Pledge of Possession According to Saudi Law

The pledge of possession, according to Saudi law, is one of the recognized types of pledges used in the country. It is more commonly used in Saudi Arabia compared to mortgages and other types of pledges. The widespread use of this type of pledge is primarily due to the fact that it allows for the use of movable assets as collateral for debt without the need to transfer ownership of the property to the other party.

Pledge of Possession According to Saudi Law

A pledge of possession is a secondary real right that arises when a contract is signed between the creditor and the debtor. This contract is binding for both parties and involves transferring ownership of movable assets, such as cars or other movable properties, from the creditor to the debtor as collateral. However, the creditor does not lose ownership or permanently transfer it to the debtor.

It is important to execute the pledge of possession correctly in accordance with the laws and regulations in Saudi Arabia. Both the property owner (creditor) and the debtor must sign the pledge contract, clearly outlining the terms and conditions. Many of these contracts are documented and registered with the relevant authorities to ensure that the process is legally sound.

It is advisable to consult a specialized lawyer with extensive experience when drafting a pledge of possession contract. Seeking legal advice helps ensure that the pledge aligns with the applicable laws and regulations and is not in violation of them. The lawyer can also help register and document the contract with the relevant authorities and handle legal issues that may arise, which can vary from case to case.

Characteristics of the Pledge of Possession According to Saudi Law

• It is a legal contract between two parties and is binding on both.
• The right to revoke the contract is linked to the right of redemption, meaning the contract remains valid and can be canceled upon the death of the mortgagee.
• A formal pledge is only made on real estate, while a mortgage is considered a real right that can be returned on movable assets.
• The mortgage can serve as a possessory right if the mortgagor is unable to sell their assets to repay the debt.
• The secured creditor can take possession of all assets if they are divided among heirs.
• In case of difficulty in locating heirs, those who pledged their assets as collateral may claim their debts. The deceased’s assets are distributed among the heirs, and each heir has the right to retain the mortgaged items to settle their share of the debt, even if the value of the pledged item exceeds the debt.

Termination of the Pledge of Possession According to Saudi Law

Dependent Termination of the Pledge of Possession

• In Civil Law: The pledge ends for various reasons, whether the debt is paid off, an equivalent amount is secured, or the pledge expires without repayment. Once one of these conditions is met, the pledge ends, and the agreed-upon mortgage reverts.
• In Islamic Jurisprudence: The basic law governing the relationship between creditor and debtor allows the mortgage to be terminated by paying off the debt or through equivalent measures, such as auctioning off the mortgaged property or pardoning the debt. In this case, the binding contract between the parties ends.

There is no difference between Islamic jurisprudence and Saudi law in that if the mortgage period expires without debt repayment, the debt must still be paid in full. Additionally, if part of the debt remains unpaid, that portion is fully secured, and the mortgage does not terminate until both parties agree.

Primary Termination of the Pledge of Possession

• Waiver by the Mortgagee:
  • In Civil Law: The pledge ends if the mortgagee waives their right, provided they are eligible to discharge the debtor from the debt. The waiver may be implicit or explicit.
  • In Islamic Law: The pledge ends if the mortgagor waives the debt, but the debt continues as unsecured, a situation referred to as “revocation.” The mortgagee also has the right to withdraw from the pledge by renouncing possession of the pledged item and returning it to the mortgagor without intending to rent it or deposit it with them.
• Destruction of the Pledged Item: If the pledged item, such as a car, is damaged or destroyed, compensation is provided by replacing the damaged item with another, provided the loss was caused by another party’s fault or their guarantee. If only part of the pledged item is destroyed, the pledge remains on the remaining portion as collateral for all debts.
• Union of Ownership: The pledge ends if ownership and the right to possession come together in one person. For example, if the mortgagor dies and the heir is the mortgagor, the pledge ends.

Conclusion

In the past, a pledge of possession could not occur unless the mortgagor handed over the pledged item to the creditor or a mutually agreed intermediary. However, under modern Saudi law, it is no longer necessary to transfer the pledged item to the debtor. This condition is no longer essential or mandatory, but has become a formal obligation held against the debtor.

From the above, we conclude that a pledge of possession has become a consensual contract that is valid once the creditor and debtor agree, even without transferring the pledged item. The contract must comply with Saudi law, and the terms of the agreement must be clearly outlined in the contract.

If the terms of the agreement are not specified, the contract is considered illegal and void. Therefore, it is always recommended to consult an experienced lawyer in such contracts, as they will ensure the contract is fully compliant with the law and without any doubts regarding its validity.

If the debt is not repaid within the specified period, the person who owns the pledged property must sell it or offer it in an auction to settle the outstanding debts.