Overview: Mortgage Agreements in the Kingdom of Saudi Arabia

Mortgage Agreements in the Kingdom of Saudi Arabia

As per the New Commercial Mortgages Law promulgated in the Kingdom of Saudi Arabia on 24 April 2018, the mortgage arrangement is anchored in a fixed debt that is promised to be amortized, or an item guaranteed under the debt or outstanding debt.

The mortgage laws in the Kingdom of Saudi Arabia are based on the fundamental principle of "Rahn", as specified in the Quran, and in Shariah Islamic law. National effectuation of the mortgage law is overseen by local jurisdictional authorities, a part of the Saudi Arabian Monetary Agency (SAMA), in addition to the Negotiable Instruments Disputes Office (NIO). While the SAMA and NIO certainly do have the authority to oversee most financial transactions, the responsibility to enforce mortgage contracts falls upon the Sharia courts. 

The "Al-Rahn" Principle of Shariah that governs Mortgage Contracts 

The term "Al-Rahn" translates directly into "collateral". Al- Rahn is implicative of an arrangement where an asset is put up as collateral for the payment of a debt or obligation. This collateral that is to be physically presented before the loaning bank is a guarantee of the borrower's full intention of paying back the loan over the course of its maturity. 

The concept of al-Rahn has been deemed critical in order to safeguard the primary objective of the "Muamalat" (transactions) component of Islamic jurisprudence, which is to protect the belongings of every person involved. It signifies that a breach of contract is tantamount to noncompliance with a critical tenet of the Shariah law (in Muamalat). 

The legitimate contractual obligations mandated by the investigative system of mortgage approval have observed the ten following Al-Rahn standards:

1. The obligation of the mortgagor is tethered to the sold or mortgaged property; 
2. The mortgagee is empowered to withhold, or keep the sold or mortgaged property if the need arises; 
3. The mortgagee is obligated, and compelled, to a degree, by honor to protect the sold or mortgaged property; 
4. The mortgagee shall pay the duties that are part and parcel of the sold or mortgaged property; 
5. While the duration of the mortgage is still effective, the mortgagor and the mortgagee shall not tamper with, or interfere with the mortgaged property; 
6. The mortgagee is disallowed from the utilization of the sold or mortgaged property; 
7. The value of the mortgaged property should directly correspond with the debt of the mortgagor; 
8. The mortgagee is not allowed to sell the mortgaged property in order to satisfy the debt; 
9. The mortgagee (who is in control of the property) should appreciate his designation of priority creditor, who shall be paid before alternate lenders and other creditors; 
10. The mortgagee is committed to releasing the mortgaged property when the obligation has been fulfilled in totality by the mortgagor.

Contract rights, as ascertained by the Mortgage Law 

Certain key provisions in Mortgage Law mandate the presence of certain elements in the mortgage agreement. 

Characteristics of the Mortgaged Property, and the Mortgage Agreement 

For a real estate property to be successfully mortgaged, it must be identifiable and detailed in the mortgage agreement, or subsequent agreement. It must be noted, as per the Mortgage Law, such a property may be sold independently through a public auction, in the event of a default. 

Management and Use of the Mortgaged Property

Returns from a mortgaged property are contractually coded as reserved for its owner, as are the related costs; the owner may continue to make returns from the mortgaged property until the law denies him of such ownership. However, this entitlement aside, the debtor is expected to use the mortgaged property in a fashion that does not prejudice the rights of the creditor. 

Invalid Terms and Conditions

If a mortgage agreement bears terms or conditions that stipulate that (a) the benefits of the mortgaged property shall be solely for the interest of the creditor, or that (b) the creditor shall own the mortgaged property in the event that the debtor fails to settle the debt in time, then these terms or conditions shall be instantaneously deemed invalid. Thereupon, these provisions shall be severed, although the mortgage shall continue to be valid.

Mortgagor's (Debtor) Obligations to the Mortgaged Property

In addition to the obligation placed upon the debtor to ensure the integrity of the mortgaged property until the settlement of the debt, the debtor shall provide warranties in the contract pertaining to the devaluation and general defects. 

This codification ensures that, if the debtor were to act with negligence or misconduct, the creditor could contractually obligate the debtor to increase the mortgage by an amount that matches the decrease in value. 

However, if the devaluation or defect is a by-product of matters that extend beyond the debtor's control, then what remains of the property shall become the subject of the mortgage.

The Rights of Recourse available to the mortgagee

Should work be started that bears the potentiality of resulting in the devaluation of the mortgaged property such that it becomes insufficient for the guarantee, the creditor may ask a court to suspend such work.

Mortgage Settlement/ Termination

Upon issuing a warning to the debtor as per the contractually mandated rules, a creditor who is a party to a registered mortgage can effectuate the eviction of the mortgaged property, and the sale thereof, should the debtor fail to settle the amounts due in a timely fashion.

The events that call for the discontinuation, or termination of the registered mortgage include: (a) a settlement of all of the debt associated with the mortgage; (b) the sale of the mortgaged property in a fashion pursuant to the law, with the proceeds brought to the creditor; (c) the residence of the mortgage rights (creditor's rights) and the ownership rights (of the mortgaged property) with one party, whether it be through the transfer of the ownership of the mortgaged property to the mortgagee, or the transfer of the creditor's right to the mortgagor; or (d) the creditor's waiving of his rights as mortgagee under the mortgage agreement, pursuant to a written waiver.

However, in circumstances where the debtor is deceased or becomes impaired, his heirs or successors shall succeed the debtor's obligations.

Measures adopted in light of COVID-19

As the impact of COVID-19 continues to unfold, the Saudi government has been implementing policies across the country in an effort to lessen the financial burden on nationals. 

The Saudi Arabian Monetary Authority engaged in dialogue with banks with the result of the introduction of flexibility in repayments of consumer finance to individuals who have lost their jobs on account of the coronavirus. Notably, the measures instituted include the relief of mortgage payment for a maximum period of six months, at no additional cost.