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COVID-19 UAE: The impact on commercial lease arrangements in Dubai

  • Market Insight 28 April 2020 28 April 2020
  • Middle East

  • Coronavirus

The current measures implemented to curtail the COVID-19 virus have plunged many sectors into uncharted waters, and the commercial real estate sector is no exception. The market has been impacted by the closure of shops, bars, restaurants and other public places, as well as the wider impact on commercial property following the 'work from home' initiatives and curfews which have been in effect.

COVID-19 UAE: The impact on commercial lease arrangements in Dubai

According to Murray Strang, Director and Head of Savills' Dubai Office, "each sector faces differing specific adversity; retailers are clearly suffering from a lack of traditional store footfall and an almost complete swing towards e-commerce and remote sales, corporate offices are relying heavily on connectivity and tech use with most staff operating from home, and the logistics sector is unsurprisingly seeing increased demand for courier services and quick-turnaround delivery".

The result is that landlords are facing frustrations, requests and demands by tenants across all sectors. This article takes a look at some of the key legal considerations with respect to amending commercial lease arrangements, noting potential consequences for both landlords and tenants, and some of the policies we have seen emerging so far.

Can the terms of a lease be unilaterally amended by either party?

From a legal perspective, the Dubai Landlord and Tenant Law[1] does not incorporate provisions which permit either party to unilaterally amend the terms of its lease.  Furthermore, Article 267 of the UAE Civil Code[2], which deals, more generally with termination of contracts, does not allow for a valid contract to be varied, unless by mutual consent or a court order.  Therefore, unless such amendment has already been addressed under the lease, the lease can only be amended with the mutual agreement of both the landlord and the tenant.

Will a tenant breach its "keep open" requirement under a retail lease due to the current closure mandated by the authorities?

Given that the direction has been imposed by the Dubai government, there is unlikely to be any action a landlord could take for breach in this regard.  It is also likely that many retail leases will contain a general provision requiring compliance with all statutory and authority requirements which would arguably override such obligation.

Can force majeure apply to excuse a tenant from paying rent under the contract?

A lease may contain a force majeure clause which permits a party to suspend or terminate the performance of its contractual obligations when certain circumstances beyond its reasonable control arise, often making the performance of such obligations impossible, illegal or in some instances commercially impracticable. Where a contractual force majeure clause exists in the lease, the parties will need to look at the precise wording of the clause and the definition to understand whether the current COVID-19 impact will fall within such contractual definition and, in particular, whether the scope of such provision would operate to excuse the non-payment of rent (which is often excluded from a contractual force majeure provision).   

In the absence of a contractual force majeure provision, the parties may be faced with considering any statutory provisions (i.e. outside the lease contract) that can be invoked.  The UAE Civil Code sets out various articles which deal with force majeure and unforeseen events, and will supplement any contractual provisions that may have been agreed by the parties. These include Articles 273, 249 and 782.

Article 273 of the Civil Code allows for cancellation of the contract upon the occurrence of a force majeure event. Whilst there is no definition as to what constitutes 'force majeure' under the law, it is generally accepted in the UAE to be limited to events that are unforeseeable and unavoidable, notably natural disasters such as earthquakes and floods, and possibly also wars and civil unrest, depending on the circumstances.

Article 249 of the Civil Code allows a party to a contract to argue oppressive performance which, if successful, grants the courts the discretion to "re-balance" the contractual obligations between the parties.  In order to successfully argue oppressive performance, tenants would need to demonstrate that the current events were unforeseen, fall outside of their control and the economics of the current situation are oppressive to the extent that the contract should be re-opened. Generally we see the courts taking a cautious approach to intervening in a contract in this way.

Article 782 of the Civil Code provides that in circumstances where it becomes impossible for a tenant to have full or partial enjoyment of the leased property due to an act of the authorities, the lease will be cancelled and the obligation to pay the rent would cease.  Generally, the consequence of successfully arguing Article 782, would be cancellation of the contract which in turn results in any payment obligations ceasing, not a temporary suspension of rent.  In order to successfully argue this provision, the tenant would be required to prove that it is impossible to enjoy the premises.   

What actions can commercial tenants take in instances where they are facing financial difficulties in paying the rent?

A tenant should check the terms of its lease, as well as any relevant insurance policies they have and open a dialogue with the landlord to discuss their circumstances.

Some landlords have already announced support to tenants by way of deferred rent payments, payment plans and rent waivers. The DIFC announced on 16th April that it will be providing a three month rent free period for its retail tenants, with previous reports of the launch of a six month deferred rent scheme for tenants of commercial DIFC-owned assets. Dubai Silicon Oasis is offering rent waivers to retail tenants within DSOA properties. The Dubai Free Zones Council has announced a general rent deferral scheme of up to six months for companies operating in Dubai free zones.

In a move to encourage business activity, the Government of Dubai announced on 24 April partial re-opening of retail trade (shopping malls, high street shops, souqs and wholesale), offices and other sectors / businesses, subject to compliance with certain measures, restrictions and protocols.  Businesses will need to ensure they have reviewed the new measures and have put in place the necessary requirements in order to satisfy and comply with the requirements.

What action can landlords take if tenants are not able to pay rent due to the ongoing business interruption?

The starting point should always be to check the contractual terms to ascertain what provisions have been agreed in this regard and understand the rights of both parties.  Ideally, each party should seek to open a dialogue with the other to try and resolve the matter amicably.  Where this proves unsuccessful, the landlord may pursue a claim against the tenant for unpaid rent through the Dubai Rental Disputes Settlement Centre.  A landlord may also seek eviction under Article 25 of the Dubai Landlord and Tenant Law[3] which permits eviction of the tenant where the tenant fails to pay the rent within 30 days of notice being served. We are, however, yet to see how the Dubai courts will view the current circumstances and whether reliefs will be granted.

Going Forward

Strang notes that "within Dubai’s commercial real estate sectors, we are seeing continuous adaptation to COVID-19 related operational challenges and workplace use; initially from tenants keen to engage with landlords to manage short-term rental cost commitments, and now increasingly from landlord’s seeking to proactively collaborate with tenants to identify solutions in the best interests of both parties".

Over the coming months we are likely to see new trends being established in relation to lease obligations, as well as the fuller economic impact of the closures on the commercial real estate sector. It is important for both landlords and tenants to keep an active communication in place during this time and to be aware of the relevant contractual provisions and wider legal considerations.   

The content contained in this article is subject to change.  Please contact your Clyde & Co contact for the latest position.  
 

[1] LAW NO. 26 OF 2007, AS AMENDED BY LAW NO. 33 OF 2008
[2] FEDERAL LAW NO. 5 OF 1985 (AS AMENDED)
‚Äč[3] LAW NO. 26 OF 2007, AS AMENDED BY LAW NO. 33 OF 2008

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