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.

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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.

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