The UAE's new 'Pledge Law' – and how it could improve sports financing in the Middle EastMichael Savva
"Sport is one of the most important humanitarian activities that contributes to building the personality of members of society and gives them happiness, vitality and positive energy, so we are keen to implement the vision of our rational leadership by making sport a way of life, and we are motivating individuals and institutions to exercise and provide avenues for their dissemination in society".1
Those are the words of His Highness Sheikh Hamdan Bin Mohammed Bin Rashid Al Maktoum, the Crown Prince of Dubai, Chairman of Dubai Executive Council and Chairman of Dubai Sports Council; word which demonstrate the UAE's commitment to sport, both as an industry and as a way of life.
Given the strong focus on sport as a sector by the UAE in general, this article considers a recent development in UAE law that has the ability to make entities in the UAE sporting sector more attractive to financiers. Specifically, it looks at:
- How the new "Pledge Law" allows the monetising of income streams and other assets
- How future property can now be pledged as security
- What this means for sporting institutions and event organisers in the UAE
- Who UAE sporting entities and event organisers can seek to raise finance from using the Pledge Law
- Registration and priority of the mortgage
- The Pledge Law in practice – a few practical tips to note
Since the turn of the year, the UAE has hosted, amongst other events, the Asian Cup football tournament, the Dubai International Sports Conference, the Omega Dubai Desert Classic golf tournament and the Dubai Duty Free tennis championships; the Dubai World Cup horse racing weekend is also just around the corner. So, clearly, sport plays a central role in the UAE. This is mirrored in the wider Middle East region as a whole. The variety of sporting events (at the professional level) and activities (at an amateur level) available to watch and participate in is testament to that.
In addition to hosting events, Dubai has seen a surge in investment in sporting and event infrastructure in recent years.
Dubai Arena, for example, will be the largest multipurpose indoor (air-conditioned) arena in the region (with a capacity of up to 20,000 spectators) when it opens its doors later this year, with the intention of hosting major sporting and entertainment events including ice hockey and basketball games as well as international music concerts. When it officially opens, the venue will, we understand, be managed by international operator AEG Ogden, whose portfolio includes The O2 in London, STAPLES Centre in Los Angeles, the Mercedes-Benz Arena in Shanghai and Qudos Bank Arena in Sydney. The design and construction of Dubai Arena is, we understand, being project managed by DXB Entertainments PJSC, a Dubai-based owner and operator of leisure and entertainment businesses.
Likewise, Al Nasr football club's Maktoum Stadium was expanded and redeveloped in time to host the 2019 Asian Cup football tournament, increasing its capacity to 15,000 amongst a variety of other upgrades. The project, as we understand, was overseen by Dubai Municipality, the governmental body with jurisdiction over city services and the upkeep of facilities in the Emirate of Dubai. Some of these infrastructure projects are overseen by government or government-related entities, others through corporate developers. How such projects are financed, however, is unclear as relevant information is not publicly available.
The new UAE "Pledge Law": monetising income streams and other assets
Recent developments in UAE law have, in principle, made it easier for parties to grant "security"2 over certain of their assets, making secured lending (and, in some respects, "asset finance"3) a more viable and attractive financing tool.
In March 2017, Federal Law No. 20 of 2016 on the Mortgage of Movable Property to Secure Debt (the Pledge Law)4 came into effect in the UAE. The Pledge Law provides a legislative framework for the creation, registration, perfection and enforcement of a new type of security interest over certain types of "movable" assets. Such "movable assets" include receivables from third parties (which, in the sporting context, could include sponsorship income, ticketing income, broadcasting revenues etc.), bank accounts, credit balances in UAE licensed banks and other future assets (including fluctuating balances in bank accounts) in the UAE.
Prior to the onset of the Pledge Law, the position in the UAE was as follows:
The principal means of granting security over movable assets in the UAE was by means of a possessory pledge under the relevant provisions of the UAE Civil Code (Federal Law 5 of 1985 (as amended) (the Civil Code)5 and the UAE Commercial Code (Federal Law 18 of 1993 (as amended) (the Commercial Code)6. This required the pledgor (i.e. the owner of the relevant asset) to transfer possession of the asset in question to the pledgee (i.e. the financier), a requirement which significantly limited the owner's ability to deal with the pledged asset. The Pledge Law eliminates this requirement.
