Foreign lenders have become more active in commercial real estate financing in Kuwait, either through traditional commercial lending or through vehicles using Islamic sukuk bonds.
In Kuwait, the ability to take security over real property, including by way of mortgage, is permitted under Article 7 of Law 5 of 1959, Real Estate Registration. Mortgages are treated as contracts and so the contracts chapter from the Kuwait Civil Code, Decree 67 of 1980, also applies.
There is a common perception that foreign lenders may not take a mortgage over Kuwaiti real property because foreigners are generally prohibited from owning real estate in Kuwait under Decree 74 of 1979, Restrictions on Foreign Ownership of Real Estate. While it is true that foreigners are prohibited from owning real estate generally, these restrictions do not apply to holding mortgages. Foreigners can and do enter into valid and registered mortgages as mortgagees in Kuwait.
Despite the fact that foreigners can act as mortgagees under Kuwaiti law, if the security or mortgage provides for possession of the land, the security holder or mortgagee must be a Kuwaiti citizen. If possession is a requirement, the security holder can be a majority-owned Kuwaiti bank licensed to practise in Kuwait.
Under Kuwait law, it would also be possible contractually for a foreign bank to take security over a lease of land held by a company operating in Kuwait, if the terms of the security agreement allowed the foreign security holder to step into the lease (rather than to take possession of the land).
The law allows a mortgage over land to be enforced (Article 190 of the Civil & Commercial Procedures Law). The security holder must serve a demand letter on the debtor. The matter is then referred to the Executions Court, where the security holder must file authenticated mortgage documentation.
The Executions Court will set a hearing date on which both parties' case may be heard. However, a debtor's ability to defend himself against enforcement proceedings is limited. It is possible that the Executions Court may refer the matter to the Experts Department, for the Experts Department to value the property. After any valuation, the case is referred back to the Executions Court, which will set a minimum permitted sale price for the land. The land will then be advertised for auction, and will be auctioned. The mortgagee is entitled to satisfy the debt out of the proceeds of the sale, and the debtor is entitled to any surplus. If a deficiency exists after the sale, the mortgagee retains the right to bring suit against the mortgagor in a separate action to collect the balance owed.
In this regard, if possession were a requirement, the security holder could be a majority-owned Kuwaiti bank licensed to practise in Kuwait. This facilitates the enforcement procedures, against such security, as opposed to the security being held by a foreign entity. There is another advantage that a Kuwaiti mortgagee has over a foreign mortgagee: at the public auction for the property, the mortgagee has the right to bid for the property using the debt owed to it by the mortgagor and take title to the real property directly. The problem is that the foreign ownership restrictions would not allow a foreign mortgagee to take title in this process. However, this restriction is not detrimental. If a foreigner holds the mortgage, it would only mean that the foreigner could not bid for the property at auction. It is still entitled to all proceeds from the sale necessary to satisfy the debt.
Kuwait's mortgage laws are well developed and enforcement procedures that are properly instituted do protect creditors, both foreign and local. However, one would be cautioned to ensure that proper review of the real estate is conducted, necessary elements of the mortgage are included in the agreement and registration of the mortgage is conducted strictly in accordance with local law and practice.