DIFC Court of Appeal confirms first foreclosure order

20 May 2021

In Al Rihab Real Estate Co. LLC v Emirates NBD Bank PJSC [2020] DIFC CA 006 (5 April 2021), the DIFC Court of Appeal confirmed the Court’s first ever order for foreclosure over DIFC land. The Court also gave important guidance on adjournments of DIFC Court proceedings.

The Appellant (“Al Rihab”) is part of the Al Jaber Group, based in Abu Dhabi. In 2006, Al Rihab had obtained a loan from the Respondent (“Emirates”) to purchase a parcel of land in the DIFC (“the Lot”). The loan was secured by a mortgage overt the Lot. The mortgage was stated to expire at the end of 2012 but was extended, ultimately until 30 June 2020.

The loan was restructured in 2014, together with a number of other financial obligations owed by the Al Jaber Group to a syndicate of banks which included Emirates. The full debt was to be repaid by 31 March 2018. Al Rihab stopped making capital repayments in January 2016 and stopped paying interest in June 2017.

Further attempts to restructure the debts failed and Emirates began steps to enforce the mortgage in early 2020. After service of a large volume of required contractual notices, Emirates began Part 8 proceedings in the DIFC Court on 21 April 2020. Given the impending expiry of the mortgage, Emirates sought either (a) an extension of the mortgage and a declaration that Emirates was entitled to sell the Lot or (b) an order for foreclosure.

Emirates served the proceedings by email and either courier or hand delivery. The case was listed for hearing on 4 June 2020.

Al Rihab received the documents. However, it subsequently claimed not to have received notice of the hearing until 28 May 2020. Shortly before and then at the hearing, Al Rihab sought an adjournment, claiming they had had difficulty in instructing lawyers.

The Judge refused to adjourn, noting that Ms Al Jaber could attend but could not take part in the hearing. At the end of the hearing, the judge reserved his judgment. He issued his decision on 15 June 2020, granting an order for foreclosure.

Noting that the Torrens system of land registration in the DIFC was quite different to the system of land ownership in England, the Judge considered that it was:

“open to the Court to mould the grant of the order…; 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.”

In that regard, the Judge accepted Emirates’ undertaking to hold part of the sale surplus to meet a claim by DIFC Investments which was protected by a caveat.

The Judge ordered that foreclosure take effect from 23 June 2020, leaving a short window for sale of the property, but ensuring that foreclosure could be completed before expiry of the mortgage on 30 June 2020.

On 21 June 2020, Al Rihab applied on short notice seeking an extension of time to file an acknowledgment of service and seeking orders extending both the mortgage and the time when foreclosure would take effect. Amongst other relief, Al Rihab sought relief from sanctions from failing to seek a stay in favour of arbitration, seeking to rely on arbitration provisions in the restructuring agreements. The application was dismissed and Al Rihab appealed.

Four grounds of appeal were initially advanced:

  • That service was defective;
  • That the claim should have been adjourned;
  • That the claim should have been stayed in favour of arbitration;
  • That the Court should, of its own motion, have adjusted the parties’ obligations as a result of the pandemic, by application of Article 249 of the UAE Civil Code.

In addition, Al Rihab sought an order referring a number of issues to the Union Supreme Court, including questions as to whether the DIFC Court Rules were constitutional in the way in which they allowed service into other Emirates.

Al Rihab subsequently applied to stay the appeal, relying inter alia on evidence which suggested that the Lot might be worth significantly more than the loan debt plus the sum owed to DIFC Investments, therefore suggesting that Emirates had received a windfall. The application was dismissed and Al Rihab was ordered to post security for Emirates’ costs below and on appeal.

Al Rihab was subsequently permitted to add further grounds of appeal:

  • Abu Dhabi Commercial Bank, the agent of the syndicate of lenders, should have been joined to the proceedings because it had a mortgage over the Lot;
  • The Judge should only have granted an order nisi in the first instance, rather than proceeding directly to a final order for foreclosure;
  • The Judge failed to advise Al Rihab’s representative at the hearing below that she could apply for permission to make submissions at the hearing, in the event that it was not adjourned.

Al Rihab also applied to introduce fresh evidence, including an agreement it had reached with a third party, ODIFC Developments Ltd, an entity associated with Omniyat One, a related party to Al Rihab. The agreement effectively handed control of the appeal over to ODIFC. In the event that the appeal was successful, ODIFC agreed to purchase the property for AED 108 million, plus any obligation Al Rihab had to DIFC Investments.

Emirates responded with evidence that (a) there was no ADCB mortgage (b) any surplus after clearing the debt and the DIFC Investments debt was due to the syndicate anyway, so there was no prospect of any windfall; and (c) DIFC Investments, who had a right of pre-emption, would oppose a sale to ODIFC because the price appeared artificial and the transaction was not at arm’s length.

