The trade and business sector in the Kingdom of Saudi Arabia has witnessed remarkable development in recent years, thanks to modern developments and legislation aimed at improving the Kingdom's economic environment in line with Vision 2030.

One of the most important systems implemented to develop the business environment and attract more investments is the commercial mortgage system. This system is considered one of the most important legal tools that has significantly regulated commercial transactions, successfully protecting the rights of creditors, supporting debtors, and facilitating their access to financing more flexibly.

In this article, we will learn about the commercial mortgage system in Saudi Arabia, its objectives, and the conditions for its termination in cases stipulated by the system.

What is the commercial mortgage Law in the Saudi legal system?

The commercial mortgage system in Saudi Arabia is one of the most important legal tools introduced to reorganize and manage commercial transactions with stronger guarantees and greater flexibility. The Commercial Mortgage Law was first issued by the Council of Ministers in 1424 AH (2003/2004 CE), then repealed to update the legislative framework in line with economic changes. It was subsequently reissued as the current Commercial Mortgage Law by Royal Decree No. (M/86) dated 8/8/1439 AH (2017/2018 CE). The implementing regulations for the law were issued by the Minister of Commerce and Investment (currently the Minister of Commerce) under Resolution No. (43902) dated 11/8/1439 AH (2017/2018 CE), based on the powers granted to him in the law. These regulations are currently in effect. The law comprises 47 articles, all aimed at regulating mortgage provisions more clearly and in accordance with the current economic environment.

The regulations incorporate a summary of international best practices in the field of credit guarantees and detail the implementation mechanisms and procedures. They also address mortgage contracts and regulate the pledging of bank accounts, whether current, investment, or time deposit accounts.

The current commercial mortgage system is distinguished by its adoption of a set of modern provisions that focus primarily on compatibility with current commercial transactions, not only locally but also internationally.

This serves the system's fundamental objective of bringing about a qualitative transformation in the commercial and investment finance sector, as well as building a more sustainable economic entity. The system and its regulations operate in coordination with other entities. For example, the regulations address provisions related to pledging shares in jointly owned assets in coordination with the Ministry of Justice, and the pledging of securities is subject to the provisions of the Capital Market Law and its implementing regulations.

What are the objectives of the commercial mortgage Law in Saudi Arabia?

The commercial mortgage Law was introduced to bring about a genuine transformation in the Saudi finance sector by focusing on developing the following:

Strengthening the credit sector within the Kingdom by establishing a modern regulatory framework that supports financing operations.

Enabling asset owners to invest the inherent value of their assets without having to dispose of them.

Supporting and encouraging the private sector to contribute to economic development.

Creating a legal environment that helps commercial institutions easily access financing.

Protecting the rights of all parties involved in commercial and financial transactions. Providing legal guarantees for loans and facilitating enforcement procedures against the mortgaged property in case of breach of contract.

Supporting small and medium-sized enterprises (SMEs) by expanding the range of assets eligible for collateral.

Expanding the scope of commercial mortgage contracts and enhancing their reliability in financial transactions.

What are the circumstances under which a commercial mortgage expires?

A commercial mortgage expires if the reason for its establishment ceases to exist or if the parties agree to terminate it. The regulations stipulate a set of circumstances under which a commercial mortgage is extinguished, namely:

First: Extinction of the secured debt

When the secured debt is fully extinguished, whether through payment, release, set-off, or any other legal reason that leads to the termination of the obligation, the mortgage is extinguished accordingly, as it is a security attached to the debt.

Second: Destruction of the mortgaged asset

If the mortgaged asset is destroyed or damaged to the point of losing its value, the mortgage is terminated, unless the mortgagor and mortgagee agree to replace it with other assets, and subject to the specific provisions of the regulations concerning compensation or alternatives.

Third: Agreement of the Parties

If the mortgagor and mortgagee explicitly agree to terminate the contract, the mortgage is extinguished by virtue of this agreement.

Fourth: Assignment

If the mortgagee assigns their right, the mortgage is nullified and extinguished.

Fifth: Various Cases Mentioned in the Law in Which the Mortgage is Extinguished as a Natural Consequence of the Loss of One of Its Essential Elements

For Future Assets and Contingent Debts: The law permits the mortgaging of future assets (Article Nine) or the guarantee of a contingent debt (Article Three). If this future asset does not materialize or the contingent debt is not established, the original obligation (the debt) ceases to exist, and consequently, the mortgage is extinguished, as in the first case.

Change in the Nature of the Mortgaged Assets: If the nature of the mortgaged assets changes substantially, causing them to lose their agreed-upon characteristics as stipulated in the contract, this can be considered a form of constructive loss of the mortgaged assets, leading to the extinguishment of the mortgage, as in the second case.

It should be noted that upon the expiration of the mortgage, the mortgagee is obligated to remove the mortgage registration from the Unified Commercial Mortgages Registry within a period not exceeding three (3) working days, in accordance with Article Ten of the Regulations Governing the Unified Commercial Mortgages Registry.

Finally, the commercial mortgage system in Saudi Arabia is no longer merely a means of securing debts, but has become a legal instrument to support commercial activities and manage financial transactions within the Kingdom. It is also a strategic tool for stimulating investment, achieving financial stability, and creating a more competitive business environment that aligns with the aspirations of the Saudi economy and Vision 2030.

Hence, the importance of engaging a reputable law firm with practical experience in commercial and financial regulations becomes clear, to ensure the protection of your rights, minimize risks, and achieve the highest levels of security and stability.

Therefore, we at Mohammed Al-Khliwi Law Firm are pleased to be your legal advisor in this field.

Commercial mortgage services are available to help you draft commercial contracts and represent you in enforcement and litigation proceedings, ensuring your interests are protected and your business stability is enhanced. Don't hesitate to contact us to be your legal partner on your journey in the world of finance and business.

Disclaimer: The above content does not constitute legal advice, and the firm assumes no legal responsibility. For legal advice, please contact us.