What is a Security Cheque and What Does it Mean in Real Estate?

What Is a Security Cheque?

Let us begin with the basics and understand a security cheque’s meaning. 

A security cheque is an undated cheque that a borrower gives to a bank or lender when they take out a mortgage or loan.

This cheque should cover the full loan amount or a significant portion of it as a minimum. 

The bank or lender does not cash a UAE security cheque; instead, it is held by them as a guarantee in case the borrower cannot repay their mortgage amount within a specified period or violates any of the terms and conditions outlined in the loan document.

People often confuse security cheques with collateral, but there are subtle differences between the two. Consider a security cheque agreement as an added layer of security for the bank or lender. While collateral is tangible, such as a property or high-value possessions, sometimes the bank/lender cannot retrieve the entire mortgage amount from those sales. In such situations, a security cheque helps them to cover the remaining value of the mortgage amount. 

Security cheques help banks and lenders form a two-tiered protection system. 

Is a Security Cheque Mandatory in Dubai?

Having understood the meaning of security cheques, let us move on to knowing whether it is a mandatory requirement in Dubai or not. 

While signing security cheques in the UAE is not a legal requirement as part of the mortgage or loan process, it is a common practice. 

Most banks or lenders will require you to give a security cheque when taking a mortgage or personal loan in the UAE. 

Security Cheque Terms for Tenants

In the context of Dubai’s rental market, security cheques have a different meaning. 

Whilst when borrowing money, they are an undated cheque given to the lender, when renting a property, a security cheque, more commonly known as a security deposit, is a payment made by the tenant to the landlord at the start of the tenancy. This deposit serves as a guarantee for the landlord and is fully refundable at the end of the tenancy, provided there is no damage to the property. 

This security cheque or deposit is typically 5% of the annual rent for an unfurnished property, or 10% if the property is furnished. 

What Landlords Should Know About Security Cheques

For landlords in Dubai and the wider UAE, a security cheque can be an effective safeguard when leasing a property. While often referred to as a deposit in rental agreements, a security cheque offers an additional layer of protection against unpaid rent, property damage, or breach of contract. 

Before accepting one, ensure the security cheque agreement clearly states the cheque amount, purpose, and conditions for use. It’s also wise to verify the tenant’s details and keep the cheque securely stored until the tenancy ends. Remember, a bounced cheque can be pursued through legal channels under UAE law, but clear documentation and communication can help prevent disputes.

Alternatives to Security Cheques

In practice, there are few alternatives to providing a security cheque in the UAE.

While the law does not make them a mandatory requirement, most banks, mortgage providers, and landlords insist on a security cheque agreement as part of their standard process. 

For lenders, it serves as a safeguard against default; for landlords, it provides reassurance against unpaid rent or damages. Some institutions may accept other forms of security, such as additional collateral or a higher cash deposit, but these are rare exceptions. In most cases, being prepared to provide a security cheque in the UAE is simply part of securing a loan or tenancy.

Legal Implications of a Bounced Security Cheque

If you default on your loan, the bank may attempt to deposit your security cheque. Ensuring that your security cheques do not bounce is critical, as a bounced cheque can have legal implications for you. Here are certain risks you may face upon a bounced security cheque:

• Legal issues: While under earlier law a bounced cheque was a criminal offense, since January 2022, most bounced cheques are treated as civil matters under Dubai law. However, in cases involving fraud, forgery, issuing cheques on closed accounts, or repeated defaults, criminal proceedings may still be initiated.

• Trust: A bounced security cheque can cause ongoing issues between the lenders/banks and you, as it calls into question your financial prudence. This could cause problems if you wish to take out new loans in the future. 

Conclusion

Understanding security cheques in the UAE is essential for anyone entering into a loan or mortgage. Whether you are reviewing a security cheque agreement for a property purchase or providing one as a tenant, knowing the security cheques meaning helps you avoid mistakes and navigate the process effectively. 

In Dubai and across the UAE, a security cheque serves as a safeguard for lenders, ensuring obligations are met. While not legally mandatory, they remain a common requirement in banking and real estate transactions. By being aware of the legal implications, especially in the event of a bounced cheque, you can approach any security cheque UAE process with clarity, confidence, and compliance.