There was (other than in the case of the DIFC and the ADGM, two "free zones" in the UAE)7, no publicly accessible register to record the rights of the parties to a security arrangement.
It was not possible to secure (or pledge) future property (such as future receivables, fluctuating balances in bank accounts etc.).
Documenting a security arrangement involved quite stringent and cumbersome formalities.
The Pledge Law is therefore an exciting step in the legal landscape of the UAE that should allow parties to create effective security packages with more certainty as to enforcement and should, by extension, promote greater certainty in commercial lending practices.
In March 2018, secondary legislation supplementing the Pledge Law was published, and an online registry for registering security interests under the Pledge Law – called the Emirates Movable Collateral Registry (the EMCR)8 – went live. The EMCR provides for a centralised, federal, publicly-accessible online register that records and prioritises secured assets, which can be searched by the public. Users wishing to record a security interest are required to create an online account with the EMCR and to submit an online form with the details of the relevant parties and the relevant secured property.
In the author's experience, financiers and UAE corporates have been getting accustomed to the scope of the Pledge Law and the workings of the EMCR since the Pledge Law came into effect. In practice, we are assisting a number of financiers to register their security interests with the EMCR.
Future property can now be pledged as security9
One of the most fundamental aspects of the Pledge Law is that, for the first time in the UAE, future property can be pledged as security for a loan (Pledge Law, Article 3). Prior to the onset of the Pledge Law, the legal position in the UAE was that changing and future property were not capable of being pledged or mortgaged (so it was not possible, for example, to effectively take security over future receivables and income streams). Historically, pledged assets had to be described very specifically to avoid the charge being void for uncertainty. It was therefore common for periodic supplemental agreements to be drawn up to update security packages when pledged assets changed or new assets needed to be secured, which made secured lending of this type administratively burdensome on both bank and borrower-side.
The Pledge Law is supplemented by Executive Regulations that provide guidance on the nature and description of future assets in mortgage contracts, putting forward various examples of asset descriptions which would be deemed sufficient for the purposes of the Pledge Law, including "a statement indicating the creation of Pledge Interest over a specific category or class of movable property, whether present or future, such as the phrase "all equipment" or "all present and future accounts receivable" (Executive Regulations, Article 4(1)(d)).
Further clarity is still required regarding the exact form that security over future property should take, though our understanding is that taking security over "all present and future receivables" would be acceptable to EDB and registrable with EMCR.
What does this mean for sporting institutions and event organisers in the UAE?
In principle, the Pledge Law opens up a variety of avenues for entities to seek to "monetise" or otherwise provide security over their assets which would not have as easily been available previously. In the sporting context, the principle assets which comes to mind are receivables (including ticketing revenues and sponsorship revenues, amongst others). Accounts and bank deposits are also covered by the Pledge Law (which is particularly important in the context of transactions where revenues are required to be directed into a particular account) and security over bank accounts is a well-trodden path in the financing community, making this a particularly suitable asset to secure for those seeking to raise finance. However, given that funding for sports and events in the region tends to be subsidised by the government (at least in part), negating the need for third party financing, there appears at present to be fewer opportunities for these types of assets to be secured.
Who can UAE sporting entities and event organisers seek to raise finance from by offering up security under the Pledge Law?
The "mortgagee" is defined very generally in the Pledge Law as "the creditor benefiting from the mortgage right" and we understand from the EDB that the mortgagee can be a UAE or foreign entity or person.
The necessary connection (i.e. the nexus) for the application of the Pledge Law, as we understand it, turns on the location of the pledged assets, rather than the identity of jurisdiction of the mortgagee. Therefore:
any asset located outside of the UAE (including assets located in certain UAE free zones that have their own security registration regime) should not come within the definition of property that may be subject to a mortgage under the Pledge Law, even where the asset belongs to a company established or registered in the (mainland) UAE; and
a free zone or foreign (i.e. non-UAE) company with a movable asset that is located in or on the (mainland) UAE can pledge that asset as security under the Pledge Law.
This, therefore, opens up an entire market to sporting and events entities in the UAE who are seeking to raise finance, as there appears to be no restriction, in principle, on who can benefit from the new security framework provided for by the Pledge Law.
