Commercial Mortgage Law in Saudi Arabia

The Commercial Mortgage Law in the Kingdom of Saudi Arabia is one of the legislative laws on commerce promulgated by the Council of Ministers. It seeks to foster the bond market in Saudi Arabia, create ideal conditions for improving the access of commercial establishments to funding, and ensure that asset owners benefit from the inherent value of such assets, ultimately achieving a positive impact on the business environment and contributing to enhancing Saudi Arabia's credit rating and position within global indices.

The first Commercial Mortgage Law was promulgated in Saudi Arabia in 2004 pursuant to a Royal Decree and a resolution of the Council of Ministers. The law was later abrogated. The currently enforced law was promulgated in Saudi Arabia in 2018 pursuant to a Royal Decree and a resolution of the Council of Ministers. It consists of forty-seven articles.

The latter defines several principles and concepts aligned with the comparative practices seeking to achieve a qualitative leap in favor of the commercial and investment sectors and to establish sustainable economic entities, ultimately benefiting the entire business community.

The Commercial Mortgage Law mainly seeks to foster the bond market in Saudi Arabia by creating ideal conditions for improving the access of commercial establishments to funding and ensuring that asset owners benefit from the inherent value of such assets.

The law seeks to foster the contributions of the private sector to development, enhance the growth rate and performance efficiency of the national economy, improve its competitiveness in light of global development, protect the rights of the parties to commercial and financial transactions, and enable private sector enterprises to leverage their operating assets and efficiently access funding.

The law also aims to optimize the small and medium enterprises' leverage of their assets, enable them to benefit from mortgaging their operating assets, protect the rights of creditors, facilitate execution procedures upon mortgage properties upon default, and expand the scope of mortgaged assets and the scope of implementation commercial mortgage contracts.

On April 27, 2018, the Ministry of Commerce issued the Implementing Regulations of the Commercial Mortgage Law, drafted in coordination with the Ministry of Defense, the Saudi Arabian Monetary Authority (currently known as the Saudi Central Bank), and the Capital Market Authority. The regulations were inspired by examining the best relevant practices. The regulations stipulate the implementing provisions for the articles set forth under the law. They include provisions for the transfer of the mortgaged property ownership and executing related procedures, provisions related to suspended mortgage contracts upon ownership transfer, to the mortgage of current accounts, investment accounts, and time deposits, provisions on direct execution, and restrictions and controls related to the valuation of the mortgaged property.

Under the Commercial Mortgage Law, a mortgage contract refers to an agreement pursuant to which the debtor or his guarantor allocates a movable asset as security for a debt. Such allocation comprises the modification of such amount or addition thereto. The law defines a mortgaged asset as a movable asset provided or agreed to be provided as security for a debt. According to the law, the debt or secured debt refers to the debt itself or a part thereof in favor of which a mortgaged asset is provided as security, including the debtor's obligation to perform a specific action.

Several articles were amended under the currently enforced law. Amendments included the definitions of "debt or secured debt" and "economic debt," with both definitions stipulated under the law's first article.

The amendments clarify that debt or security debt refers to the debt itself or a part thereof in favor of which a mortgaged asset is provided. This covers all types of current and prospective obligations, including fixed or condition-bound obligations, as well as monetary and non-monetary obligations.

Furthermore, the concept of economic debt was also amended to be defined as commercial debt or any debt encumbered by a non-merchant, upon engaging in a professional or other activity seeking the generation of profit. This covers all types of current and prospective obligations, including fixed or condition-bound obligations, as well as monetary and non-monetary obligations.

The amended law enhanced the procedural path of commercial mortgages, thus ensuring that these procedures are aligned with the requirements related to growth, ease of doing business, safeguarding rights, and compliance with the law. The law stipulated that the mortgage contract should only be restricted to movable assets (tangible and intangible assets), rights, and place of doing business of an economic enterprise, should the latter be a company.

The provisions stipulated under the Commercial Mortgage Law apply to a written mortgage contract applying upon movable assets provided as security for a debt. Pursuant to the second article of the law, a mortgage contract is considered to be written should it include the information below:

- Names of the mortgagor, the mortgagee, and the debtor (should the mortgagor be an individual guarantor), the name of the mortgage holder (the person upon which the mortgagor and mortgage agreed for holding the mortgaged property), if any, in addition to the identification of the mortgage holder, their addresses, and contact details.

- Description of the mortgaged property, its status, and value on the contract date, in addition to determining the expected description, approximative date of availability, and estimated value of prospective mortgages.

- General description of the secured debt, its value, or maximum value, as applicable.

- Date of the mortgage contract.

- Maturity date of the secured debt or expected date of maturity for the debtor's unsecured debt.

The Commercial Mortgage Law determines the conditions under which a commercial mortgage is terminated. These conditions include the following:

The mortgage does not expire as a result of the secured debt rescheduling or renewal.

The Commercial Mortgage Law is one of the laws aligned with Saudi Vision 2030. It supports the vision of achieving its targets determined under the pillar seeking the establishment of a thriving economy by providing a comprehensive and outstanding legislative and regulatory environment that is able to achieve the ambitious growth sought by the Saudi economy. The promulgation of the law and its implementing regulation aim to provide tangible security for commercial loans, ultimately enabling business owners and investors to secure the funding required for their business activities.

Pursuant to the provisions stipulated under the Commercial Mortgage Law, the law focuses on regulating the mortgage process within its financial, commercial, and legal contexts, ultimately contributing to instilling a robust business environment. The law highlights, throughout its chapters and articles, the most notable aspects it tackles, including the mortgage of movable assets by a debtor as a security for an economic debt, the mortgage of movable assets in favor of more than one mortgagor, the order of priority, and the provisions regulating the preservation and investment of mortgaged property. Pursuant to the law, the commercial mortgage law is executed upon the transfer or registration of the relevant property. The commercial mortgage contract expires upon the agreement of the mortgagor and mortgagee, the expiry of the debt, or the loss of the mortgaged property. Furthermore, the law sets forth the provisions for the establishment of the unified register for commercial mortgages.