While situation with epidemic of coronavirus COVID-19 is developing in Dubai, more and more people and businesses are getting affected, in particular, with their tenancy arrangements. I receive questions from my clients, both landlords and tenants in Dubai, whether tenancy contracts could be terminated and, if so, could tenants leave the premises without any penalty or could they be evicted? On the other hand, questions have been asked regarding reduction and postponement of rent? Could tenant ask to reduce and/or postpone the rent and is the landlord obliged to satisfy such request?
I attempt to answer some of these
questions in the article.
Dubai legislation on
Tenancy Contracts
Dubai Law No. 26 of 2007 (as
amended by Dubai Law No. 33 of 2008) regulates the relationship between
landlords and tenants in the emirate of Dubai (the “Dubai Tenancy Law”). Basic
principal of this law is that the relationship between the landlord and the
tenant are regulated by the Tenancy Contract that shall specify parties,
property, term of the contract, rent and payment terms.
Article (4)
The contractual relationship between
Landlord and Tenant will be regulated by a Tenancy Contract detailing, in a
manner allowing no room for uncertainty, a description of the leased Real
Property, the purpose of the tenancy, the term of the Tenancy Contract, the
Rent and payment method, and the name of the owner of the Real Property, if the
Landlord is not the owner.
It is customary that majority of
Tenancy Contract in Dubai are for a period of one (1) year. Both Tenant and
Landlord shall adhere to their agreement and any attempt to terminate the
contract prior to its expiry is an exception that usually leads to refusal of
such early termination by the judicial authority and/or sanctions. I will
discuss it in details further in the paper.
Amendment of Tenancy Contract
There is no right of any party to
amend the Tenancy Contract during its term and limited right with several
conditions on amendment upon renewal, unless both parties agree with such amendments.
In particular, party wishing to amend shall notify the other party 90 days
prior to expiry of current term (Article 14 of the Dubai Tenancy Law).
Article
(14)
Unless otherwise agreed by the parties, if
either party to the Tenancy Contract wishes to amend any of its terms in
accordance with Article (13) of this Law, that party must notify the other
party of same no less than ninety (90) days prior to the date on which the
Tenancy Contract expires.
There must be an agreement of
both parties regarding amendments to the tenancy contract including the rent
(whether increasing or decreasing it) and should the parties fail to reach
agreement, the Rental Tribunal may
determine fair rent (Article 13 of the Dubai Tenancy Law).
Article
(13)
For the purposes of renewing the Tenancy
Contract, the Landlord and Tenant may, prior to the expiry of the Tenancy
Contract, amend any of the terms of the Tenancy Contract or review the Rent,
whether increasing or decreasing it. Should the Landlord and Tenant fail to
reach an agreement, then the Tribunal may determine the fair Rent, taking into
account the criteria stipulated in Article (9) of this Law.
Based on the above provisions,
there is no right of either party to request the amendment of the contract
during its term, unless such amendment is made by mutual agreement of both
parties.
My first recommendation to the
Tenant is to notify the Landlord immediately, stating in details the
circumstances that lead to inability to pay the Rent on time, provide documents
confirming such circumstances. Thereafter, the Tenant shall try to engage into
conversation with the Landlord in an attempt to find immediate and long-term
solution. In particular, the Tenant may
ask the Landlord to consider split payments, deferral of payments and even
reduction of rent in return for advance payment of Rent for few months.
It is important to remember, that
Landlord also has financial obligations and might also suffer the affect of the
epidemic Covid-19 on personal and financial levels. Moreover, he/she/it has
maintenance, service charge and tax obligations with regard to property and the
rental received. The Landlord is not obliged to satisfy Tenant’s requests on
reduction, postponement of rent or restructure of payments and might only do it
on his/her own will on humanitarian grounds.
For example, a fair relief may
constitute an agreement between the Tenant and Landlord that for the months
through which the income of the tenant is affected, the rent will be decreased
proportionally. For instance, if a commercial establishment was shut in
compliance with the Government’s order as part of preventive measures against
epidemic of COVID-19, a commercial tenant’s revenues in these months could decrease
by up to 100 percent, the Landlord might agree to 30-70 percent rent reduction for
those months and review the situation depending on the its development. The
Landlord is not obliged to do so, but if it values the Tenant and does not wish
to lose it for future rentals, it might agree on one of the following measures:
- postponing rent payments by a period of up to six
months,
- facilitating instalments for payments,
- refunding security deposits and guarantees,
- cancelling penalties for both companies and
individuals,
- reducing or waiving the rent for few months.
We must stress, that if the
parties agreed on some changes to the Tenancy Contract, they should put in writing
any amendments that they agreed and to do their best to comply with these new
provisions. The amendments shall be registered with RERA (in EJARI system) in
the same manner as the principal Tenancy Contract (Article 4.2 of the Dubai
Tenancy Law).
