Banks Legal on COVID-19 and leases in the UAE

Banks Legal senior associate, Anshul Kalra, looks at some of the key issues facing tenants and landlords in the current economic and legal environment

Banks Legal senior associate Anshul Kalra (pictured)
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Banks Legal senior associate Anshul Kalra (pictured)

As the economic impact of the COVID-19 pandemic permeates economies across the region, we have seen an increase in enquiries from clients as to how this affects obligations and rights for both landlords and tenants in relation to leasing arrangements.

With various retail stores, outlets and commercial stores being closed during the lockdown period - imposed by the UAE Government in line with the National Disinfection Program – many tenants have been left wondering if their landlords would provide them with any form of concession during these extraordinary times.

With tight liquidity and general economic downturn, the feedback we are receiving is that landlords are being accommodating wherever possible, to an extent, but many are enforcing their lease terms and putting pressure on tenants to pay up or else face eviction.

Before taking any action, it is always recommended for tenants to check the terms of their lease as well as any insurance policies they may have. Some landlords in free zones are currently offering rent waivers, reduction and deferred payments to tenants who are severely impacted by the COVID-19 economic crisis.

Additionally, there are several other free zones in the UAE which are also offering either rent reductions or deferred payment schedules for commercial leases.

In the absence of any uniform policies for landlords of residential leases, the Dubai Courts are offering respite to individuals who are affected by the downturn, or who have otherwise lost their jobs.

In the unfortunate circumstance where a tenant is forced to default on their payment obligations either due to the losses caused by business closures, or loss of a job, the local courts are allowing those tenants to argue the principles of ‘Force Majeure’.

It is worth noting that both Dubai and Abu Dhabi Courts are allowing affected parties to rely on these principles as the courts appreciate that these are unprecedented times and accordingly relief should be offered in genuine cases.

Having said the above, the local courts are not offering a free pass to anyone who is looking to default on their payment obligations and use COVID-19 as an excuse to justify such default.

The courts expect affected parties to produce corroborating evidence such as a copy of termination letter or audited books, prior to arguing force majeure and asserting relief and termination of tenancy without penalty.

In any event the local courts generally exercise broad discretionary power and recourse is afforded to parties on a case by case basis.

What actions can a landlord take in the event a tenant has defaulted on their payment obligations?

First off, the starting point should be reviewing the terms of a tenancy agreement and considering available recourse under the tenancy.

It is common for tenancy contracts to contain eviction terms and penalty terms, which generally trigger when a tenant fails to pay rent.

In normal circumstances, it would be advisable to issue a letter of demand to a defaulting tenant and requesting to pay within a time period and if the default continues, taking such tenant to court for recovery and an eviction order.

But given that almost every business is affected by COVID-19, we would advise those affected landlords to enter into good faith negotiations with tenants with a view to finding grounds for settlement.

A financial settlement is a better option than going through the courts process and taking a risk for a tenant to argue that it is indeed affected by circumstances beyond its control and impossible to perform under the lease.

As such, landlords and tenants might consider agreeing to additional payment/or compensation paid to the landlord once the market returns to some form of normality.

Aside from this, to recoup their losses and securing future payment, landlords may consider taking equity in tenant’s business, or creating a charge on tenant’s assets.

It goes without saying that these options should only be exercised after carrying adequate due diligence on tenant’s financial position, corporate structure and assets.

In any event it will be to the benefit of both parties for tenant’s business to withstand the continued difficulties COVID-19 has caused and will continue to cause in the short term.

Landlords of residential leases are also encouraged to enter into negotiations with the defaulting tenants and in most cases a sensible option may be to allow concessions in the short term with a view to recovering losses once the situation normalises.

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