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The Dubai International Financial Centre (‘DIFC’) free zone has, over the years, cemented itself as a leading international financial hub and continues to experience strong demand in the rental market.
In 2018, the governing authority of the DIFC, DIFC Authority (‘DIFCA’) overhauled the previous legislative framework in respect of real estate and introduced a new Real Property Law (DIFC Law No. 10 of 2018) and accompanying Real Property Regulations. The Real Property Law does not include detailed guidance on leasing in the DIFC, although it did foreshadow the introduction of a new leasing law.
The Leasing Law (DIFC Law No. 1 of 2020) and Leasing Regulations have now been issued by DIFCA and came into force on 14 January 2020. The Leasing Law supplements the existing Real Property Law but deals specifically with leasing matters. It provides clarification to lessors and lessees of properties in the DIFC on their respective rights and obligations and is intended to ‘further align the DIFC with international best practice in this regard’ (DIFC Consultation Paper).
What follows is an high level overview of the key aspects of the Leasing Law.
The Leasing Law applies to all residential, retail and commercial leases in the DIFC, with the exception of:
The Leasing Law applies to leases entered into prior to the enactment of the Leasing Law, except where particular provisions of the Leasing Law require compliance with time and notice periods that are incapable of being applied to such leases.
The Leasing Law implies into leases the following statutory obligations on the lessee:
The Leasing Law implies into leases the following statutory obligations on the lessor:
These statutory obligations mean that such obligations no longer need to be explicitly stated in the lease itself.
Security deposits are now not permitted to exceed 10 per cent of the annual rent of the lease.
The Leasing Law clarifies that a security deposit may only be used to compensate the lessor after the expiry or termination of a lease, and only for the following reasons:
The Leasing Law has introduced a new security deposit scheme whereby security deposits are to be paid to the DIFC Registrar of Real Property (‘Registrar’) within 30 days of receipt by the lessor. Please note that this does not apply to leases that were in place prior to the enactment of the Leasing Law.
The Registrar will hold the security deposit in an escrow account and administer the release and refund of security deposits. On the expiry or termination of a lease, the lessee and lessor may sign a release form confirming whether the lessee is entitled to a refund of all or part of the security deposit. If the parties do not agree on the refund of the security deposit, the dispute must be notified (by either party) to the Registrar to be resolved by the DIFC Courts or any specific tribunal that may be established (the DIFC Authority is considering the possibility of establishing a separate arm within the DIFC Courts’ Small Claims Tribunal to deal with lower value disputes).
The law does not specify the timeframe in which the Registrar is required to release the security deposit. However, it is recommended that the release form or notification of dispute be lodged as soon as possible after the expiry or termination of a lease, as any security deposit which is unclaimed six months after the termination or expiry of a lease will be forfeited to DIFCA.
The Leasing Law has also introduced a (non mandatory) regime for the preparation of condition reports in order to prove the condition of the premises at the time of handover. Where a lessee is required to pay a security deposit, the lessor may, prior to handover of the premises to the lessee, prepare a condition report specifying the state of repair and condition of the premises. Where a condition report is provided by the lessor, the lessee must sign and return the condition report or provide details of its disagreement with the condition report within 20 days of receipt, otherwise the condition report is taken as evidence of the condition of the premises should any dispute arise between the lessor and the lessee relating to the state of repair and condition of the premises. Any disagreement in respect of a condition report is to be resolved by an independent expert. If a condition report is unsigned the DIFC Courts are entitled to draw their own inferences from the evidence provided at the time of the dispute.
The Leasing Law imposes an obligation on the lessor to give the lessee 90 days’ written notice of any proposed rent increases . This corresponds with rent increases relating to renewals in mainland Dubai. However, it is interesting to note that the DIFC has not followed in the footsteps of mainland Dubai in legislating for automatic lease renewals where the lessee remains in the premises after the expiry of a lease.
The Leasing Law clarifies the respective obligations of the lessee and the lessor in respect of maintenance of the residential premises:
Below we set out some additional statutory obligations applicable to residential leases:
The Leasing Law prohibits the acceptance of key-money (i.e. payment by a lessee in order to secure the grant or renewal of a lease) or any consideration for the goodwill of any business in respect of retail leases.
Generally, leases may be terminated before the expiry of the term by written agreement of the parties, or without agreement of the parties or DIFC Court order where:
Notwithstanding the above, Article 54 provides that residential leases may only be terminated by the lessor and by an order of the DIFC Courts in the following circumstances, offering greater protection to lessees of residential leases:
The lessee also has a right to terminate a residential lease by order of the DIFC Courts in the event that the lessor has failed to comply with a material obligation under the lease and failed to remedy such failure within 30 days of written notice from the lessee or the residential premises are not fit for purpose or unsafe for occupation.
While it is common for leases to state that the lessor has a lien over the lessee’s property left at the premises on expiry or termination of a lease, the Leasing Law now grants the lessor a statutory lien and a preferential claim over the proceeds of sale for payment of any arrears in rent. The process for selling such property depends on whether or not the lessee is insolvent.
The introduction of the new Leasing Law is a welcome development to the rental market in the DIFC. As is the case in any jurisdiction, lessors and lessees should always seek legal advice with respect to their rights and obligations under the law and the current practices adopted by the Registrar.
Al Tamimi & Company’s Real Estate team and International Litigation Group regularly advise on leasing in the DIFC and disputes arising from DIFC leases. For further information, please contact Mohammed Kawasmi (firstname.lastname@example.org), Shirley Zhang (email@example.com), Rita Jaballah (firstname.lastname@example.org) and Peter Wood (email@example.com).