Right to terminate
Tenancy Contract
Could the Landlord or the Tenant terminate the contract
during its term? The answer is no, unless the contact is terminated by mutual
agreement of both parties or in accordance with the provisions of the Dubai
Tenancy Law. See Article 7 below:
Article 7
Where a Tenancy Contract is valid, it may
not be unilaterally terminated during its term by the Landlord or the Tenant.
It can only be terminated by mutual consent or in accordance with the
provisions of this Law.
Termination by Landlord
The Dubai Tenancy Law stipulates
several reasons for terminating the Tenancy Contact by the Landlord and
eviction of Tenant prior to the expiry of the term. Among such reasons, the
most relevant for the subject of this article is failure of the Tenant to pay
the rent.
Article (25)
1. The Landlord may seek eviction of the
Tenant from the Real Property prior to the expiry of the term of the Tenancy
only in the following cases:
a) where the Tenant fails to pay the
Rent or any part thereof within thirty (30) days after the date a Notice to pay
is given to the Tenant by the Landlord unless otherwise agreed by the parties;
It should be understood that
simply not paying rent to the Landlord even during financial difficulties
sustained by a person or a business during COVID-19 would lead to Landlord’s
right to request the eviction pursuant to Article 25.1(a) of the Dubai Tenancy
Law. Moreover, such Tenant must pay the rent for the whole period during which
the claim is considered and until the award is rendered and executed. See
Article 31 of the Dubai Tenancy Law below:
Article 31
Filing a claim to evict the Tenant does not
exempt the Tenant from paying the Rent for the whole period during which the
claim is considered, and until an award is rendered and executed.
That is why stop paying the rent
is not an option for the Tenant. I reiterate the importance of negotiating
between the parties and reaching the agreement.
Historically, only in some exceptional
circumstances where the Tenant died or lost his job and was obliged to leave the
country, Dubai Rent Tribunal agreed to terminate the residential tenancy
contract prior to its expiry with or without penalty (usually two months’ rent)
and, hence, refrain the Landlord from claiming payment of rent for remaining
period of the tenancy term including presenting cheques to the bank. In most
cases, the Tenant was obliged to pay the rent until the expiry date agreed in
the Tenancy Contract. Financial difficulties as such were not considered as
sufficient reason for early termination of the Tenancy Contract, as it is
responsibility of the Tenant to properly estimate his/her financial ability to
pay rent at the time of entering the Tenancy Contract.
Termination of Tenancy Contract for Commercial Properties
In addition to non-payment of
rent specified above, Article 25.1 (c) of the Dubai Tenancy Law provides, that the
Landlord may terminate the Tenancy Contract for commercial property where the
Tenant leaves it unoccupied for no reason for thirty (30) consecutive days or
ninety (90) non-consecutive days within the same year.
Article 25
1. The Landlord may seek eviction of the
Tenant from the Real Property prior to the expiry of the term of the Tenancy
only in the following cases:
c) where the Tenant of commercial Real
Property leaves the Real Property unoccupied for no valid reason for thirty
(30) consecutive days or ninety (90) non-consecutive days within the same year,
unless agreed otherwise by both parties;
We would expect that a direct
order of the Government to close particular commercial establishments during
UAE measures against epidemic of COVID-19 would be considered as a “valid
reason” for the commercial property to be unoccupied. I believe that for the purposes
of the above Article 25.1(c), no eviction would be permitted if such commercial
establishment remain close during lock-down period, provided the rent is paid
by the Tenant. But I shall live and see the position of the Rental Tribunal on
these cases.
There are other reasons when the
Landlord can terminate the Tenancy Contract during its term. In particular, where
the Tenant uses the property or allows others to use it for any illegal purpose
or for a purpose which breaches public order or morals (Article 25.1(b)) or
where the Tenant makes a change to the property that renders it unsafe (Article
25.1(d)) or where the Tenant fails to observe any obligation imposed on him by
the Dubai Tenancy Law or any of the terms of the Tenancy Contract within thirty
(30) days from the date a Notice to perform such obligation or term is served
upon him by the Landlord (Article 25.1(g)).
Termination of Tenancy Contact by Tenant
Can tenants terminate Tenancy Contracts
prior to their expiry and without paying penalty?
The Dubai Tenancy Law does not
provide for Tenant’s right to terminate the Tenancy Contract during the term,
hence, the tenant must comply with the payment and other obligations during all
period of the contract (usually one year). It is customary for Dubai Tenancy
Contracts to include provision that Tenant would notify the Landlord in advance
of Tenant’s intention not to renew the contract by giving 60 or 90 days prior written
notice. Moreover, some contracts contain provision of early termination with 60
days penalty. The implementation of these provisions vary much depends on
parties’ relationships and their abilities to be fair and reasonable. Usually
parties to the Tenancy Contract prefer to negotiate and reach a mutual
understanding rather than referring dispute to the Rental Tribunal and incur
additional costs.
Many commercial leases address
force majeure, market disruption and/or extraordinary circumstances and it is
therefore important to establish whether there is a right to delay performance
of obligations or for the contract to be terminated in each of these cases.
