This is the third in a series of articles providing an overview of the types of security available in Oman. This article will focus on security over land, usufruct rights and buildings.

Since land can represent the highest value asset of a business, lenders will normally require security over that land in some form or another.

Oman recognises the concepts of freehold and leasehold interests as well as usufruct interests.

Security can be taken over freehold and usufruct interests in land in the form of a legal mortgage. A legal mortgage is a security over a land interest.

A leasehold interest is not capable of being mortgaged as it is a land right where one party can exclude the other.

A legal mortgage over land or a usufruct right is perfected by registering the mortgage at the Oman Ministry of Housing (MOH). Freehold interests can be mortgaged in this way, provided that the mortgagor is the registered owner of the mortgaged property and is entitled to dispose of the property.

It is not necessary under Oman law for a mortgagee to have a legal presence in Oman. Consequently, a non-Omani bank would be able to have a legal mortgage granted by a borrower registered in its name without a legal presence in Oman.

However, there are practical issues associated with registering a legal mortgage in the name of a foreign entity, and we therefore suggest that such a charge be granted in favour of a local security agent who will hold the security as agent for the non-Omani lender pursuant to a security agency agreement. On enforcement of security in Oman, the proceeds of sale of the land interest charged would be remitted to the security agent, who would in turn pass these on to the non-Omani lender in accordance with the terms of the security agency agreement. Note that, under Oman law, the beneficiary of the security need not be the same person to whom the debt or obligation is owed. Security agency agreements are used where one party acts as the agent of one or more lenders to whom the secured obligations are owed.

As trust structures are not recognised under Oman law, where syndicated loan agreements are secured by way of legal mortgage and to ensure that such security remains valid for a fluctuating group of lenders (i.e. without the need to retake or re-register such security if a lender changes), it is not uncommon to find parallel debt provisions inserted into the loan and security documentation.

Although any Omani or non-Omani individual or corporate entity is able to purchase leasehold interests in Oman, non-Oman entities (other than those from within the GCC) are not able to purchase freehold or usufruct interests. GCC entities (i.e. GCC individuals and wholly owned companies) have the same rights as Oman entities and may purchase leasehold, freehold and usufruct interests in Oman.

A further exception to this, however, is in relation to Integrated Tourism Complexes, whereby all non-Omani entities are able to purchase freehold as well as leasehold interests.

Lease interests:

It is not possible to create security over a leasehold interest. As an alternative, a lender could seek to take an assignment of a lease and negotiate step-in rights with the landlord, but this would not constitute a security interest.

Usufruct interests:

A usufruct is a land right granted by the owner of land in accordance with Sultani Decree 5/1981 Regulating Usufructs of Sultanate Lands and the Implementing Regulations (Sultani Decree 88/1982). The usufruct is granted by an agreement between the owner, who may be an Omani national or a government authority, and the usufructuary.

Under a usufruct, the usufructuary will have rights similar to those of the owner. These rights include the right to transfer or mortgage the usufruct rights and to enter into leases over all or part of the usufruct land. The usufructuary will have the right to use the land for the purpose specified in the usufruct agreement for the term of the usufruct. This right is granted in exchange for the payment of the usufruct rent.

A usufruct differs from a lease in that the law relating to usufructs specifies the maximum term of a usufruct, which is 50 years, and provides for the way in which parties may deal with any assets remaining on the land after the expiry of the usufruct term. Article 2 of Sultani Decree 88/1982 also prohibits any subdividing, for any reason, of the land subject to the usufruct.

Owing to the prohibition of subdivision, lenders must be wary. If the security offered is a mortgage over a sub-usufruct right, unless the sub-usufruct right is specifically allowed by Sultani Decree, the sub-usufruct, and any security interest over it, may be unenforceable. In such circumstances, there would be a risk that a lender would not be able to take over the sub-usufruct and so be excluded from the land.

A mortgage over freehold land would not be referred to as a usufruct right, as they are two different types of right over the land. A usufruct entitles a party to use the land. The right is a real right, limited in time and expiring after the duration of its specified term, or on death of the usufructuary, whichever is earlier.

During the usufruct term (maximum 50 years but which can be renewed further), all dealings with the land by the owner of the land are subject to the usufruct right. The usufructuary is entitled to use (for the approved use) and deal with the land as an owner. Other than freehold land, this is the only other land right in Oman over which you can grant a mortgage. On the expiry of the usufruct, the land is transferred in its original state back to the owner unless otherwise provided for under the usufruct agreement. However, it is usual to see a provision inserted into the usufruct agreement that states the landowner will compensate the usufructuary for the increase in the value of the land as a direct result of the usufructuary's actions, e.g. building a hotel on the land, or give the usufructuary the right to remove any plant and machinery or grant an extension or renewal of the usufruct term.

The legal mortgage must be executed by both parties in the form of a standard form two-page mortgage contract issued by the MOH. The mortgage contract must be completed in Arabic and executed at the Directorate General of Transactions at the MOH in Muscat.

