Real Estate, Construction and Hotels & Leisure Focus
David Bowman Senior Counsel, Real Estate
Dr. Ahmed Alawbthani Associate, Real Estate
Abu Dhabi law recognises four principal types of real estate rights:
Ownership right: the ownership right is the foremost real estate right that allows the holder to own property without any limitation as to time (known in common law jurisdictions as a freehold title);
Usufruct right: a usufruct right in favour of the usufructuary to use another person's property and exploit it provided that such property remains in its original condition. This right is restricted to a maximum term of 99 years;
Musataha right: a right to construct and make improvements on land owned by another person and then own such improvements throughout the term. A right of Musataha is granted pursuant to a musataha agreement, which is akin to a ground development lease. A Musataha right can be granted for up to 50 years. The Musataha right can be renewed once for a further 50 years; and
Leasehold right: a right to lease a property. The Lease term must exceed four years to create real estate rights under Abu Dhabi laws, and this right is limited to a maximum period of 99 years.
It is commonly understood that owners of properties in Abu Dhabi can grant mortgages over their properties, however, there is often confusion as to whether the holders of Usufruct, Musataha and Leasehold rights can enter into mortgages. This article explains the possibilities for creating mortgages over Usufruct, Musataha and Leasehold rights in Abu Dhabi.
Law No. 19 confirms that non-UAE nationals may hold Usufruct and Musataha rights over properties situated within areas designated for foreign real estate investment (“Investment Areas”). Law No. 19 confirmed that Usufruct rights may be created for up to 99 years, and Musataha rights can be granted for up to 50 years with the option of being renewed for a further 50 years, subject to the mutual agreement of both parties.
Law No. 19 states that the holder of a Usufruct or Musataha right with a term of more than ten years has the right to grant a mortgage over the usufruct or musataha right without consent from the landowner. However, the landowner and the holder of the Usufruct or Musataha right may agree otherwise, in which case the landowner's permission will be required. When a Usufruct or Musataha right is granted for less than ten years, a mortgage can still be created over that right, but the landowner's consent will always be required.
Resolution No. 64 reaffirms that non-UAE citizens (and companies owned by them) can hold Musataha rights for up to 50 years, renewable by mutual agreement with the landowner, over properties in Investment Areas. Resolution No. 64 also reaffirms that non-UAE citizens (and companies owned by them) can hold Usufruct and Leasehold rights for up to 99 years over properties located in Investment Areas. Resolution No. 64 clarifies that the holder of any of these property rights will be entitled to mortgage their rights. All these rights will be registered at Abu Dhabi Municipality. Once registered, Resolution No. 64 states that the holder of the Usufruct, Musataha or Leasehold rights will not be allowed to dispose of their rights without the lender's consent.
Administrative Decision No. 267 introduced a standard format of Musataha Agreement that government entities in Abu Dhabi should use. The standard Musataha Agreement contained within Administrative Decision No. 267 includes provisions relating to and protecting banks or finance companies entering into agreements for financing projects on the land subject to the Musataha Agreement. These financing agreements include mortgages. Administrative Decision No. 267 gives protections for banks and finance companies. It requires landowners to keep banks informed when they take any action to terminate the standard form Musataha Agreement due to a breach by the holder of the Musataha rights.
Law No. 3 reconfirms that mortgages can be created over Usufruct and Musataha rights and Leases. Law No. 3 reiterates that where the Usufruct or Musataha rights are for ten years or more, the holder of those rights may create a mortgage without the landowner's consent. Law No. 3 also added that where a Lease is for a term of 25 years or more, the tenant may also create a mortgage over the Lease without the landowner's consent. It is, however, possible for the parties to the Usufruct, Musataha or Lease agreement to agree contractually that any mortgage will require the permission of the landowner. Hence, the provisions of Law No. 3 only apply where the parties have not expressly agreed otherwise. When a Usufruct or Musataha right is granted for less than ten years, or where a Lease is for less than 25 years, a mortgage can still be created over that right, but the landowner's consent will always be required.
Resolution No. 249 sets out the conditions that must be satisfied to register a mortgage over any property rights at Abu Dhabi Municipality. An essential requirement is that the party providing the mortgage must be a bank, financing company or institution registered with the UAE Central Bank. Resolution No. 249 provides that Abu Dhabi Municipality will cancel the registered mortgage in the Real Estate Register on the expiry of the Usufruct or Musataha rights or at the end of the Lease term.
There is a range of possibilities to register mortgages over Usufruct, Musataha and Leasehold rights in Abu Dhabi.
There is a range of possibilities to register mortgages over Usufruct, Musataha and Leasehold rights in Abu Dhabi. Once registered, these mortgages give lenders a high level of security over the borrowers’ real estate rights. Following the implementation of Law No. 3, registered mortgages are considered execution deeds. As execution deeds, mortgages can be directly executed and enforced before the execution court in Abu Dhabi with resultant time and cost benefits to lenders.
For further information, please contact David Bowman or Dr Ahmed Alawbthani.
Published in July 2022
