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The use of kiosks in a retail setting is steadily gaining popularity in the global market, as competing retailers adapt the strategy of using kiosks to expand their customer base and introduce their brand to new markets without costly investment in additional brick-and-mortar space. The good news is that mall owners and operators also recognize the enhanced value that kiosks can bring to the customer experience, as well as the potential for boosting revenue from otherwise vacant space.
Dubai is at the forefront of retail innovation. According to Emaar Properties, The Dubai Mall attracted 75 million visitors last year and has been the most visited retail destination in the world for the past three years. The recent announcement of the state-sponsored mega project Mall of the World, comprising 8 million sq ft of retail space, further demonstrates the importance placed on retail tourism as a core contributor to Dubai’s economy.
In the context of the creation of a 7km stretch of airconditioned retail streets beneath a retractable dome, few may consider the increasing use of retail kiosks as particularly innovative. Conceptually, this could be true, but for those retailers and mall operators used to operating kiosks in common law jurisdictions on the basis of a licence, as opposed to a lease, it will be important to understand the challenges in replicating this model from a legal perspective in the UAE.
Lease or a licence?
The distinction between a lease and a licence is not recognised in the UAE Civil Code (Federal Law No.5 of 1985) and there is no reported case law supporting the distinction. Under the law of England and Wales, the distinguishing feature of a lease, as opposed to a licence, is exclusive possession. Exclusive possession is when a person can exercise the right to exclude the landlord and third parties from the premises.
The substance of the agreement, rather than the form, will be determinative. The distinction is significant as a properly drawn up kiosk licence agreement will not be subject to landlord and tenant law and should provide for greater flexibility as regards relocation within a mall and termination (subject to the agreed contractual terms).
Under Federal Law (Article 742 onwards of the Civil Code), a lease is not an interest in the land and is a personal contract for hire between parties conferring a right of use for a specified period for an ascertained rent. Each emirate has its own real estate laws setting out the basis upon which land and rights deriving from it can be held. This article refers to the Landlord and Tenant Law of Abu Dhabi or Law No.20 of 2006 (as amended) and Dubai’s Law No.26 of 2007 (as amended).
While in most cases common sense and commercial considerations will prevail, landlords in particular should be aware of potential unintended consequences of these arrangements.
What’s the risk?
Where parties seek to use and adapt kiosk or licence agreements framed in other jurisdictions for use in the UAE, these are likely to be interpreted as leases and not licences and enforced as such. This would mean that arrangements would be subject to the applicable emirate’s landlord and tenant law, with disputes to be determined by the appropriate rent committee or court.
A key risk for mall operators to be aware of is the possibility of significant delays in obtaining judgments in the event of disputes (e.g. when kiosk retailers refuse to vacate).
The Landlord and Tenant Law in Dubai and Abu Dhabi does not allow for early termination by landlords other than where the tenant is in breach. Furthermore, both sets of legislation require either party not wishing to renew a lease on expiry of the term to give 90 days or three months notice prior to the date of the lease’s expiry. Failure to do so risks the agreement automatically renewing for another term.
Contractual termination rights will usually be included in the agreement, but these are only enforceable in so far as they comply with local law.
It is typical to see termination rights on short notice periods in kiosk licence agreements, and this is often viewed as fundamental to achieving the desired flexibility. In the UAE, however, the termination of a lease for convenience on short notice periods would not be enforceable without the other party’s agreement.
Such agreement would be at the other parties’ discretion and is often made conditional on satisfaction of certain requirements such as a break fee.
Ultimately, if a retailer refuses to vacate a kiosk area on expiry of the term, a mall operator would need to obtain an order to evict from the appropriate rent committee or court. It is not unusual for such orders to take 12-18 months to acquire, with uncertainty surrounding recovery of costs (including legal fees) and damages.
Finally, Dubai’s Department of Economic Development generally requires applicants to produce a lease of at least one year in order to grant a trading licence. Retailers will need a trade licence in respect of a kiosk. If they do not have a trade licence, they will be trading illegally, which will have consequences for the retailer and possibly for the mall operator.
Simply labelling an agreement a licence over a lease would not assist in circumventing the local landlord and tenant law. A rent committee or court will look to the substance of the agreement rather than the form. Irrespective of using a carefully drafted agreement containing the hallmarks of a licence, there is significant risk the agreement would be ruled as a lease by default in the absence of a distinction between a lease and a licence under UAE law.
To comply with the landlord and tenant law and preserve the lawful right to terminate at the earliest opportunity, an operator could serve a statutory notice to evict through the notary public at the start of the agreement. This is not a customary practice in the UAE and it is unclear how a rent committee or court would interpret the action.
Arguably the most secure form of protection available to a mall operator will be contractual remedies, including penalties and a right to retain a security deposit for a retailer’s failure to vacate at a certain date. Again, enforceability needs careful consideration as the operator will usually only be entitled to recover its actual losses. Commercially, retailers are not usually willing to offer a security deposit or accept penalty provisions as this starts to take away from the cost-effective advantages of kiosks.
Kiosks have the potential to work effectively for retailers and operators in the UAE, but careful consideration of the risks is required. Clear contractual terms and a relationship built on trust will be paramount to retailers and operators in delivering a successful retail kiosk strategy.
Source: Sean Cope, Special to Property Weekly
Legal Consultant at DLA Piper Middle East and is admitted as a solicitor in England and Wales. Sean specialises in commercial real estate matters and has particular experience in the acquisition and disposal of freehold and leasehold property, mixed-use development projects and landlord and tenant matters.
Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.