New Kingdom of Saudi Arabia Commercial Mortgage Law 2018 – Securitization and Structured Finance

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The Kingdom of Saudi Arabia has proclaimed a new Law on Commercial Mortgages (the “New Law”) by Royal Decree number M/86 of 08/08/1439H (corresponding to April 24, 2018) and by resolution number 426 of the Council of Ministers. of the same date. The new law entered into force on April 24, 2018 and the implementing regulations of the new law, in accordance with the resolution number 43902 of the Minister of Trade and Investment, were published and entered into force on May 2, 2018 .

The new law replaces the old law on commercial mortgages (the “previous law”) issued under Royal Decree number M/75 of 21/11/1424H (which corresponds to 14 January 2015). The new law is much more extensive than the previous law and introduces several new concepts such as floating charges, codification of the order of priority of security interests, which was absent from the previous law. In addition, the new law also repeals some provisions of the previous law, such as the authorization to take security over future property.

Parties affected by the new law have until September 24, 2018 to ensure that the relevant security instruments to which they are party are amended to comply with the provisions of the new law. The priority of titles executed before April 24, 2018 will not be affected by the new law until September 24, 2018, after which the provisions of the new law will govern the priority of the titles concerned.

What types of assets can be secured?

An asset to be secured must be:

  • Must exist;

  • In the possession of the debtor;

  • Must belong to the debtor who must also own the disposal rights;

  • Must be unambiguously identifiable.

What are the main features of the new law?

The main features of the new law can be summarized under the following points:

  • The new law allows the creation of security interests in future assets

  • Mandatory registration with the Unified Lien Registration Center for the mortgage to be enforceable against third parties;

  • Possessory mortgages are permitted, provided the mortgage does not take the form of a floating pledge, which must be registered;

  • It is possible to grant securities on bank accounts, including present and future balances, provided that they are nominative;

  • It is possible to create more than one pledge on a particular asset;

  • The new law introduces the concept of security on a commercial enterprise; and

  • The new law also provides for summary procedures for the enforcement of securities.

In the following sections, we will examine these main features of the new law compared to the previous law:

Securing future debt

Under the previous law, only known, quantifiable or crystallized debts could be secured. The new law explicitly authorizes the guarantee of debts arising in the future, including contingent debts. In addition, further drawing down of debt (such as a loan facility) or rescheduling thereof will no longer affect the effectiveness of the underlying security. This sheds light on the extent to which a guarantee title executed on a given date would legally cover all future drawings under the corresponding financing.

The new law also requires that the asset over which the security is provided must be capable of being sold or appraised. For security to be provided on future rights, the following two elements must be specified in the relevant security document:

  • the value of the aforementioned future rights; as well as

  • the dates on which they become vested in the person providing the security.

Valuation of securities

The new law further requires that the asset over which the security is granted be valued according to the methodology agreed between the party granting the security and the party in favor of which this security is provided, whether in the relevant security document or in a document that is entered into after the date of the security document.

When the valuation method has not been previously agreed, the parties are required to each appoint a certified expert, the final valuation being the average of the two valuations calculated by each of the two values.

Security on fluctuating amounts

The previous law did not explicitly apply to security acquired over amounts arising in the future. The new law, however, reverses this position and allows such security to be taken, provided that the amounts secured are expected to occur before the date of repayment of the secured debt. This suggests that taking security over future proceeds such as receivables is legally enforceable in the Kingdom of Saudi Arabia.

Scope of security

The provisions of the new law explicitly authorize the creation of a security interest in part of an indivisible movable property, whereas the security interest would generally apply to the relevant part of the property concerned, as covered by the deed of security. In addition, a person can also grant multiple interests on the same asset.

Security refinement

Under the previous law, for the security right to be perfected, the secured creditor or its agent had to have constructive possession of the relevant secured asset. Under the new law, however, security is perfected by registering it with the Unified Center for Lien Registration (UCLR); or by granting constructive possession of the secured property to the secured party or its agent.

This provision helps to clarify the position surrounding certain forms of collateral (such as assignments) taken in Saudi Arabia and its enforceability. Further, with respect to commercial goods, registration cannot perfect the security since possession of such goods is necessary to perfect the security unless they are subject to floating charges.

Floating fees

The new law introduces the concept of floating charges, which is defined as charges created on movable property without determining the precise elements of that movable property. Floating charges may be levied in full or as part of the movable property of a going concern, although the assets subject to such floating charges may fluctuate from time to time. It appears that these floating charges do not cover fixed assets. However, it is necessary to note that the new law provides for a variation of the floating charge where, in the case of an incorporated entity, the floating charge is meant to also include the establishment of the relevant entity.

In case of default, floating. Until the floating charges crystallize, the affected assets may be dealt with in the ordinary course of business. As an exception to floating load flexibility, the new law imposes more floating load requirements on commercial goods, such as periodic reports specifying details including the location of such goods, their quantity and their value.

Security priority order

The previous law did not clarify the order of priority of securities. This limitation was lifted by the New Law, which specifies that a title of security has priority as soon as it is registered with the UCLR; or upon receipt of constructive possession of the secured property by the secured party or its agent. It also sets the following order of priority:

  • With respect to registered and unregistered securities, a transferable security registered with the UCLR will have priority over the unregistered transferable security.

  • In the case of unregistered security instruments, the party who has possession of the secured property will have priority over the party who does not.

  • Between titles registered with the UCLR, priority is determined on the basis of the date of registration of the titles concerned. If these deeds are registered on the same date, the deed registered earlier takes precedence.

  • A fixed charge on an asset takes precedence over a floating charge on the same asset, unless otherwise agreed by the parties.

Account Security

The new law authorizes the taking of securities on the accounts, which was absent under the previous law. This security must be supplemented by its registration with the UCLR or any other relevant register. In addition, the bank holding the account must be aware of the security on the relevant account and must have agreed to comply with the provisions of the relevant security instrument with respect to the use of the secure account.

The guarantee on an account includes the credit balance of the account on the date of execution of the guarantee title concerned, as well as any amount deposited after the date of the guarantee title.

Unless otherwise agreed, the person providing security over the account balance may not transfer or withdraw monies from the account.

Security on shares

The new law authorizes the taking of security over a determined part of an indivisible property. Security may be acquired over a shareholder’s participation in the share capital of a limited liability company. In accordance with Saudi corporate regulations, however, the security holder’s recourse will be limited to the dividends accruing to such shares and may only sell the shares by way of judicial auction.


Under the previous law, there was a claims committee as the judicial body through which security over commercial property was to be enforced. In the new law, a differentiated approach has been devised whereby the security right can be enforced either directly by the secured creditor by presenting a security document issued by the UCLR, delivering it for immediate enforcement to the competent authorities, or by providing a title issued by the UCLR which provides for the enforcement of the security in the enforcement court.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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