Monday, April 30, 2012

Mou in Hotel Development Transactions - Part I

By the time a major transaction is finalized, its terms typically will be enshrined in a lengthy legal agreement – or, indeed, in multiple agreements (sometimes enough of them to fill a conference room table). Hotel development transactions, for example, may include a management agreement, a technical assistance agreement, and centralized cost reimbursement agreements, among others.

Yet many large deals, including those that ultimately end up with an array of lengthy documents, will begin with a single short agreement between the parties, such as a memorandum of understanding (MOU).

This article discusses MOUs in the context of hotel development transactions, in which they play a particularly important role. However, it is important to note that many different types of transactions make use of MOUs, so a number of the principles described in this article are likely to apply beyond the hotel project setting to deal-making in general. Part I of this article discusses what MOUs are and why they are so important. Next month, Part II will cover particular deal points that are typically addressed in MOUs for hotel development transactions.

What is an MOU?

In different jurisdictions and different sectors, an MOU (or a “letter of intent” or “heads of terms”) might take on a slightly different meaning, as far as the terms it includes, the parties to it, and its enforceability as a legal document.

For purposes of this article, however, we shall use a simplifying approach and take “MOU” just to mean a short, preliminary agreement entered into by the parties to the agreement at an early stage of the transaction process. Some MOUs are longer versus shorter, and more detailed versus less detailed, but the basic point is that MOUs outline the key terms that the parties will use as the foundation for their final agreements.

In the hotel development context, the MOU will reflect the key terms between the owner and the operator – such as management fees, term of the agreement, and certain key operational issues – that both sides consider necessary to agree up front before they invest the time, energy and costs to negotiate a suite of lengthy, detailed agreements.

Why is the MOU important? The MOU is typically very important to the deal because it will shape the negotiations over the final transaction agreements. Many or most of the key terms in the final agreements will be obliged to follow the way such terms are treated in the MOU.

As mentioned above, the MOU may or may not specify that its terms shall be legally binding between the parties. However, whether or not the MOU is legally binding, it will often carry significant weight as a practical matter; if one party attempts to deviate from the MOU, the other party can accuse of it of not acting in good faith or of backtracking from a position already discussed and agreed.

Thus, it is important for the parties to take the negotiation of an MOU as seriously as the negotiation of the final agreements. Indeed, the MOU might be the most crucial stage of the entire negotiation process. With this in mind, the parties often will be well advised to engage any third-party advisors (including commercial consultants, technical advisors, or lawyers) early in the negotiation process to assist with the MOU, rather than waiting until the MOU already has been signed.


Wednesday, April 18, 2012

Legal Requirements for Document Retention

In recent years, the rapid growth of the Omani economy has led to a significant increase in business activities and commercial transactions in the Sultanate. As companies have become bigger and more active, they unsurprisingly have tended to find themselves with an ever-growing amount of corporate documents and records.

Such documents were easily stored back in the days when companies were smaller and transactions were less frequent. Today, however, many companies have such high volumes of documents and data that they may look to store them outside of their own premises. Some companies also may look to discard old documents and records. The question thus arises: what, if any, legal obligations do Omani companies have to retain their business documents?

Many countries throughout the world impose legal obligations on companies to retain their documents for a certain period of time. While Omani law does not prescribe an overall regime of document retention requirements, several key statutes outline particular retention obligations that apply to companies in the Sultanate.

Commercial Companies

All organizations that are regulated under the Law of Commerce (Royal Decree No. 55/90) – which includes all types of commercial companies, regardless of corporate form – must look to the Law of Commerce to help them ascertain the record-keeping requirements that apply to them under Omani law.

For example, merchants should look to Article 28 of the Law of Commerce, which imposes on them a duty to retain the following types of records:

  • Day books, in which shall be entered day-by-day all transactions pertaining in any way to the merchant’s commercial undertaking, and month-by-month the total of his personal drawing;

  • Inventory books, which shall be updated at least once each year; and

  • Copies of all correspondence, as well as telegrams, invoices, and other essential documents sent and received by the merchant for the transactions of his trade.

  • Article 31 of the Law of Commerce obliges merchants to keep their day books and inventory books for a period of ten years. In addition, merchants must also keep the copies of their correspondence and telegrams for the transactions of their trade for a period of five years.

    Financial Institutions

    The Anti-Money Laundering Law (Royal Decree No. 34/02) imposes a legal obligation on financial institutions to retain their documents for a period of time. Article 1 of the Anti-Money Laundering Law defines ‘financial institutions’ to mean any establishment licensed to do business in the Sultanate as a bank or money exchange or as an investment, financing, insurance or a financial intermediary company (or any similar activity specified by the committee). Article 5 of the statute requires financial institutions to maintain and hold documents of identification and addresses of their customers and records of their transactions, and prohibits the destruction of the original paper documents during a period of not less than ten years.

    Law Firms

    There is no specific law concerning document retention obligations of law firms in the Sultanate; however, it could be presumed that law offices are subject to the Law of Commerce’s obligations regarding retention of documents.


    Tuesday, April 10, 2012

    Taking Security: Commercial Mortgages - Part I

    When an entity or individual borrows money, in addition to a contractual right of repayment under the lending contract, it is common for lenders to take security over the borrower’s assets as an additional form of protection to ensure repayment of the loan. One way of doing this in Oman is for the lender to take a commercial mortgage over some or all of the assets of the borrower, if the borrower is a company, partnership or sole proprietorship registered with the Ministry of Commerce and Industry (“MCI”).

    Part I of this article explains what commercial mortgages are and how they are perfected. Next month, Part II will delve deeper into registration requirements and enforceability issues.

