Claim No: CFI 037/2020
THE DUBAI INTERNATIONAL FINANCIAL CENTRE
EMIRATES NBD BANK PJSC
AL RIHAB REAL ESTATE COMPANY LLC
JUDGMENT OF JUSTICE ROGER GILES
|Hearing :||4 June 2020|
|Counsel :||Mr Tom Montagu-Smith QC instructed by DLA Piper Middle East LLP for the Claimant|
The Defendant is a litigant in person. Did not participate in the hearing.
|Judgment :||15 June 2020|
UPONthe Claimant’s Part 8 claim dated 21 April 2020
AND UPONreading the witness statement of Jeetendra Wadhwani dated 20 April 2020 together with annexures
AND UPONhearing counsel for the Claimant at a hearing on 4 June 2020
AND UPONaccepting the undertaking of the Claimant set out in the Schedule to these orders
IT IS HEREBY ORDERED THAT:
1. On and from 23 June 2020 the Defendant shall stand absolutely debarred and foreclosed of and from all right, title and interest and equity of redemption of, in and to the property known as Plot No. PA-05, Zaabeel Second (the“Property”).
2. On or after 23 June 2020 the Registrar
3. The Defendant shall pay the Claimant’s costs of the claim, to be assessed if not agreed.
4. Liberty to apply to set aside
(a) the Defendant pays the Claimant the sum of AED 94,846,792.29 together with the costs due under order 3; or
(b) the Claimant sells the Property in accordance with Article 63 (1) (a) of the Real Property Law 2018.
Date of issue: 15 June 2020
1. The Claimant, Emirates NBD Bank PJSC, is the mortgagee from the Defendant, Al Rehab Real Estate Company LLC, of a parcel of land in the DIFC
2. The Defendant is an Abu Dhabi incorporated company, part of the extensive Al Jaber group of companies. It is licensed to manage and invest in real estate. In March 2006 it obtained a facility from National Bank of Dubai PJSC (“NBD Bank”), pursuant to which NBD Bank advanced AED 201 million (“theloan”) with a final repayment date of 31 December 2010. On 11 May 2008 it mortgaged the property, an undeveloped (and still undeveloped) parcel of land being Plot PA -05 Zaabeel Second, to secure the loan.
3. The mortgage was a short and somewhat informal document. Of some significance to the relief claimed by the Claimant, it provided, “Date of mortgage: 11/05/2008 to 31/12/ 2012”. It recorded agreement that the “value of this mortgage“ was AED 201 million “against a loan [NBD Bank] has granted to [the Defendant] as per the two parties agreement in the facilities agreement signed by the two parties“, and that the mortgage “covers any facilities granted or will be granted in the future or any expenses, commissions, interests and others [sic]“. It provided that in the event the Defendant “fails to pay“, NBD Bank “shall have the right to request from the court
4. The mortgage was duly registered on the DIFC Real Property Register. In the following years the terms of the facilities were amended and their duration was extended, and the Claimant took the place of NBD Bank following NBD Bank’s merger with Emirates Bank International PJSC. The mortgage was also amended, ultimately to “[E]xtend the duration of the mortgage up to the date of 30/06/2020“, and to provide that on default the Claimant should “have the right to take legal action to recover the debt in full during the mortgage term or thereafter in accordance with the Dubai Mortgage Law No 14 of 2008…“. The Register was amended to record the Claimant as mortgagee and to reflect the extended duration of the mortgage.
The Defendant’s Default
5. As at 12 June 2014, the sum outstanding in respect of the loan was a little under AED 88 million. On that day a number of documents (“the documents“) were executed restructuring the liabilities of members of the Al Jaber group, including the Defendant. The loan was converted into a term loan, to be re-paid by 31 March 2018, and there was a repayment schedule for all liabilities with payments to be made to and distributed by central agents. The Claimant’s mortgage was preserved as security for the loan. In one of the documents, to which the Defendant was not a party, the Claimant consented to the grant of a second mortgage over the property in favour of a central security agent, and agreed to consult with the agent for 30 days before enforcing the mortgage. The agency role was undertaken by Abu Dhabi Commercial Bank PJSC (“ADCB“).
6. The Claimant received some re-payments of capital and interest, but nothing after 30 June 2017. Discussions between the Al Jaber group and the creditors were held, but did not produce a new restructuring of liabilities or other variation to the loan or mortgage. 31 March 2018 passed without repayment of the loan.
