Finance Leasing Law – Federal Law No 8 of 2018 (“Law”)
After many years of consultation and calls for regulating finance lease activity in the UAE, the draft finance lease law which was approved by the UAE’s National Council in 2018 is now in force by publication in the Official Gazette.
The Law will be supplemented by a set of implementing regulations applicable to the licensing of finance lease activities in the UAE. The Law mandates the Central Bank of UAE (CBUAE) to regulate the lease financing and accordingly the CBUAE shall issue its regulations or circulars to licence finance lease activities in the UAE.
We enclose with this update an Arabic version of the Law.
Salient provisions of the Law are set out below:
- Finance Leases are defined in the Law as “A relationship between lessor and lessee, whereby the lessor shall own the leased asset for the purpose of leasing it. The lessor shall lease the asset to the lessee for a limited period and through an independent contract with an option to the lessee to own the leased asset according to the provisions of this law”.Technically this would capture ijara financing currently undertaken by the Shari’a compliant UAE financial institutions.
- There is a restriction on a person or an entity providing a finance lease in the UAE without a licence from the CBUAE. It is unclear at this stage whether the restriction (in the absence of the implementing regulations) extends to existing banks and finance companies who are currently carrying out such activities (including for example, by way of ijara).
- The Law indicates that the licencing restrictions discussed above renders a finance lease contract void if not signed by a licensed entity or otherwise not registered in accordance with the relevant requirements of the Law.
- The Law regulates almost all types of finance lease over movable and immovable assets (including real estate, aircraft, vessels, vehicles, plant, machinery equipment etc.). However the Law directs that the leasing arrangement relating to real estate, aircraft, vehicles and vessels should be registered in their respective specialised registers.
- A register will be set up for registering finance lease contracts involving non-registrable movable assets (such as plant, equipment and machinery). However, at this stage, it is not clear what role the Emirates Movable Collateral Registry will play as it already allows for registration of finance leases over moveable assets. Finance leases involving real estate assets (e.g. ijara arrangements) shall be registered with the relevant land department in the Emirates where the real estate is located. The Dubai Land Department has had such a system for some time, whereas, other Emirates will need to implement new systems to cater for this.
- Whilst the lessor is required to insure the leased asset, all other obligations for the maintenance and upkeep of the leased asset are attributable to the lessee, except for substantive maintenance of the asset (in accordance with common technical standards), which would be the lessor’s obligation.
- If the lessor is leasing a third party asset, the Law permits the lessee to directly deal with the vendor of such leased asset in connection with any warranties, service arrangements etc., provided the lessor duly notifies the vendor of the lease arrangement. This arrangement under the Law provides a recourse to the lessee against the vendor in breach of any warranties and service and supply arrangements.
- The Law also clarifies the liability attributed to a party for the use of the leased asset. According to the relevant provision of the Law, the lessee will be fully liable for any loss or liability for the use of the leased asset and it seems such liability may not be attributable to the lessor.
- In terms of enforcement, the Law permits the lessor to repossess the leased asset in accordance with the provisions of the finance lease contract. This appears to be a self-help remedy and the lessor would not be required to initiate court proceedings to exercise its rights of repossession of the leased asset (assuring of course it can legally repossess the asset). The Law does not however stipulate any other rights or remedies the lessor has, such as enforcing the purchase of the asset, damages and so on. Furthermore, if the lease arrangement is duly registered, the leased asset is not subject to any attachment or execution by any third party creditor.
- In case of the liquidation or bankruptcy (or where applicable death) of a lessee, the leased asset does not form part of the lessee’s assets available to creditors of the lessee and the leased asset must be returned to the lessor within 90 days from the issuance of a liquidation decision, or from adjudication of bankruptcy, or the death of the individual (unless the liquidator or administrator in bankruptcy has decided to continue performing the finance lease contract).
It is important to note that the Law stipulates a grace period of one (1) year for full compliance with the provisions of the Law. Therefore, all concerned parties need to register the existing finance lease contracts before the end of 2019 and all entities carrying out financial leasing in the UAE must approach the CBUAE for guidance on adjusting their licences.
It is not clear whether UAE-licenced financial institutions will be required to apply for a separate licence from the CBUAE to carry out financial leasing activities. It is expected that the CBUAE will issue implementing regulations and/or notices to clarify the steps to be taken during the transition period.
Given the importance of this much awaited Law to banks, finance companies and captive financiers, we will circulate further updates in due course.
In the meantime, should you have any questions, please do not hesitate to reach out to us:
Partner, Head of
Banking & Finance
Banking & Finance
Sarah El Serafy
Banking & Finance
Banking & Finance