    What is a commercial mortgage?

    A commercial mortgage grants lenders rights over the assets of the borrower that may be exercised to ensure repayment of the debt. A commercial mortgage requires the consent of the borrower and it may be granted over a variety of the borrower’s assets including its business (including its commercial registration number and business name), machinery, equipment, trademarks, intellectual property (including goodwill), stock, vehicles, ships and aircrafts.

    It is important that, on the date the commercial mortgage is signed, the assets secured by the commercial mortgage are (i) owned by the borrower, (ii) in existence and (iii) clearly set out in the commercial mortgage.

    Regarding the first of these requirements, it is important to note that contractual rights which are contingent or which come into effect in the future cannot be mortgaged. This can have significant implications for structuring transactions. For example, if an asset is sold via a ‘lease-to-buy’ arrangement, under which title to the asset is only transferred to the buyer after the final payment has been made, the buyer will not be able to grant the seller a mortgage over the asset at the time of purchase; under Omani law, the buyer only can grant a mortgage over the asset once he has title to the asset.

    The third requirement is typically achieved by attaching to the commercial mortgage a schedule of the assets with sufficient detail to ensure that the relevant assets are easily identifiable. If the assets covered by the commercial mortgage are not clearly set out, the commercial mortgage only will cover the business trade name, the right to lease, the right to contact clients and goodwill.

    It is also important to note that a commercial mortgage is distinct from other similar-sounding kinds of interests. A commercial mortgage is distinct from a legal mortgage which is used to take security over land. In addition, there is no concept of a floating charge under Omani law.

    In practice, in order for lenders to capture assets acquired by a borrower after the date of registration of the commercial mortgage, a new addendum is often added every six months, or after the acquisition of a major asset, listing those additional assets. In terms of priority, the mortgage over the additional assets takes effect upon the date of registration of the addendum listing the additional assets rather than the date of registration of the original mortgage.

    Perfecting a commercial mortgage

    To be enforceable in the Omani Courts a commercial mortgage needs to be perfected, meaning that it has been formally registered at the MCI in accordance with its procedures. For this to occur, the commercial mortgage in Arabic must be signed by both the borrower (the mortgagor) and the lender (the mortgagee) in the presence of the relevant official for the MCI. Where Arabic is not the primary language of one of the contracting parties, it is possible to have a dual language mortgage; however, in the event of any inconsistency, the Arabic language version will prevail. Finally, the commercial mortgage needs to be attested and registered at the MCI within thirty days of it being signed but typically this all done at the same time as the commercial mortgage is signed. Priority is established by the date and time of registration with the MCI. It is possible for more than one commercial mortgage to be granted over the same assets of the borrower.

    Please see upcoming posts for a continued discussion of registration requirements, as well as key issues relating to enforceability of commercial mortgages in Oman.


    Wednesday, April 4, 2012

    Time Bar Limitations Under Omani Law

    Sometimes, little-known procedural points can be decisive, even trumping legal substance. Time bar limitations are a classic example of this.

    What is a time bar limitation?

    A time bar limitation is a maximum period of time established by law for the exercise of a claim, judgment, or right, such that the claim, judgment or right will lapse if it is not exercised within this time period. In other words, a person wishing to exercise a right that is subject to a time bar limitation must use this right within the period stated in the law, or else lose the right. Likewise, if a certain judgment that is subject to a time bar limitation is not carried out within the legally specified period, then that judgment lapses and is no longer applicable.

    Omani law prescribes a variety of time bar periods in relation to different types of legal matters. This article highlights several of these time bar limitations which are relevant to businesses.

    Under the Law of Commerce

    The Law of Commerce (Royal Decree No. 55/90) includes numerous time bar limitations, particularly in relation to the carriage and delivery of goods. Some of these include:

  • A consignee, in case of damage to goods, must submit a contestation to the carrier immediately after he discovers the damage and no later than seven days from the date of delivery.

  • Where an item is delivered without reservation, the right to seek recourse against the carrier due to damage, partial destruction or delayed arrival shall lapse unless the consignee proves the condition of the goods and lodges an action against the carrier within thirty days from the date of delivery.

  • The limitation period for filing a court case in respect of a guarantee of the defect is one year as from the date of delivery of the item sold, unless a guarantee for a longer period has been given.

  • Any lawsuit in relation to a bill of exchange against the person that accepted it shall lapse after three years.

  • The limitation period for an action arising from a contract for the carriage of goods or persons or a contract of carriage commission agency shall be one year.

  • The limitation period for the obligation of merchants towards each other in relation to their commercial activates shall be ten years as from when the date for performance of such obligations lapses (unless the law provides for a shorter period).

  • Under other Omani statutes

    Certain key time bar limitations are prescribed by other Omani statutes as well, including the Engineering Consultancy Law (Royal Decree No. 120/94) and the Labor Law (Royal Decree No. 35/2003). These limitations include:
  • In the Engineering Consultancy Law, if the engineering consultancy office’s duties are restricted to design and do not include supervision or execution, the engineering consultant shall only be responsible for design defects and all security cases shall lapse after three years from the time of discovering the defect without taking action.

  • In the Engineering Consultancy Law, the project owner of the engineering consultancy office and the supervisor shall be jointly responsible with the contractor for the defects in the projects designed by them or executed under his supervision for ten years from the date of handover of the project; provided that a claim in respect of any defect must be filed within three years of when such defect is discovered (as noted in the preceding bullet).

  • In the Labor Law, the employee’s rights to bring an action shall lapse after one year of the facts and circumstances that gave rise to such an action.

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