7. The documents provided for notices prior to loan recovery. On 12 January 2020 the Claimant gave a 30 day notice in accordance with the documents, recording default and its intention to enforce the mortgage and, in relation to ADCB, inviting consultation. No payment was made, and consultation was not productive. On 13 February 2020, again in accordance with the documents, the Claimant gave notice that the loan was immediately payable, demanded payment, and said that it would exercise its rights to enforce the mortgage.
8. As at the hearing date, the outstanding amount under the loan was a little under AED 95 million.
The Real Property Law 2018
9. In 2007 a Torrens Title system of title by registration was introduced for real property within the jurisdiction
10. The Register of real property in the DIFC records Real Property Interests, being any ownership interest in real property. Article 10 introduces the concept of freehold ownership of real property, described as carrying “the same rights and obligations as ownership of an estate in fee simple under the principles of English common law and equity“. The Defendant was and is registered as freehold owner of the property. In the Law, the property is a Lot.
11. Mortgages are dealt with in Part 9 of the Law. By Article 56, a Registered Real Property Interest may be mortgaged. Article 58 provides –
“58. Mortgage as charge only
(1) A Mortgage operates only as a charge on the Lot for the debt or liabilities secured by the Mortgage.
(2) For the avoidance of doubt, the Mortgagor is taken to have an equity of redemption under the principles of English common law and equity.“
12. Article 63 (1) sets out the powers of a Registered Mortgagee on default by the Mortgagor; so far as presently relevant, a power of sale (para (a)) and a power “to obtain an order of the Court
13. Subsequent Articles regulate the exercise of the power of sale and the consequences of its exercise, including by providing (Article 65) that the Mortgagor is entitled to seek and injunction
Article 70 deals with foreclosure –
(1) On application by a Registered Mortgagee, the Court may make an order for foreclosure.
(2) If the Court makes an order for foreclosure, the Registrar shall notate the order on the Folio to which it relates if requested by a party to the proceedings or directed by the Court.
(3) On notation of the order, the Mortgagor’s Real Property Interest in the Lot vests in the Mortgagee, free from all liability under Mortgages or other Real Property Interests registered after the Mortgage, except for Leases and other Real Property Rights that bind the Mortgagee under this Law or contractually with the respective parties.”
The Claimant’s Claim
14. Immediately after 13 February 2020, the Claimant served 60 day notices in accordance with Article 63 (3)). It commenced these proceedings on 21 April 2020, after the expiry of the 60 day notices. It brought its claim by the Part 8 procedure in the Rules
15. The relief first claimed was a package comprising, in a summary of the substantive relief, a declaration that the Claimant could exercise its power of sale over the property; an order that it could do so within 18 months notwithstanding the expiry of the mortgage; an order that the term stipulated in the mortgage be extended by 18 months to 30 December 2021; an order that the Registrar record of the sale of the property in the Register; and an order that all direct and indirect costs incurred by the Claimant in the marketing and sale of the property could be recouped from the proceeds of sale. I describe this as a package because it was said in the claim to relief that “ If the orders sought at paragraphs 1 to 6 above cannot be granted in the exact form in which they are requested, the Claimant seeks the following relief in the alternative”.
16. The alternative relief , a collection rather than a package and again in summary, comprised a declaration that the Claimant could exercise its power to obtain an order for foreclosure under the Law; an order for foreclosure; and an order that the Registrar notate the order in the Register “in the name of the Claimant’s specific property holding subsidiary, Emirates NBD Properties LLC”.
17. The claim was supported by the witness statement of Jeetendra Wadhwani, an Associate Vice President of the Claimant managing the account of the Al Jaber group as a non-performing account, with extensive annexures. The witness statement was adopted on oath at the hearing. It was redolent with the Claimant’s concern that on the expiry of the duration of the mortgage on 30 June 2020, the Claimant would lose its rights to exercise the power of sale or obtain foreclosure. The Claimant asked that its claim be dealt with on an urgent basis, lest “its ability to seek redress from [the Defendant] … be seriously, if not fatally, restricted”.