Registration and priority of the mortgage
A couple of points are worth mentioning in relation to the implications of registration with the EMCR.
Registration of the mortgage with the EMCR is not a requirement to create a valid mortgage, but it is required in order to perfect11 the security and make it effective against third parties (Pledge Law, Article 9). The Pledge Law provides that no subsequent mortgage can be granted over the same property without giving notice of the first mortgage in the mortgagor’s declaration (Pledge Law, Article 10(2)).
Multiple pledges can be created over the same asset. Priority12 is based on the date and time of registration with the EMCR (Pledge Law, Article 17(1)), unless the mortgagee waives its priority in writing and registers such waiver.
That being the case, any banks who have taken security over registrable assets are advised to register, or require their borrowers to register, such security with the EMCR at or as soon as possible after the financing transaction has been completed.
The Pledge Law in practice
However, some practical points are worth noting:
The need for financing: It is unclear which types of entities in the sporting and events industry in the UAE could benefit most from these developments. For example, do football clubs in the UAE need external financing or are they sufficiently managed (financially) by their owners and/or subsidised by the relevant authorities? Owners of sporting real estate in the UAE could quite feasibly seek to "monetise" ticketing income, for example (a process which effectively involves selling the rights to such income at a discount – this provides an immediate injection of cash flow to the owner through the upfront receipt of the "purchase price" from a financier, rather than the owner waiting for such (ticketing) income to be collected over time). However, again, questions remain as to whether there is any appetite or need for this in practice.
Islamic banks: Proceeds raised through Islamic financing cannot be used for the purposes of purchasing or investing in products that are prohibited under Sharia'a law (including, for example, alcohol and gambling). Event organisers and stadium owners should be aware that, if they are seeking to discount, for example, F&B (food and beverage) receivables from particular events, they may not be able to raise finance from a number of local and regional banks that are required to comply with Sharia'a law if, for example, the event serves alcohol.
Enforcement in practice: Although the enforcement mechanisms offered by the Pledge Law appear to be helpful, it is too early to tell how the Pledge Law will be implemented in practice by EDB, and interpreted by the courts, so it may take time before the regime in practice reflects that which the Pledge Law seeks to introduce. In particular, a number of questions remain as to the applicability of the proposed enforcement mechanisms to certain types of asset and around their implementation in practice.
For example, it is difficult to understand how the self-help remedies (which have been introduced in the Pledge Law in relation to certain assets) work where the secured asset is an intangible such as receivables so, in practice, it may still be the case that enforcement in relation to receivables will need to be done through the courts.
If, however, the receivables are deposited into an account held with the financing bank, set-off is expressly permitted and, if the account is held with a third party account bank, the financing bank will be allowed to claim against the credit balances held on that account. So, in that context, self-help remedies would be available to that extent.
The Pledge Law does bring the promise of a more modern and efficient system for registering and enforcing security over a range of movable assets, which is more in line with other developed jurisdictions. For financiers, the Pledge Law should give comfort as to which assets can be secured, the process for securing such assets and clarity as to the priority of the mortgage against other claims. UAE companies, including sporting institutions and event organisers, should, as a result, find it easier in principle to secure financing. They should also find it easier to pledge their movable assets, as this can now be done without the need for physical delivery (a requirement historically). Whether they need to do this in practice, however, is another question altogether.
Arguably, this is something which could be driven by event organisers themselves, who could seek to promote (to the relevant stakeholders/government entities) their ability to market an event and raise finance through foreign investors, secured on the various related income streams. If that is something the relevant stakeholders would allow the organisers to explore, it could give the market a significant boost.
Having said that, and as a general word of caution, the Pledge Law remains untested to date, so how the courts in the UAE will interpret the provisions of the Pledge Law remains to be seen.
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- Tags: Construction | Finance | Middle East | Pledge Law | UAE Civil Code | UAE Commercial Code | United Arab Emirates (UAE)
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About the Author
Michael is a Solicitor in the Asset Finance practice at Watson, Farley & Williams LLP. He specializes in advising clients in relation to sports finance including: loan finance, financing of broadcasting and ticket revenues and the player transfer finance.