Dissecting mortgage contracts in Uzbekistan

In Uzbekistan, all forms of real security are collectively referred to as pledges. The object of a pledge may be any asset such as movables, immovables and rights. However, there are exclusions: items withdrawn from circulation, claims inseparably linked to a creditor (such as compensation for harm to life or health, and alimony), and other claims prohibited by law from being transferred.

The legal significance of a pledge is that if a debtor (pledgor) fails to fulfil their obligations, their creditor (pledgee) has the right to be compensated from the value of the pledged property in accordance with legal provisions, before other creditors.

Types of pledge

According to Uzbekistan’s Civil Code, there are three types of pledge – namely, pawn, mortgage and pledge of rights.

• A pawn involves the transfer of possession of movable personal property from a pledgor to a pledgee, who then manages it.
• A mortgage specifically refers to the pledge of immovable property such as real estate in the form of buildings, structures, apartments and enterprises, as well as non-agricultural lands owned by other property complexes, legal entities or individuals. However, the property must be registered as real estate to qualify as a mortgage asset.
• A pledge of rights involves pledging the rights owned by a pledgor, excluding claims inseparably linked to a creditor (such as compensation for harm to life or health and alimony).

As required by Uzbek law, pledge contracts, including mortgage contracts of immovables, must be concluded in writing and contain particular information such as the pledged asset and its value, the nature of the asset, the secured amount, the term for fulfilling the principal debt, and the ownership of the pledged asset.

Additionally, for mortgages involving vehicles and immovables, the mortgage contract must be registered and notarised, or it will be deemed invalid.

Registration and notarisation

In Uzbekistan, a mortgage contract of immovables is subject to being registered among bans and restrictions with local cadastre authorities and the pledge register of the central bank. The contract must also be notarised by a notary public. A mortgage contract of immovables without registration or notarisation will be considered invalid.

Notaries in Uzbekistan usually require mortgage contracts of immovables to be signed using a template from an electronic system database. Created by the Ministry of Justice, the template is concise and neutral. Despite certain exceptions, most notary publics do not accept mortgage contracts that have not employed this template.

To meet specific business needs, companies should ask in advance about the notary’s requirements for the format and content of mortgage contracts. It is also recommended that companies contact the lawyer and the notary beforehand, to discuss the extent to which the mortgage contract might be modified so as to satisfy both the company’s needs and the notary’s requirements.

Limitations

Under the law of Uzbekistan, the pledging of immovables and movables fall under two different types of real security – mortgages on immovables and pledges of movables.

Mortgages on immovables must be registered and notarised, and the contract terms usually lack flexibility. As a result, it is generally impractical to include pledges of both immovables and movables in a single mortgage agreement. Instead, a mortgage contract for the immovables and a pledge contract for the movables should be concluded separately, with both securing the same principal debt.

However, from the perspective of execution, certain assets, such as those in power stations, are difficult to be split into immovables and movables for disposal. Immovables such as the land and buildings, and movables such as the machinery and equipment, are tightly integrated, making it challenging to find suitable buyers if the assets are separated during auction or other execution procedures.

In such cases, creditors may consider an enterprise mortgage (EM). Under Uzbek law, an EM allows entire assets, comprised of both the immovables and the movables, to be mortgaged as a single asset complex.

As a form of mortgage on immovables, an EM also needs notarisation and registration. However, EM mortgagors are required by the notaries to present proof of ownership for each asset item, including title deeds for real estate, sales contracts for fixed assets like machinery and equipment, as well as technical passports for vehicles. This can be difficult for the mortgagors, thus making EM uncommon in practice.

For companies planning to enter into mortgage agreements with Uzbek mortgagors, it is essential to understand Uzbekistan’s legal framework for mortgages, as well as the practical requirements on registration and notarisation of mortgage contracts.

The authors suggest that companies consider their transaction needs, legal regulations and practical operations to prepare and design a transaction structure, including the mortgage agreement. This proactive approach helps avoid potential issues that could prevent the agreed-on mortgage terms from being implemented due to practical constraints.

Wang Jihong is a senior counsel and Chen Haobi is an associate at Zhong Lun Law Firm