18. The Claim Form and witness statement were served on the Defendant on 21 April 2020, as well as being otherwise communicated to it and representatives of the Al Jaber group. The Defendant did not file an acknowledgement of service
19. I am satisfied that this Court has jurisdiction to entertain the claim pursuant to Article 5(A) (1) (b) of the Judicial Authority Law
20. Following communication with the Courts
21. The application was opposed by the Claimant, and was on any view unacceptable: that it was made in the face of the reason for urgency in Mr Wadhwani’s witness statement reflected adversely on its bona fides. I invited submissions on a short adjournment. After hearing Ms Al Jaber and Mr Montague-Smith for the Claimant, I declined any adjournment. Ms Al Jaber acknowledged that the Defendant had been served on 21 April 2020, and her astonishing explanation for failure to act sooner to engage legal assistance was that there had been more important things to attend to. When initially asking for an adjournment, Ms Al Jaber said that the Defendant opposed the Part 8 procedure because there was factual dispute, but my later invitation to indicate what the dispute was went unanswered. The response to a possible short adjournment was to the effect that the Defendant could instruct its legal representatives if it had to, which was not consistent with the initial requirement of at least a month. I considered that, particularly in the absence of any indication of a defence to the Claimant’s claim, the application was not genuinely made with a view to defending the claim, but was a spoiling application in the hope of deferring and prejudicing its outcome.
Availability of the Powers
22. By Article 63 (2), the powers in Article 63 (1) may be varied or removed by express provision in the Mortgage. The mortgage in its original and amended forms included a power of sale, and in its amended form includes rights under the Dubai Mortgage Law. However, there was no express removal or variation of the powers conferred by the Law.
23. I am satisfied that notice in accordance with Article 63 (3) was served on the persons described in Article 63 (4). In that regard, although the Claimant consented to granting a second mortgage to ADCD, on the evidence before me there was no other registered mortgagee in relation to the property.
The Power of Sale Relief
24. It is clear, in my view, that a court order is not necessary in order that the power of sale be exercised. It is not required in the Law, in this respect there being distinction from the power to obtain an order of the Court for foreclosure, nor do any terms of the mortgage require it; if it matters, in other jurisdictions a power of sale is commonly exercised without a court order.
25. I go first to what I have described as a package of relief in relation to the power of sale, claimed as the first alternative. The package is explained, at least in part, by the termination date in the mortgage, now 30 June 2020. Mr Wadhwani made clear the Claimant’s concern that, come that day, the Claimant might lose its ability to sell in exercise of the power of sale; but also, he explained, it was considered that in order to obtain a reasonable market price for the property a marketing and sale process possibly over 18 months was necessary, and it was not “realistic or practically possible“ to sell the property more quickly. It is evident that, for that reason, the Claimant sought the orders that it could exercise its power of sale within 18 months notwithstanding the expiry of the mortgage and that the term stipulated in the mortgage be extended by 18 months.
26. As was properly conceded by Mr Montague-Smith, the Court has no power to remake the contract between the Claimant and the Defendant, and an order extending the term stipulated in the mortgage cannot be made. Nor, understanding the order that the Claimant could exercise its power of sale within 18 months notwithstanding the expiry of the mortgage as dependent on that extension, can that order be made.
27. Perhaps anticipating this, at the hearing Mr Montague-Smith asked only for a declaration of the amount of the indebtedness under the loan and a declaration that the Claimant is entitled to sell the whole or part of the property in accordance with Article 63 (1) (a) of the Law: as his submissions made clear, meaning entitlement to sell prior to 30 June 2020.
28. Assuming that there is power to grant a declaration without further remedy, I have considerable reservations about exercising the power in this case when there does not appear to be genuine dispute over the debt or the entitlement to sell the property. But in any event, I do not consider the declarations should be made. By the Claim Form and the witness statement of Mr Wadhwani, the Defendant was told that the Claimant wanted relief in relation to the power of sale and that, if it could not get it exactly, it wanted relief in relation to foreclosure instead. If it is correct to describe that relief as a package, as I have done, I do not think that in the Defendant’s absence I can grant part only of the relief in the package, still less grant relief differing in its terms from that in the package. The Defendant was and still is entitled to believe that, if the exact relief could not be granted, relief in relation to the power of sale would fall away and the Claimant would fall back on, and only claim, the relief in relation to foreclosure. Amendment and notice to the Defendant would be necessary.
29. Mr Montague-Smith submitted that the relief claimed in relation to the power of sale should not be regarded as a package, and that it was open to grant part of that relief and more particularly the declarations sought at the hearing. I am unable to agree. In my view, in saying in the Claim Form that if the relief in the paragraphs could not be granted in its exact form, the Claimant was referring and would be taken to refer to all the declarations and orders claimed as relief in relation to the power of sale. It would not make sense to read the Claim Form in this respect as referring to each individual paragraph in its exact form, when the orders and declarations were directed to the overall objective of validating an exercise of a power of sale in the 18 months following 30 June 2020.
