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Over the past decade, landlords and tenants renting in Abu Dhabi have had the benefit of a legal framework that has seen very few changes, the most notable of these exceptions being the recent removal of the cap on the level of rental increase in certain circumstances.
However, a long-standing legal framework comes with its own challenges and below are five key areas of the landlord and tenant relationship where reform could prove useful to both sides.
Residential and commercial leases dealt with under the same regime
The Abu Dhabi Law No. 20 of 2006 (AD L&T Law) currently treats leases of residential and commercial premises the same way. However, residential tenants generally require more protection — they typically do not have as much bargaining power, are not as experienced in negotiating leases and are more sensitive to increases in rent. Commercial tenants, on the other hand, are more experienced in leasing premises and are more likely to seek professional advice when entering into them.
Different legal regimes applying to residential leases and commercial leases are common in many other places, including England and Wales. However, as no neighbouring countries in the Middle East have taken this step yet, if Abu Dhabi adopted the approach, it would be seen as the regional leader in this type of consumer protection.
Greater protection that could be provided to residential tenants could include:
• An element of rent control. We understand from articles published in the local press and other sources that with effect from November 22, 2013, the previous 5 per cent cap on rental increases (imposed originally by the AD L&T Law) was abolished. No decree or decision has, however, we believe been formally issued. That said, the Urban Planning Council Middle Income Housing Policy does envisage a form of rent control continuing in Abu Dhabi for certain categories of private rented property. So, this may change in the future.
• Security of tenure (i.e. the right for the tenant to renew their lease, provided that certain circumstances such as persistent breach do not apply). This ensures a landlord can only terminate a lease or refuse to renew it in a limited number of circumstances. Landlords were previously unable to evict tenants, except under very limited circumstances. However we believe this feature was also abolished on November 22, 2013.
As mentioned above, we understand from articles published in local press and other sources that there is currently no cap on rental increases at the end of a lease term. To be able to offer affordable housing in the Abu Dhabi market, it may be necessary to have rent controls in residential leases in order to protect individuals and families. However, in commercial leases, such a rent cap may prove problematic.
By way of example, it is common for the owners of shopping malls to include in their leases both a basic nominal rent and a turnover rent, in which the retailer pays a certain percentage of their gross revenue from that particular unit to the landlord and allows both parties to share in the risks and rewards of the mall. Therefore, from one year to the next, it is possible for the overall rent to increase considerably if business grows a lot. If a cap were reintroduced — in the same way as the previous cap — there is a risk that such agreements could be interpreted as being in breach of the law.
Interim rents being awarded pending completion of rent review
As commercial leases become more sophisticated in Abu Dhabi, it is becoming common for parties to agree to conduct a rent review to open market rent at the end of a certain period — e.g. three years — or at the end of the term. This involves the landlord and tenant attempting to agree an open market rent, failing which, the parties appoint an independent surveyor to review comparable premises and determine what the market rent is for a particular unit.
The process of agreeing on the market rent in this manner can take some time and this may mean that the new lease term/year commences without the new rent having been finalised yet. In England and Wales, it is possible to get an interim ruling as to the level of rent that should apply until the market rent is determined and agreed. Following this estimation, the interim rent paid is adjusted accordingly — i.e. the tenant either pays the additional amount as per the market rent determination or is credited with a certain amount if the interim rent was higher than the market rent determination. It may be helpful if the same is provided in Abu Dhabi.
The advantage of determining an interim rent is that — in a rising market — it allows the landlord to get some uplift in rent prior to the market rent being determined.
Security of tenure / termination of a lease
For the reasons mentioned above, security of tenure is of great importance in residential leases. It is also important to some commercial tenants who invest capital to build a business in a location or wish to avoid incurring unnecessary costs.
In all cases, landlords should be entitled to prevent a renewal where the tenant is in breach of the lease. A regime whereby in commercial leases, the landlord and tenant can choose to opt out of the security of tenure provisions upon mutual consent may be beneficial. This gives greater flexibility to landlords and commercial tenants when negotiating the terms of their lease.
In commercial leases, some parties agree that the landlord and tenant will have the right to break or terminate a lease part way through a term on the occurrence of some event. At present, there is some uncertainty as to whether a landlord in Abu Dhabi can operate such a break clause unless they demonstrate grounds for termination and obtain an order at the Rental Disputes Resolution Committee.
The grounds for termination currently set out in Article 23 of the AD L&T Law are clear, but could be reviewed in the light of how they apply for residential and commercial leases. It may be appropriate to add some further grounds for termination in the case of a commercial lease but remove some of the grounds for termination in the case of a residential lease.
The current definition in the AD L&T Law of necessary repairs (being the land-lord’s obligation) and rental repairs (being the tenant’s obligation) is not particularly clear. Nor is it clear whether it is lawful for the parties to agree to an alternative division of responsibilities within the lease.
Currently, if a landlord fails to carry out necessary repairs, a tenant (under Article 8 of the AD L&T Law) must obtain a decision from the Rental Disputes Resolution Committee, authorising it to carry out the works and deduct the cost from the rent. This is time-consuming and costly for a tenant. n
- Additional inputs from Laura Hecht, Senior Legal Consultant at DLA Piper
Source: Helen Hangari, Special to Property Weekly
Helen Hangari is a Senior Legal Consultant at DLA Piper. She is an expert in commercial real estate matters and has particular experience in the hotel sector, including hotel management arrangements, mixed-use development projects, sales and acquisitions and landlord and tenant matters.