The legal mortgage must also be accompanied by a power of attorney, authorising the relevant person to sign the mortgage on that entity's behalf. If the entity is not registered in Oman, the power of attorney must first be notarised and then attested and legalised by the equivalent foreign office and/or the Oman Embassy in the relevant jurisdiction (as appropriate), accompanied by any addendum containing any further terms and conditions to the mortgage that the parties agree, which can be submitted together with the standard mortgage agreement.

A fee must be paid on registration of a legal mortgage registration, which is calculated at 0.5 per cent of the amount secured by the legal mortgage (subject to a cap of 100,000 Omani Rials). This fee is generally satisfied by the mortgagor unless otherwise agreed by the parties.

A legal mortgage may be released and removed from the register at the MOH by way of letter of release and discharge issued by the mortgagee or by court judgment. The fee for release is 15 Omani Rials.

Amendments

A registered legal mortgage can be amended and supplemented by way of addendum.

The MOH has registered amendments to a legal mortgage, which entails adding additional land rights to the mortgage and amending the secured amount.

In terms of registering the addendum, there is a nominal fee for amendments other than an amendment to the secured amount, in which case the fee of 0.5 per cent of the additional secured amount is charged.

Court Procedure

Under Oman law a legal mortgage is enforced through court procedure following the establishment of the debt that is secured by the legal mortgage. There is no requirement for a mortgagee to seek the consent of the mortgagor prior to enforcement of a legal mortgage.

Whilst a mortgagee would normally only be entitled to receive the proceeds of the sale of the mortgaged assets, the court does have the discretion, if a mortgagee so requests, to transfer the assets in question to the mortgagee direct, in whole or partial satisfaction of the relevant debt. However, the court would need to be satisfied that such action would not be prejudicial to the general body of creditors. It should be noted that a second ranking legal mortgage cannot be enforced without the cooperation of the first ranking mortgagee.

Once the court has granted an order for the sale of the mortgaged assets, the sale will generally be effected by way of court-supervised public auction. The court will appoint an expert to value the assets, and a reserve price will be set. After the assets have been valued, the court will set a date for their auction. If the reserve price is not met in respect of any asset, the court has the discretion to accept the price offered or to hold another auction at a later date with the hope of attracting the reserve price.

Furthermore, the beneficiary of a legal mortgage need not be the same person to whom the debt is owed. For example, in a syndicated transaction the mortgagee will generally be one of the lenders acting in the capacity of security agent on behalf of all the lenders in the syndicate pursuant to a security agency agreement. This type of arrangement is recognised under Oman law.

Please note that the enforcement of the obligations of a mortgagor may be limited or otherwise affected by bankruptcy, insolvency, liquidation, reorganisation or other laws of general application relating to the rights of creditors. In addition, claims may become barred through limitation and the lapse of time. Article 92 of the Law of Commerce establishes a limitation period of 10 years in respect of commercial obligations in general.

Power of Attorney

It has become more commonplace in secured transactions in Oman for the mortgagor to grant a power of attorney to the mortgagee so that the mortgagee may proceed to sell the mortgaged assets upon an event of default without reference to the court process. As far as we are aware, a court in Oman has yet to examine whether a sale of any mortgaged asset (whether it be land and buildings charged by way of legal mortgage or moveable assets charged by way of commercial mortgage) pursuant to a power of attorney rather than going through the court process outlined above is valid. Therefore, we cannot say with certainty whether a power of attorney is an effective way of circumventing the court process and caution should be exercised in attempts to circumvent the court process.

It should be noted that under Oman law a power of attorney is revocable even if it is expressed to be irrevocable. Accordingly, the effectiveness of a power of attorney will be greatly dependent on a compliant mortgagor.

Priority

Priority is determined by order of registration. Even if a first ranking mortgage is released, the second ranking mortgage will remain second ranking. To reclassify the second ranking mortgage as first ranking, an addendum will need to be registered at the MOH.

The second ranking mortgagee must also consent to registration of a new first ranking mortgage.

Please note that this article is based on the modern, written, secular legislation of the Sultanate of Oman as promulgated by decree or decision of HM the Sultan or other competent source of regulatory utterance including, but not limited to, Ministerial Decisions and/or fatwas having the force of law as at 13 December 2011.

It should be borne in mind that the Basic Law states, in Article 2, that "Islam is the religion of the State and the Islamic Shari'ah is the basis of legislation" and, in Article 77, that existing laws and regulations remain in force "provided that they do not conflict with any of the provisions of the Basic Law". The Basic Law also provides for the establishment of a court with jurisdiction to determine whether legislation complies with the provisions of the Basic Law. Whilst it is our expectation that it is not the government of Oman's intention to introduce a means of challenging the validity and enforceability of legislation relating to commercial matters generally on the basis that it is contrary to Islamic Shari'ah and, therefore, conflicts with Article 2 of the Basic Law, it is not possible for us to state that this is or will be the case. The only area which the Basic Law expressly states will be governed by Islamic Shari'ah is the law related to family affairs and inheritance (Article 11).

All laws, regulations, decisions and decrees are in Arabic with no official translation into any other language. All references to or extracts from the same in this analysis are based upon unofficial translations. Please also note that the decisions of the courts in Oman are not published nor is there any doctrine of binding precedent as in common law jurisdictions. Consequently, it is difficult to predict with any certainty what decision on interpretation a court would take on any given issue in the future.