30. I add that, when this matter was debated with Mr Montague-Smith it was accepted that the relief sought at the hearing was likely to be of limited utility, in that the prospect of a sale prior to 30 June 2020 conformably with the Claimant’s responsibilities in exercising the power of sale was highly unlikely.
The Foreclosure Relief
31. The references in the Law to equity of redemption and foreclosure must be understood in the light of English real property law principles. They do not sit comfortably with them.
32. A common law mortgage provided for a conveyance of the legal estate in the land to the mortgagee subject to a proviso for redemption. If the mortgagor defaulted, it lost its right to redeem, and the land remained in the mortgagee’s ownership. But equity regarded the mortgage as only a security, and would allow redemption although the right to redeem had been lost at law: hence the equity of redemption. The mortgagor would lose its equity of redemption only through foreclosure, being an equitable remedy whereby the mortgagee obtained an order that the mortgagor must redeem within a given time and, if it did not do so, would lose the equitable right to redeem; thereupon the land would be in the mortgagee’s ownership both at law and in equity.
33. It is therefore problematic when, as is common in a Torrens Title system, Article 58 (1) provides that a mortgage operates only as a charge on the land, but Article 58 (2) then affirms that the mortgagor has an equity of redemption under principles of English common law and equity. The mortgage being a charge only, there is no question of an equity of redemption as known to English real property law. And in providing that the mortgagee can obtain an order for foreclosure, the Law can not mean foreclosure in the sense of extinguishment of the equity of redemption known to English law, leaving the mortgagee with full ownership of the land. Since the mortgagee has only a charge over the land, a positive vesting of the land in the mortgagee (usually the freehold ownership, equated with the English law fee simple) is necessary. That, indeed, seems to be the point of Article 70 (3).
34. Foreclosure as referred to in the Law, then, expresses the concept of the mortgagee realizing its security by gaining ownership of the mortgaged land, but is different from the foreclosure in traditional English real property law. In considering foreclosure by application to the Court as referred to in the Law, however, some matters arising under that traditional law where the mortgagee gains ownership of the mortgaged land must be borne in mind.
35. If the mortgaged land is worth more than the amount of the debt it secures, by foreclosure the mortgagee will gain a windfall at the expense of the mortgagor. Since the mortgagee will take the land free from subsequent security interests, again if the land is worth more than the amount of the debt it secures, the holder of a subsequent security interest will be prejudiced – it will lose its security. Hence in a foreclosure suit in equity, it was necessary for the holder of a subsequent security interest to be joined in the proceedings: at the least, it had an interest in whether the mortgagee was entitled to foreclosure. A foreclosure order nisi was made, directing the taking of any necessary accounts and giving to the mortgagor time to pay the money due and to the holder of any subsequent security interest an opportunity to redeem the prior mortgage and so preserve its security. If there was neither payment nor redeeming up, a foreclosure order absolute followed. But the order was not necessarily final: equity would “open“ the foreclosure in some circumstances. (I leave aside whether and when, if the land is worth less than the amount it secures, the mortgagee is unable to sue on the personal covenant to recover the shortfall.) Foreclosure was an elaborate and rather unsatisfactory procedure. In England, statute now provides for court-ordered sale instead of foreclosure (Law of Property Act, 1925, s 91 (2)), but there is no such provision in the Law.
36. Unfortunately, the Law is silent on these matters. When the Law is silent, what is brought into the making of an order for foreclosure by application to the Court?
37. The Claimant submitted that the Law gave it an absolute right to foreclosure, so long as it established default and service of the notices required by Article 63 (3). It said that, where Article 63 (1) (a) entitles the mortgagee “to obtain” an order of the Court for foreclosure under Article 70, no more was required. I do not think that is correct. Textually, Article 70 provides that the Court “may“ make an order for foreclosure, and that the order shall be notated by the Registrar “if“ it is made. On ordinary principles, joinder of any holder of a subsequent security interest is necessary, as someone who will be affected by an order for foreclosure. There remains the need to consider the any windfall and any prejudicial effect of foreclosure upon subsequent security holders, and in giving the Court a jurisdiction equivalent to that of an equity court, the Law can not sensibly be taken to have put those established considerations aside. The Claimant placed some reliance on the notice required by Article 63 (3) as satisfying them, but it goes only part of the way: it gives the mortgagor time to remedy its default, but does not specifically warn it, still less any subsequent security holder, of foreclosure; and notice to an unregistered security holder is not required.
