THE LIFESPAN OF A COMMERCIAL MORTGAGE: A SECURITY UNDER CONTINUOUS REVIEW
Authored by: Lori-Ann Campbell
- Commercial mortgages are governed by the UAE Commercial Code and are the type of security registered over business premises’ in the UAE in relation to the tangible and intangible assets of a business necessary for commercial activity.
- Commercial mortgages can only be mortgaged to banks and financing institutions.
- Commercial mortgages are a registrable form of security and as such must be notarised and registered to be perfected.
- Parties’ contractual and legal obligations under a commercial mortgage are continuous.
- A commercial mortgage is not a quick and easy security to enter into and both parties should be aware of their ongoing obligations to ensure the mortgage is fully perfected and enforceable according to the terms of the financing documentation.
- Both parties to the mortgage should cooperate, bearing practical considerations in mind, to ensure that the commercial mortgage is an effective security.
Provision for use of a commercial mortgage is set out in the UAE Commercial Code. A commercial mortgage may be registered over a “business premises” which includes all tangible and intangible assets deemed necessary for commercial activity. Tangible assets are specified in the Commercial Code as covering such items as goods, equipment or machinery and intangible elements such as customer contact details, goodwill, trade name, right to let, industrial, literary and artistic patents and licences.
A list of all existing moveable assets of the company is normally included in the mortgage specifying the assets which are to be mortgaged. At the very minimum, UAE law provides that a commercial mortgage should cover the trade name, the leased premises, customer contact details and goodwill.
Commercial mortgages can generally be viewed as an umbrella mortgage under which various types of moveable assets can be mortgaged. Unlike in other jurisdictions, a floating charge over all and any assets, current or future, is not possible under UAE law. Instead, piecemeal security over specific assets or classes of assets, as set out above, has to be taken.
A commercial mortgage is a relatively cumbersome form of security and it is not recommended for use with construction finance or traders as requires all assets of the company, including the incorporeal, to be mortgaged.
There is specific provision in the Commercial Code which provides that a commercial mortgage may only be mortgaged to banks and financing institutions, therefore it is not possible for another company or individual to take this form of security in a financing transaction.
Commercial mortgages are a registrable form of security and as such must be notarised and registered to be perfected. Perfection is by way of registration in the Commercial Register of the relevant Emirate (for example the Commercial Mortgage Register is maintained by the Department of Economic Development in Dubai and Abu Dhabi or the Fujairah Municipality in Fujairah). Priority is obtained simply by date and time of registration.
Renewals and periodic reviews
Parties’ contractual and legal obligations under a commercial mortgage are continuous and do not end upon a successful registration. A commercial mortgage is intended to cover the term of the loan and, in order to remain a perfected and enforceable security it must be renewed and upgraded throughout its life span.
The Commercial Code provides that a commercial mortgage, once registered, shall only secure a priority right for five years. Registration in the Commercial Register must be renewed before the expiry of the fifth anniversary or the priority provided by this form of security is lost and the mortgage will be deemed to have been cancelled.
Renewal in the Commercial Register is normally negotiated between the parties at the outset and provision can be made whereby the bank can opt to renew the mortgage without notice to the company.
Regardless of which party effects the renewal, both parties should be aware of the consequences of non-renewal. Failure to maintain a properly perfected security is normally deemed to be a breach of the financing documentation and the company risks a technical default should it fail to keep its commercial mortgage registrations up to date. The banks also have some responsibility in keeping an eye on the registration dates of its commercial mortgage to ensure that security duly perfected at all times and is enforceable for the full term of the loan.
Periodic review of the secured assets’ value throughout the term of the loan is a common feature of a commercial mortgage. Under a commercial mortgage the company is required to mortgage all its existing identifiable moveable assets. Where the company acquires further assets during the period of lending, it will be required to execute, notarise and register addenda to the filed commercial mortgage with the Commercial Register, specifying the additional assets and their values.
The mechanics of filing addenda are usually set out in the commercial mortgage and negotiated between the parties. It is common to have a provision whereby addenda are required to be filed quarterly or semi-annually and on a case by case basis where certain assets are higher than an agreed threshold value.
The filing of addenda is, in practice, administratively burdensome for companies if there are no threshold asset values agreed at the outset and parties are often forced to obtain waivers with regards to filing requirements. Practically speaking, it is advisable to take threshold considerations into account at the outset, as the administrative burden to both sides involved in ensuring assets are mortgaged and the commercial mortgage is kept whole, can be time consuming and costly.
The payment of fees in relation to filing each addendum is regularly discussed as there is a fee payment required on a percentage of the new asset value to be secured. Often, the payment of fees is negotiated with the authority at the outset and a lump sum fee can be agreed upon to cover a percentage of the full value of the loan upon filing the initial commercial mortgage and this can include any subsequent addenda.
A commercial mortgage is not a quick and easy security to enter into and both parties should be aware of their ongoing obligations to ensure the mortgage is fully perfected and enforceable according to the terms of the financing documentation. Both the company and the bank should adopt a flexible and co-operative approach to ensure that the commercial mortgage is an effective security.
Ten practical tips to ensure your commercial mortgage is an effective security
- Be aware of the renewal date. Registration is only valid for five years.
- Commercial mortgages can be renewed by application to the relevant authority within the relevant Emirate. Each authority may have its own procedures, however all will require sight of the original commercial mortgage and the original commercial mortgage registration certificate.
- Pay attention to the agreed dates pertaining to the filing of addenda. Failure to do so can result in a technical default.
- Either agree registration fees upfront with the relevant registering authority or be prepared to pay additional fees on the filing of each subsequent addendum. Fees can be capped or uncapped and vary from Emirate to Emirate. Where registration fees are uncapped, a direct exemption can be sought from the local authority concerned to avoid borrowers having to pay high ad valorem fees that may render a project uneconomic.
- Addenda should be registered in like form to the original commercial mortgage. They should be translated and notarised.
- In order to notarise an addendum, the Notary Public will require sight of a copy of the original notarised commercial mortgage and the original mortgage registration certificate.
- Addenda should contain a full list of assets, clearly identifying each asset and its individual value.
- Addendum should include confirmation that the new assets are insured and provide details of the insurer.
- Check with the relevant filing authority before attempting to register an addendum as there may be a publishing requirement prior to it being registered.
- Check whether the commercial mortgage requires any other filings or notifications to be made upon the registration of an addendum, for example, to other regulatory or supervisory bodies.