Saudi Arabia recently issued implementing regulations to the Commercial Mortgage Regulations (the CMR). The CMR addresses mortgages on commercial movable property and does not cover real property.
The concepts of security and the means of perfecting and enforcing security interests in the Kingdom are based on the Sharia (Islamic law) and are distinct from the way such terms are used in western jurisdictions. The term rahn in the CMR, as in the Sharia, is used interchangeably for both pledges and mortgages. Article 3 of the implementing regulations provides that the mortgaged property (marhoun) must: (i) be something that can be validly sold; (ii) be specifically designated in the rahn agreement; and (iii) be deliverable.
In Saudi Arabia a mortgage/rahn may only be perfected through possession. Article 15 of the implementing regulations provides that, for possession to be sufficient to perfect a mortgage on commercial moveable property, the mortgagee or a neutral trustee (adl) must possess the mortgaged object. Article 16 of the implementing regulations states that such possession must be in a manner that leads third parties to reasonably believe that the object is in the possession of the mortgagee or adl or that a deed exists granting the possessor exclusive rights in the marhoun. If the mortgagee or adl is not determined to have possession of the marhoun, then the mortgagee will probably be treated as an unsecured creditor under the Sharia.
Various articles of the implementing regulations provide for the issuance of deeds granting a rahn on patents, copyrights, trade marks, and securities issued in Saudi Arabia. Articles 12, 13 and 14 of the implementing regulations outline the requirements for these deeds to be recognized. Neither the CMR nor the implementing regulations, however, envision recording a rahn in a central registry. Instead, the CMR provides that the existence of a rahn may be proved by all available means.
Article 20 of the implementing regulations provides that the mortgagee or adl is responsible for the preservation of the marhoun. If the mortgagor defaults on a payment obligation, after the mandatory notice period the mortgagee may request the Board of Grievances to order a sale by auction of the marhoun. If multiple pieces of commercial moveable property are mortgaged, the Board of Grievances will not order the sale of mortgaged property that is in excess of the value of the unpaid debt amount. Article 29 of the implementing regulations states that any agreement permitting the mortgagee to sell or dispose of the marhoun in a manner other than as specified in the implementing regulations will be null and void.
The CMR and the implementing regulations are primarily a confirmation of the existing Sharia rules regarding mortgages, but they provide some clarity as to the requirements for an enforceable mortgage on movable property in Saudi Arabia.
The implementing regulations were adopted by Royal Decree M/85 dated 21/11/1424 H (about January 13 2004 G).