Thursday, May 10, 2012

Taking Security: Commercial Mortgages

In Part I of this article, which was featured in a previous post, we provided an overview of what commercial mortgages are and the fundamental legal concepts that govern them in Oman. This month we conclude by discussing further the registration requirements for commercial mortgages, along with potential enforcement issues.

 Further details on commercial mortgage registration

For a commercial mortgage to remain valid, its registration must be renewed every five years at the Ministry of Commerce & Industry (MCI). A commercial mortgage can be released and removed from the register of the MCI by the expiry of the mortgage after five years, i.e., without its renewal. It can also be released and removed by virtue of a court order or written agreement of the borrower and the lender.

Details of the commercial mortgage are set out in the commercial registration papers of the borrower. These details include the name of the mortgagee, the date of the charge and the assets mortgaged. In practice, the MCI require the consent of the lender to make any changes to the commercial registration of the borrower once the commercial mortgage has been registered even if only one asset, such as a rig, has been mortgaged.

The registration of a commercial mortgage at the MCI requires the assets to be located in Oman and the borrower to be incorporated in Oman. For moveable property such as ships and aircraft, the vessel must be registered in Oman as the mortgage will be registered against the title to the ship or, as the case may be, the aircraft. Such registrations will be with the relevant authority and not with the MCI.

Potential enforceability issues

If the borrower fails to pay its debt, then a court order is required by the lender to enforce the commercial mortgage against the assets of the borrower (unless the borrower otherwise cooperates with the lender’s enforcement against its assets). This can be a long process and it can take up to two years to obtain the court order. The assets will then be sold by public auction administered by the Omani courts and the lender only will be entitled to the proceeds of sale of the asset sufficient to discharge the secured loan. It is not possible for a lender to simply take physical possession of any secured assets and sell them without the involvement of the Omani courts.

In practice, in relation to limited recourse projects and other transactions, commercial mortgages have been granted and registered by the MCI over a wide range of contracts and government licences. But in our view, there is serious doubt about the ability to mortgage and enforce a mortgage over contracts and government licences. The fact that such commercial mortgages have been registered by the MCI does not mean that they will automatically be enforceable in the Omani courts. In relation to contracts, many of the borrower’s rights under contracts are contingent or come into effect in the future. In addition, many contracts, by their very terms, are not capable of being sold in the manner that mortgaged assets are sold by the Omani courts on enforcement, and consent of the counterparty to any transfer of obligations is likely to be required. In a similar manner, most government licences are not capable of being sold and as a matter of law are generally personal to the borrower.