In a significant judgement by the Court of First Instance on whether a lender could enforce a registered mortgage for the full amount of a project financing facility where part of the loan amount had never been deposited into the project’s escrow account, the Court clarified the responsibility of the lender in detail.
Law No. (8) of 2007 Concerning Escrow Accounts for Real Estate was introduced to build confidence in developing properties in the Dubai real estate sector. It helped investors purchase off-plan property safely, preventing the misuse or diversion of project funds. These laws are not only applicable to purchaser payments but also to project financing obtained through lenders.
Article 13 of Law No. 8 of 2007 states that if a developer mortgages a developing project to obtain a loan from a financial institution or company, then these institutions or companies must deposit the loan amount in the relevant escrow account. This section lacked an express statement of the consequence of non-compliance. This judgement further clarified the consequence of not following this article.
Facts of the Case
In this case, a real estate developer was financed through a lending facility, which obtained security in the form of a mortgage over project land. The mortgage was duly registered. A dispute arose concerning the enforceability of the mortgage.
The key problem emerged regarding compliance with Article 13, where it was stated that the full financing amount had not been deposited in the escrow account. Portions of the financing had bypassed the escrow account.
An expert was further appointed and an investigation was conducted. The expert compared the amount advanced by the bank and reflected in the bank accounts to the actual amount that was deposited into the escrow account. The expert ultimately found that only part of the financing facility had entered the escrow account.
The Legal Issue Before the Court
Whether a registered mortgage remains fully enforceable where the lender fails to comply with Article 13 by depositing the financing proceeds into the project’s escrow account.
The Two Interpretations
Interpretation One
It was argued that Article 13 was merely regulatory and that mortgage registration creates enforceable security. It was further argued that non-compliance may attract regulatory consequences, but the mortgage rights should remain unaffected.
Interpretation Two
This interpretation stated that Article 13 does affect mortgage enforceability and that mortgage rights depend upon compliance with this article.
The Court’s Reasoning
Article 13 Creates a Mandatory Obligation – The provision uses the words “must deposit”; these words demonstrate that compliance is compulsory.
Purpose of the Escrow Regime – The escrow regime was introduced to protect purchasers and to ensure that funds remain available for development. Allowing lenders to bypass the escrow regime while retaining full mortgage protection would undermine these objectives.
Mortgage Rights Cannot Be Detached from Escrow Compliance – A lender cannot seek the benefit of mortgage protection while disregarding the statutory conditions attached to project financing.
Escrow Deposit as a Condition Precedent – Although Article 13 does not expressly describe escrow deposit as a condition precedent, the Court’s reasoning effectively produces that result.
Reliance on Court of Cassation Precedent – Another significant judgment, Cassation No. 11 of 2024, recognised the mandatory nature of Article 13.
Key Takeaways and Implications of the Judgment
- Mortgage enforceability is now directly linked to compliance with the escrow account requirements under Article 13.
- Lenders now bear the risk of losing mortgage protection for funds disbursed outside the escrow framework.
- Developers and financiers must ensure that all project financing proceeds are routed through the designated escrow account.
- Documentary and financial evidence of escrow deposits will play a crucial role in future mortgage enforcement disputes.
- Investors and purchasers of distressed assets must assess escrow compliance in addition to the existence of a registered mortgage.
We at Ayesha Aldaheri Advocates & Legal Consultants, we regularly advise clients on matters relating to escrow accounts, mortgage enforcement, real estate financing and security arrangements. We also closely monitor significant judicial developments and court judgments.