The new DIFC leasing law

A new Dubai International Financial Centre (“DIFC”) leasing law was recently announced - DIFC Law No.1 of 2020 (the “Leasing Law”), which came into force on 14 January 2020. It applies to leases within the jurisdiction of the DIFC, which means that landlords and tenants operating in the DIFC need to understand what it means for them.

Until now, the only relevant legislation affecting leases within the DIFC has been DIFC Law No.10 of 2018 (the “Real Property Law”). This law was very administrative in nature and did not go into any great detail as to the rights and responsibilities of both landlords and tenants within the DIFC. The introduction of the Leasing Law builds on the Real Property Law and includes some more detailed leasing requirements, as well as general obligations on landlord and tenants. However, it is important to note that the Leasing Law does not apply to serviced apartments, hotel leases or financing leases amounting to a mortgage.

A party that contravenes the Leasing Law is liable to any penalty specified under the leasing regulations (which may be issued by the DIFCA from time to time) or directives (issued by the Registrar).

Key Points

The main provisions that landlords and tenants owning and occupying premises in the DIFC should be aware of, include:

• Invalid terms - parties cannot contract out of the Leasing Law, otherwise it invalidates the particular clause which is contrary to the Leasing Law.
• Tenants – specific obligations include paying rent on the dates specified in the lease, using premises for the permitted use, not causing nuisance or interference, paying certain taxes and fees in respect of the premises.
• Landlords – specific obligations include ensuring that the tenant has quiet enjoyment of the premises and prohibiting the landlord from disconnecting any utility services to the premises.
• Termination – the termination provisions apply to all leases in the DIFC (whether commercial, residential or retail), irrespective of whether they were entered into prior to the commencement of the Leasing Law. This includes circumstances under which leases may be terminated by: (i) agreement, (ii) with or without a court order, or (iii) surrendered (to apply retrospectively to all leases in the DIFC).
• Sale of assets – procedures must be followed by the landlord in respect of goods left at the premises by the tenant on expiry or termination of the lease.
• Registration fees - lease registration fees are payable by the landlord unless otherwise agreed in the lease.

Residential only provisions

There are aspects of the Leasing Law that are applicable only to residential leases (for example, including residential units in Burj Daman, Index Tower, Central Park Towers, Limestone House and Liberty House), such as:

• Security deposit scheme – payment of a security deposit is not mandatory. However, the following provisions apply:
  • security deposits must not exceed more than 10% of the annual rent;
  • except as otherwise expressly agreed in a lease, a landlord may not use a security deposit towards payment of rent during the term of a residential lease;
  • disputes in respect of security deposits must be referred to the DIFC Court or any specific tribunal that may be established;
  • the scheme will be administered by the DIFC Registrar of Real Property (including top-ups, release and refund of security deposits), who shall hold the deposit pursuant to the Leasing Law in an escrow account;
  • the DIFC does not seem to be applying any fees to register security deposits, although the DIFC Registrar may retain the interest accruing to fund the administration of the scheme.
• Condition report – when a tenant is required to pay a security deposit, the landlord may (but not must) provide two signed copies of a condition report specifying the state of repair and general condition of the premises. The tenant must then sign the condition report within 20 days after taking occupation of the premises, either agreeing or disagreeing with the condition report. The report may then assist with any disputes when yielding up the premises.
• Maintenance – the landlord is under an obligation to maintain premises in good repair during the term and the tenant is obliged to avoid damaging the premises and keeping the premises reasonably clean.
• Rent increases - landlords must give tenants at least 90 days’ notice of a proposed rent increase prior to expiry of the lease. Any increase in contravention of the Leasing Law will be invalid.
• Landlord assignment - if the landlord transfers its interest in the premises, then it shall not affect the tenant’s right to continued occupation of premises.

Retail only provisions

This section of the Leasing Law only has one main provision, which states that key-money payments or any consideration for the goodwill of a business are prohibited.

Commercial Leases

Other than general administrative provisions governing termination of leases and service of notices, the Leasing Law is largely silent with regards to commercial leases (retail leases aside) within the DIFC. This means that the parties to a commercial lease remain open to agree the terms of their lease. This provides continuing flexibility to both landlords and tenants to achieve a favourable commercial position depending upon the financial and commercial strengths of the individual parties.

Conclusion

The Leasing Law aims to cement the DIFC leasing framework and evoke added protections for both landlords and tenants, which is increasingly more important as the DIFC is continuing to attract international investment. The Leasing Law is largely aimed at residential tenancies, in order to address the common areas of dispute among leases generally across Dubai, including repair and maintenance, schedules of conditions and security deposits. Consequently, the Leasing Law goes some way to control these issues in the DIFC’s residential leasing market; otherwise there is flexibility for parties to commercial leases to choose their own leasing terms (except termination provisions).

If you would like to speak to one of our property lawyers in respect of any DIFC property matter, please do not hesitate to contact a member of our team using the contact details provided.