substantial damage.
Dale added: "What is sold in the auction is not the property, but the purchaser's contract and his entitlement to buy the property."
Painter said in case of a default a notarised notice had to be issued stating the borrower had 30 days to pay the arrears. At the end of that period, the mortgagee had to apply to the court to seek an enforcement order. The execution judge is entitled, but not obliged, to afford the borrower a further period, of up to 60 days, to rectify the default.
"Provided that the borrower does not rectify the defaults, an enforcement order is then issued requiring the property to be sold by auction in accordance with Land Department procedures."
Dale said Law No 14 covered two types of case. She added: "First, it relates to units that are registered on the interim register or the off-plan contracts of units that have not been handed over yet but where the bank may have helped the purchaser to finance the instalments. The bank would have registered a pre-mortgage interest in the unit.
"The second scenario concerns the situation where a buyer has a registered title and is in possession of the property. In this case, he has a registered mortgage and any defaults on his payments are recorded and any enforcements on the property can be activated by the lender," said Dale.
Painter said once a mortgagee had established that a homeowner was in arrears there was very limited scope for the borrower to contest a public auction in court.
Fichte & Company Legal Consultancy said it has so far received up to 30 claims with respect to mortgage default payments from companies, individuals and investments funds holding one or multiple units.
"Following the financial crisis, a number of companies and individuals are being faced with a major problem repaying their real estate properties. A big number of these properties were bought for speculative purposes and were not intended for end-users," said Walid Jaafar, Head of Corporate Department, Fichte & Co. "So far we have received up to 30 claims mainly regarding the possibility of renegotiating these agreements in order to reschedule the installments."
Fichte outlined five broad scenarios where mortgage defaults are arising from in Dubai.
According to Tatjana Fuhr, Legal Consultant, Corporate Department of Fichte, some of the claims have come from individual investors who bought one or two units with the intention to flip and some from big private investors who have purchased an entire floor or building intending to flip. Claims have also come from investment funds who have purchased an entire floor or building from private end-user who have a mortgage in place, but want to forfeit their property because of delayed construction or cancellation of projects, and finally there are claims from private end-user who has been made redundant recently.
"Developers are putting pressure on the buyers to fulfill their obligations under the agreements and asking them to abide by the payment plan. The developers themselves also have contractual obligations towards their contractors, financiers and other buyers as well.
"Our advices so far have been to renegotiate the contractual relationship between the developer and the buyers, although there is no general rule on how to approach a particular case. Each matter is being dealt with on a case-by-case basis. Taking things to court at this stage proves to be a very lengthy and costly option for both parties involved. However, in some cases such an option cannot be avoided," Fuhr added.
Painter said: "We are not aware of any specific instances. However, we envisage that there will be a number of cases where investors are struggling to make their payments and there is potential for these to be brought to court in the near future.
However, Painter said Decree 28 of 2008 stated that the Property Court would hear all property disputes. "Dubai Courts may hear the case if the matter is viewed to be more appropriately held under their supervision. If security cheques have been given to the mortgagee and the mortgagee has cashed those cheques and they are not honoured then criminal proceedings may be pursued," said Painter.
Al Haddad said the attendance at an auction would depend on the type of property to be sold. "In the case of a freehold property the auction would be open to all nationalities. However, for a non-freehold property only UAE and GCC nationals would be allowed to attend and bid."
An application to execute a mortgage enforcement order was subject to fees payable to the court, said lawyers. The mortgagor would pay the court fees while the auction fee would be recovered by the Land Department from the amount raised by the auction. Al Haddad said the court fees were 7.5 per cent of the claim amount or a maximum of Dh30,000, which would be payable to the court by the mortgagor.
Painter said the fee structure varied on a case-by-case basis. An investor with a large portfolio of properties with varying financing arrangements was clearly in a very different situation from an individual with mortgage on one villa. "The fee for a public auction is one per cent of the sale price or a maximum of Dh30,000 payable to the land department," he added.
"The fee for the transfer of title is one per cent of the sale price payable by the seller and one per cent of the sale price, payable by the purchaser," he said.
Unfinished property grey area
The property debt situation is even less clear with regards to unfinished property sold off-plan, which can also be mortgaged, according to Fichte & Company Legal Consultancy.
"In such cases the mortgage requires to be registered in the new Interim Property Register, which has been installed by Dubai Law No13 of 2008. Pending the registration of buyers holding interests in off plan properties, again delayed by developers and master developers, we are facing the same dilemma," said Tatjana Fuhr, Legal Consultant, Corporate Department of Fichte & Co.
A mortgage legally speaking could not be installed which served as a commercial barrier, unless a flexible approach with regards the new mortgage law is adapted by the judges until the new laws are completely implemented.
Banks wishing to enforce an older mortgage that was installed upon a mere contractual structure might face a difficult decision when faced with the defaulting debtor.
Filing a case for enforcement of the mortgage, defaulting debtors have a risk that their mortgage might be declared void unless the judges adopt a flexible approach as mentioned above.
New mortgages on Dubai properties legally can only be installed upon the registration in the Property Register of both the buyer as the owner of the property and the bank as mortgagee.
"It is surprising that this fact apparently does not seem to push developers and master developers to co-operate with the Land Department in the registration of all units and buyers, even though it means that developers and master developers give up some control as well as valuable sources of income, such as transfer fees, etc," said Fuhr.
In the long run, developers and master developers as well as the whole economy can only profit from a transparent and legally secure mortgage system that enables investors and banks to properly work together.
The process of enforcing a mortgage through public auction is a process that has been in place long before the recent economic crisis and it is prescribed mainly in the UAE Civil Procedures Law (Federal Law No12 of 1992) and referred to in the UAE Civil Transactions Law (Federal Law No5 of 1985).
A bank wishing to attach a property for auction has to file a court case against the debtor to the Execution Judge. During the case the bank will have to establish the default of the payments. The court may order the attachment of the property and its evaluation. Upon evaluation the court will announce a date for the public auction.
At the specified time and place the property in question will be offered to bidders at a certain minimum amount in relation to the evaluated price, for example 60 per cent. If no bidder comes forward with a bid, the court will adjourn and announce another auction where the property will be offered again to bidders at a lower minimum price and so forth until a bidder has come forward and the auction has been successful.
The proceeds will then be allocated to the mortgagee. If there are more than one mortgagee the bank decides the order of satisfaction, the higher-ranked mortgagee has to be entirely satisfied before the lower-ranked mortgagee can be allocated any proceeds. The rank of the mortgage according to Law No14 of 2008 is decided upon its date of entry in the property register. The same law states that any mortgage, which is not registered in the Property Register, is regarded void. Pending proper and complete implementation of this law, it is questionable how to deal with the mortgages that have been installed on properties, which are not yet registered.