The Legal Guide to Leasing Commercial Properties in the UAE

The UAE in general, and Dubai in particular, is a market that is exponentially growing in terms of an increase in business organization setup. Consequently, the effect is seen and felt in the commercial property market, which has grown rapidly. It is essential that lessors and lessees gain knowledge and understanding with respect to standard market practices and awareness while entering into their primary real estate asset investment involving significant financial obligation, which will require thorough and informed due diligence, negotiation, and consultation with their legal advisor. This explanation touches upon the overview of the legal framework that governs commercial property.

Today, projections and predictions state that the commercial property market is going to witness further regulatory frameworks with respect to commercial property in the UAE and the legal considerations in this respect. Commercial leases are significantly different from residential leases. One significant factor is that commercial leases entail substantial periods and financial forecasts. Thus enforcement of the lease is of greater relevance in commercial leases as compared to enforcement in residential leases. Business organizations or individuals look forward to a reliable place from which to lay down business and higher construction, who may be captivated by immense retail, office, industrial, warehouse premises, or the hotel industry in the UAE.

With this growth, legal issues in relation to leases are anticipated to form an integral part. It will be observed that commercial leases are subject to greater risks than residential leases. Furthermore, various lessors and lessees do encounter legal problems following their decision to invest in or lease a commercial property. It is a matter of fact that the parties to a lease must be familiar with applicable laws and regulations to ensure that their lease arrangement is legally binding and enforceable in the UAE.

2. Key Legal Frameworks and Regulations Governing Commercial Leases

Both the federal laws of the UAE and local laws of the individual Emirates prescribe substantive rights for landlords and tenants, as well as procedural requirements that the parties must follow. Key federal laws on the topic include the UAE Civil Code (Federal Law No. (5) of 1985, Law No. (33) of 2008 Amending Law No. (26) of 2007 Regulating the Relationship between Landlords and Tenants in the Emirate of Dubai, and Federal Law No. (1) of 1987 Concerning Civil Transactions Law. It is important for a tenant to also be aware of which Emirate jurisdiction they are subject to.

Since it is required that tenancy contracts be registered through EJARI, plans have been created to link all parties involved in the property lease and management industry, including businesses with licenses in this field, companies that own and manage properties, landlords who personally manage their properties, or their legal representatives, and allow them to register and issue contracts. In Dubai, the main laws and regulations that are most pertinent to landlord-tenant relations are overseen and enforced most significantly by RERA. In essence, all laws and rules, including the signed EJARI contract, establish duties and obligations between the parties, particularly with regard to property management, tenant services, lease contract issuance and registration, legal follow-ups, and payment of rent, maintenance and other obligations. It is of the utmost importance that either party understands the legal obligations the other party has as well as their own obligations, the failure of which can lead to both time, effort, and cost to enforce or dispute.

3. Important Clauses and Provisions in Commercial Lease Agreements

3.1 Rent: is the consideration or price for the property. If the tenant is not required to pay rent, the mere possession of the property amounts to a lease. Rent can be commercial rent, retail rent, or office rent and would have an influence on the total consideration. Generally, rent would be fixed on the basis of a particular measurement, which in the case of commercial property is a square foot. Rent escalations have different principles, including a definite rent increase during the lease term, rent increase based on the RERA Index, increases based on the sales turnover of the tenant, and step rent, where increasing rates would be applicable at specific periods during the lease term. During the negotiation of the lease, rent should be discussed in relation to the definite space provided by the landlord, and all increases should be specifically stated and agreed upon. According to Article (13) of Law No. (33) of 2008, the landlord and tenant may amend any terms or reconsider the rent prior to the lease expiry. If no agreement is reached, the Rental Dispute Center (RDC) may determine the fair rent. Tenants should negotiate favourable renewal terms and ensure they have the option to renew the lease if desired.

3.2 Duration: specifies the term of the lease, which includes the legal as well as a definite term and determines when the property should be given back to the landlord. The term of the lease should also consider any of the lessee's options to renew or extend the term, along with the landlord's right to re-enter the property and/or terminate the lease early. Advantageous lease terms will be discussed further in this piece. It should also be explicit about the right of first refusal or any pre-emptive rights. For the lessee, it means how long he has the space, and for the landlord, it means how long he can claim a rental for the property. Article (15) of Law No. (33) of 2008 states that the landlord must hand over the property in good condition, allowing the tenant to fully use it as stated in the lease contract. Tenants should clarify who is responsible for routine maintenance and major repairs to avoid unexpected costs.

3.3 Renewal Right: A lessee must take great care that his lease has a renewal clause. According to Article (13) of Law No. (33) of 2008, the landlord and tenant may amend any terms or reconsider the rent prior to the lease expiry. As an unprotected lessee, he may subject his commercial property interest to imminent termination. The duration of any renewal option should also be addressed and provided in the lease. If the lessee has the wherewithal to achieve his objectives when negotiating the lease, then at the very least, the lease should provide for a pro-rata share of costs that are prorated to the benefit of the lessee. The lease should also include an auditor's clause because this allows the lessee to examine the landlord's books and premises without notifying the landlord. This is important because a landlord may try to disguise his income and the lessee will not be able to confirm whether the landlord is actually operating at a profit.

4. Dispute Resolution Mechanisms in Commercial Lease Disputes

Facilitating the legal considerations for leasing commercial properties in the UAE

4.1 Dispute resolution mechanisms

Commercial leases typically involve large amounts of investment and are usually entered into for a period ranging between 3 to 10 years or even longer. Both landlords and tenants may have conflicting incentives and interests for these reasons. Where available remedies for breach of the lease include forfeiture of the leasehold or entry of judgments, the necessity to have viable inherent dispute resolution mechanisms is indispensable. A large number of disputes arise as a result of misinterpretation or arguments over particular lease terms. The UAE courts have in place a number of mechanisms to specifically resolve disputes arising from lease agreements, including the rent committee, RDC, and first instance and appellate civil courts.

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Disputes arising from breach of lease agreements can usually be resolved in three ways: 1) distributing the losses and risks between landlord and tenant in leased property by making provisions in the lease agreement; 2) availing of a cheaper and quicker mechanism of dispute resolution outside the traditional jurisprudence; and 3) having a well-drafted dispute resolution clause. If parties agree to share the losses between them and ensure that they are appropriately compensated through, e.g., landlords" insurance, the management service providers for the property could protect them from their tenant's default. They can save on the costly traditional dispute resolution mechanisms should a dispute arise. In the UAE, the RDC is can be accessed through mobile application andparties" access to them can be an added advantage should they need to dispute or know their rights. Where lease agreements provide so, parties often tend to resolve their disputes through these two bodies. A single judge or three-judge panel determines an appeal before the appellate civil courts, which could influence the disputes.