On 22 May 2017, the Saudi Arabian Monetary Authority (SAMA) issued a circular stating that the popular structure used as an alternative to mortgaging real property, the Ifragh structure, is no longer permissible and that all security over real property would need to registered as a mortgage under the Saudi Registered Real Estate Mortgage Law issued by Royal Decree No. M/49 dated 13/08/1433 AH (issued on 03 July 2012).
Whilst the Saudi Registered Real Estate Mortgage Law was issued almost five years ago, progress to register mortgages had been slow due to a number of factors. Firstly, the Real Estate Register has yet to be formally implemented. Currently, real property records are kept manually and administered by notaries public. Secondly, a key issue was also that historically Saudi notaries public have refused to notarise mortgages over real property in favour of banks and other lenders on the grounds that lenders charge interest which is a violation of Shariah principles (see our previous elexica note where we discuss this in further detail).
To address these concerns, commercially, banks and financial institutions have avoided having to mortgage property by using an Ifragh arrangement (which requires the borrower to transfer legal title in favour of the lender’s real estate special purpose vehicle until the loan is repaid, with an agreement to retransfer title once the amounts outstanding have been repaid). However, the SAMA circular issued on 22 May implemented the following:
- usage of the Ifragh structure is no longer permissible and real properties should be mortgaged instead, in accordance with the Saudi Registered Real Estate Mortgage Law
- all properties that are currently subject to an Ifragh arrangement should be registered as a mortgage within three years of the circular, and banks/lenders should inform their clients, who are party to an Ifragh, of the same, and
- all cases where a Saudi notary public refuses to register a mortgage over real property in favour of the bank or lender should be reported to SAMA.
Converting an Ifragh agreement to a mortgage agreement will require amendments to existing facility documents, as well as drafting a new mortgage agreement. Simmons & Simmons can provide full assistance in converting your Ifragh arrangements into a legal mortgage arrangement. For more information, please contact us.
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