Securing a loan with mortgages case-by-case - The Fine Print Legal, tax insight

The new Foreign Investment Law permits the Myanmar Investment Commission (MIC) to allow foreign investors to secure a loan with a mortgage in Myanmar on a case-by-case basis. It does not say so explicitly, but it is understood that foreign lenders may be the beneficiary of such a mortgage. Previously, mortgages with a foreign beneficiary were prohibited.

However, the MIC does not seem to have approved any mortgage and it is expected the MIC will proceed cautiously as land issues are very sensitive.

A lot is still unclear. In Myanmar, citizens can obtain a land grant from the state which resembles ownership. Foreign-invested companies, in contrast, can only obtain a “normal” lease. If a citizen leases land to a foreign-invested company, can a foreign bank lending money to this company obtain a mortgage over the land grant, or is the bank reduced to taking a mortgage over the lease?

A mortgage over the land grant would be much better for the bank. Usually, the grant holder would of course not agree to it. However, he might agree if he has a personal interest in the success of the business of the borrower. If the company (borrower) defaults, the bank (lender) could sell the land grant without court intervention to any citizen interested in using the land for whatever purpose the land grant permits.

However, the MIC can only grant its consent to the mortgage if the mortgagee “has the capacity to successfully continue the business”. This suggests that the MIC has no room to allow a mortgage over a land grant of which the object is realisation through sale.

As in other common-law jurisdictions, mortgages over a lease are in principle possible if the lessor agrees. The lender is less protected than with a mortgage over a land grant, though.

The beneficiary of a mortgage over a lease has, if the borrower defaults, the choice of using the property himself. However, the property may only be used for the purpose defined in the original lease agreement, and only for the remaining term of the original lease. If, eg, the land was leased in order to operate a factory on it, it may not be used for another business even if this business might be more profitable than the operation of the factory.

Given that borrowers tend to default when their business runs into trouble, a lender secured by a mortgage over a lease will often only be able to recoup the loan if he either continues to operate the business of the borrower and is better at it, or finds someone willing to pay money to take over the business and try their luck.

It may work, of course: for instance, a bank might find a capable hotel manager who succeeds in turning a loss-making hotel into a profitable one.

In order to avoid all these difficulties, a foreign lender could instead try to obtain a share pledge or a guarantee from a Myanmar bank which, in its turn, is secured by a mortgage over a land grant.

Sebastian and Hnin are consultants with Polastri Wint & Partners Legal & Tax Advisors.

source: The Myanmar Times
http://www.mmtimes.com/index.php/business/8441-securing-a-loan-with-mortgages-case-by-case-the-fine-print-legal-tax-insight.html