38. In my view, on an application for foreclosure under Article 70 it is open to the Court to mould the grant of the order having regard to such considerations; by no means necessarily by following entrenched procedures of English law and practice, but by measures with a view to just recognition of the mortgagor’s “equity” in the sense of the excess of the value of the land over the amount of the debt it secures, and of the security interest of a subsequent security holder. That may be by giving time to repay or sell (in some circumstances no time at all may be warranted) or the opportunity to redeem up, or by imposing conditions on the order or requiring an undertaking; the Law leaves flexibility to the Court.
39. There was no evidence of the value of the property. I was informed that valuations had been obtained, and that it was valued at more than the present amount of the loan plus the AED 40 million next mentioned, but that interest accruing in the period prior to any sale of the property by the Claimant could bring a shortfall.
40. I go first to subsequent security. There is no registered security interest other than the mortgage. However, the Register records a caveat against the property by DIFC Investments LLC (“Investments“), registered on 29 September 2019. The nature of its interest is not disclosed. Investments is the Master Developer from which DIFC landowners acquire their land, and from Mr Wadhwani’s evidence the Claimant believes the caveat relates to fees payable under the sale and purchase agreement as a result of the Defendant’s failure to develop the property, and that Investments claims in the order of AED 40 million. From the caveat, Investments may have a security interest in the property ranking after the mortgage. But it was not joined as a party to the proceedings.
41. To overcome this, the Claimant offered an undertaking to the effect that in the event that it sold the property, after payment of the debt (in its amount at that time, I.e. with further interest) and the costs of sale and of these proceedings, it would hold the residue of the sale proceeds for 30 days after Investments was notified of the sale; if Investments claimed an entitlement to the residue or any part of it, it would hold the residue to the order of the Court, but otherwise would retain it for itself. I did not initially regard the undertaking as satisfactory, since the Claimant might not sell the property and Investments would be unprotected. The Claimant then provided evidence that it had provided the undertaking to Investments, and that Investments by its Chief Legal Officer wrote that it was “in support of “the orders with that undertaking. In the particular circumstances, I am prepared to accept the undertaking as sufficient accommodation of the position of Investments, although at the Claimant’s risk when Investments has not been joined.
42. I was initially inclined to require similar accommodation for the Defendant against a windfall to the Claimant at its expense. On reflection, I am prepared to make a foreclosure order notwithstanding that possibility. From the witness statement of Mr Wadhwani, there have been many discussions between the Claimant and the Defendant with a view to a solution to repayment of the loan, with many promises of repayment or a repayment plan which have not been fulfilled. These have included that the Defendant would itself sell the property. The Defendant must be taken to have known of foreclosure as a possible consequence of default, and of the approximate value of the property, and has had time to repay including by sale of the property. Other than by the adjournment application earlier described, which was not a proper engagement with the proceedings, it has not responded even at the last to the exercise by the Claimant of its rights as mortgagee. To the Defendant’s knowledge, that has been within the confines of the agreed mortgage duration, and the Defendant can not reasonably complain if it is not given more time.
43. However, as discussed at the hearing I will not order that the Registrar notate the order in the Register in the name of Emirates NBD Properties LLC. Foreclosure is the mortgagee realizing its security by gaining ownership of the mortgaged land; conceptually, by extinguishment of the equity of redemption, not by transfer of the land. The order for notation does work a transfer, but by the nature of the remedy it must be a transfer to the mortgagee.
44. At the Claimant’s request, the orders allow the possibility of payment or of sale of the property before 23 June 2020. I have made some minor changes to the draft provided by the Claimant, and do not make order 3 in the draft: the effect of notation of the foreclosure order is stated in Article 70 (3).
Date of issue: 15 June 2020
UNDERTAKING GIVEN TO THE COURT BY THE
In the event that the Claimant sells the Property after 23 June 2020, the Claimant shall notify DIFC Investments LLC of the sale and shall apply the proceeds of sale as follows –
(a) to pay the costs of the sale;
(b) to pay the costs of these proceedings;
(c) to discharge the sum due to the Claimant from the Defendant under the loan, being AED 94,846,792.29 up to 2 June 2020 together with interest accruing thereafter;
(d) to hold any residue of such sale proceeds after the deduction of the sums set out in paragraphs (a) to (c) above (“ the Residue”) for a period of 30 days after DIFC Investments LLC was notified of the sale (“the Period”);
(e) in the event that, within the Period, DIFC Investments LLC claims to be entitled to the Residue or any part of it, the Claimant shall hold the Residue or such part of it as is claimed to the order of the Court; and
(f) the Claimant shall retain any part of the Residue in respect of which no such claim is made within the Period.