The Court of Appeal considered that the effect of the agreement was that the appeal had been taken over by a related party in an attempt to obtain the Lot for a price below market value and so remove value from the pool of assets against which the syndicate could enforce.

The Court of Appeal considered each of the grounds of appeal and the application to refer to the USC and dismissed them.

Of most interest were the Court’s conclusions on Ground 2 (adjournment) and Ground 6 (order nisi).

On ground 2, the Court confirmed that a decision refusing an adjournment is a case management decision. The Judge had been entitled to take the course he did. In a warning to dilatory litigants, the Court said:

“If this Court were to adopt a practice of condoning complete inaction following service of legal proceedings, without any cogent reason or justification, and then reward such inaction with the grant of an adjournment of a listed hearing following an application brought at the last minute, the orderly busi-ness of the Court would become shambolic, to the detriment of all litigants before the Court and to the detriment of the efficient utilization of the limited resources of the Court.”

On ground 6, the Court gave valuable guidance on how the Court should approach claims for foreclosure. This was very much an open question, given (a) the differences between the English and DIFC systems of land registration (b) the vanishing use of foreclosure in England and (c) the administrative nature of the remedy in systems of law which continue to use it, such as Australia.

Al Rihab argued that the Court should maintain the invariable English practice of first granting an order nisi, the effect of which is to give the mortgagor a further period of at least 6 months in which to redeem.

The Court rejected this argument.

The Court noted that DIFC land law is based on the Torrens system, which differs significantly from English law. Under English law, the mortgagee holds legal title to land, with the mortgagor having an equity of redemption. An order nisi alters that balance and a third party would need to see the order to get full information about rights and ownership in the land. Even when made absolute, a foreclosure order can be reopened. These features of English law were “entirely antithetical to the transparency and certainty of the system of title by registration” in the DIFC.

The Judge’s approach was therefore entirely correct and to be applied in future cases. Where further time was warranted, it could be granted by adjournment.

In the present case, no adjournment was warranted for a range of reasons, not least because Al Rihab was long in default and the mortgage was due to expire.

Further, the purpose of the appeal appeared to be to facilitate a transaction (the sale of the Lot to ODIFC) which was contrary to justice in a number of respects.

The remaining grounds of appeal were also rejected.

The service complaint was that Al Rihab should have been provided with a “form for defending the claim”: RDC Rule 7.36. That provision of the Rules was found to be “inexplicable” because the requirement to serve such a form is disapplied for Part 8 claims: RDC 8.6(1)(d). In reality, nothing would have changed if some different or further information had been provided.

The Judge had rightly found that it is not open to the Court to grant relief from sanctions to allow a party to make a late application to refer a matter to arbitration. The right to make that application is conferred by the Arbitration Law, not by any Rule, Practice Direction or Order. The consequences of failing to make such an application were not therefore a sanction falling within RDC 4.46.

In any event, relief would not have been granted.

The Court of Appeal noted that foreclosure is a remedy only the Court can grant. As such it was strongly arguable that the claim fell outside the terms of any arbitration agreement.

The only factual dispute identified was as to the amount of interest due. However, it had commenced Court proceedings in Dubai in respect of the issue “which of course amounts to a waiver of any right to refer that issue to arbitration”. That may be a conclusion with which practitioners would have some trouble, given the nature of the Dubai Court proceedings, which was to appoint an expert to report.

Article 249 of the Civil Code had not been incorporated into the mortgage. Nor were its obligations to repay the debt governed by the mortgage agreement. Nor could the pandemic have been relevant, given the long history of non-payment. Nor was Al Rihab prejudiced by foreclosure – all the proceeds would be applied to reduce its debts. The only party to gain from the appeal was Omniyat (or ODIFC).

No mortgage had been registered in favour of ADCB and the register was determinative of third-party interests in the Lot. In any event, the evidence was that there was no unregistered mortgage agreement in existence.

Finally, Ms Al Jaber had plainly been aware of the rule which indicated that she could apply for permission to participate in the hearing. In any event, she had been given an opportunity to explain Al Rihab’s case, but had failed to do so.

Together with the Court of Appeal’s recent decision in Vegie Bar v Emirates NBD Properties [2020] DIFC CA 001 (15 October 2020), this judgment provides important guidance on the application and effect of the DIFC Real Property Law. These judgments also emphasise the fundamental differences between the DIFC land system and the laws of England and Wales.

Tom Montagu-Smith QC acted for Emirates, instructed by James Iremonger, Adam Bradshaw and Catherine Jordan of DLA Piper Middle East.