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.