Considering that there is no
Tenant’s right of early termination of the Tenancy Contract, there is a debate
in Dubai legal community whether Tenant can request the judicial authority,
i.e. Dubai Rental Tribunal to look at the exceptional circumstances and make a
decision by application of Article 249 of the UAE Civil Code, which states:
Article 249 of UAE Civil Code
If exceptional circumstances of a public
nature which could not have been foreseen occur as a result of which the
performance of the contractual obligation, even if not impossible, becomes
oppressive for the obligor so as to threaten him with grave loss, it shall be
permissible for the judge, in accordance with the circumstances and after
weighing up the interests of each party, to reduce the oppressive obligation to
a reasonable level if justice so requires, and any agreement to the contrary
shall be void.”
Article 249 of UAE Civil Code is usually used by a
party where contractual obligations become impossible or burdensome and the
continuation of the contract is threatened directly as a result of unforeseen
circumstances for causing a huge loss. A party may ask the judiciary to
reasonably balance the interests of the parties to the contract by easing the
burden of their obligations. This balance may include decreasing the value of
the contract, allowing a grace period or any other remedies that a judge may,
in his discretion, determine. The mere existence of financial difficulties or
economic adversity does not relieve the party from non-performance of
obligation since the parties of the contract are expected to have reasonable
business insight and are expected to have estimated the economic risks before
committing themselves with any obligations of a particular contract.
If the Tenant’s income had been reduced due to
COVID-19 and the Landlord does not agree to reduce or postpone the rent, then the
Tenant could apply to the Dubai Rental Tribunal and ask for a fair level of
rental relief under Article 249 of the UAE Civil Code. The Tenant may ask for decrease
or rent, rental postponement or restructure of instalments, but I shall live
and see whether the Tribunal will make such an order to oblige the Landlord to
act accordingly.
Another legal discussion is with
regard to application of Article 273 of the UAE Civil Code to the Dubai rental
disputed during COVID-19. Article 273 stipulates that if a force majeure event
makes a contract (fully or partially) impossible, all contractual obligations
will cease, and the contract will be automatically (fully or partially)
cancelled and the parties are to be restored to the position they were in
before they entered into the contract; if that is not possible, damages may be
awarded by way of compensation to a party that has suffered a loss as a result
of the inability to unwind the contract.
Article 273 of UAE Civil Code
(1) In
contracts binding on both parties, if force majeure supervenes which makes the
performance of the contract impossible, the corresponding obligation shall
cease, and the contract shall be automatically cancelled.
(2) In
the case of partial impossibility, that part of the contract which is impossible
shall be extinguished, and the same shall apply to temporary impossibility in
continuing contracts, and in those two cases it shall be permissible for the
obligor to cancel the contract provided that the obligee is so aware.”
The UAE Civil Code does not
define “force majeure”. Hence, it is up to the judge to decide whether COVID-19
made the obligation of the relevant party impossible to perform and decides to
cancel the contract.
With regard to tenancy
relationship, if the Tenant’s income dropped to a level that makes it
impossible to pay the rent or the Tenant lost the job, and all negotiations
with the Landlord on early amicable termination failed, the Tenant may file a
case at the Rental Tribunal with reference to Article 273 of the UAE Civil Code
stating how COVID-19 has made him/her impossible to pay the rent. The Tribunal
will then decide whether the tenant’s situation qualifies as force majeure and
the tenancy contract could be cancelled without penalty.
The above legal assumptions are
theoretical and shall live and see what approach the Dubai Rental Tribunal
takes.
Concluding remarks
The best approach is to negotiate
and come to fair amendments of the Tenancy Contracts. The Tenants that cannot
pay the Rent due to COVID-19, advised to negotiate with Landlords a fair rental
relief if their income dropped temporarily, or terminate the Tenancy Contract
in case the loss of income is permanent due to COVID-19. Present the Landlord a
fair proposal supported by documents indicating loss of salary (for residential
properties) or comparison of revenues (for commercial properties) to showcase
the percentage drop in sales, seeking a proportional relief on rent from the Landlords.
For example, re-schedule of rental payments to monthly basis, rental holiday,
reduction of rent could be negotiated. In case the agreement with the Landlord
was not reached, the Tenant might wish to file a case before the Dubai Rental
Tribunal and request either a fair relief from the obligations of the Tenancy Contract
or to cancel the Tenancy Contract without paying any penalty to the Landlord as
force majeure made the payment burdensome or impossible.
As there are no precedents available
to us at the moment that would indicate the position of the Dubai Rental Tribunal
on eviction of tenants of either residential or commercial properties, as well
as providing relief under the Tenancy Contracts where the contractual
relationship were affected by coronavirus COVID-19 or protective measures of
the UAE or Dubai Governments against epidemic, it is hard to indicate which
view the Dubai Rental Tribunal will take. We shall live and see.
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