January 23, 2020

DIFC issues a new leasing law

The wait for the DIFC leasing law is finally over, as the DIFC issued its first all-encompassing DIFC Leasing Law No. 1 of 2020 (Leasing Law) on 7 January 2020. This article explores what areas the new law covers, what it says, who it protects and possible implications.

The new law, which came into effect on 14 January 2020, bridges the regulatory gap created following the repeal of DIFC Real Property Law No. 4 of 2007 which contained general leasing provisions under Part 8, and the implementation of DIFC Real Property Law No. 10 of 2018, which contains tapered leasing provisions. The Leasing Law, together with the leasing provisions set out in DIFC Real Property Law No. 10 of 2018, as well as the new Leasing Regulations 2020 (Regulations), provides a comprehensive legal framework regulating landlord and tenant relationships within the jurisdiction of the DIFC.

Remit of the law

The Leasing Law applies to all leases within the jurisdiction of the DIFC, save for serviced apartments, or hotel inventory leased as part of a hotel, and leases entered into in accordance with the terms of a mortgage. Parties are not permitted to contract out of the law.  It applies to leases which were entered into prior to the date of commencement of the law, except where provisions of the law require compliance with time and notice periods not capable of being applied to leases entered into prior to commencement of the law. The security deposit requirements for residential leases also do not apply retrospectively and will only apply on new leases or renewal of leases entered into prior to the law coming into effect.

The Leasing Law is split into four key areas: general requirements and termination provisions which apply to all leases, provisions specific to residential leases, and provisions specific to retail leases.

General provisions and termination provisions

The following provisions apply to all types of leases:

Lease particulars: the Leasing Law sets out the minimum lease particulars required.  These include; term, rent, payment dates (although see below where lease is silent on rent payment dates), permitted use, description of property and identity of the parties.  

Rent and utilities: where the lease is silent on payment dates, the Leasing Law provides for rent to be paid quarterly.  Tenants are also responsible for payment of any fees and taxes payable in respect of the tenant's occupation (subject to some exceptions under the law).  Furthermore, the law prohibits disconnection of utilities by the landlord.

Property transfer: Any legal transfer of the property will not affect the tenant's continued occupation in accordance with the terms of the lease. 

Termination: termination of the lease may take place in the following instances:

  • By the parties' mutual written agreement;
  • By the tenant obtaining a court order in instances where the landlord has failed to comply with material obligations under the lease and has not remedied the same within 30 days following notice, or the premises are unfit for purpose or unsafe for occupation;
  • By the landlord obtaining a court order in instances where a residential tenant has (i) failed to pay rent on the payment date and subsequent remedy period (ii) failed to comply with any other material obligations under the lease and has not remedied the same within 30 days following notice (iii) abandoned the premises for a period exceeding 3 months (iv) used the premises for an illegal purpose or (v) is declared insolvent;

  • Without a court order being required where (i) termination is permitted pursuant to the Real Property Law (ii) real property rights of the parties have become vested in one person, (iii) termination has been exercised in accordance with the lease (iv) the tenant of a residential premises has died (or all the shareholders if a corporate tenant) (v) the tenant has abandoned the property for a period exceeding one month (not applicable to residential leases) and (vi) the premises have been destroyed.

Provisions applicable to retail leases

Security deposit

A key change for residential leases the introduction of a payment security deposit system.  Where landlords require tenants to pay a security deposit to safeguard's the tenant's obligations under the lease, the following applies:

  • Whilst payment of a security deposit is not mandatory, if the landlord requires such payment, the same is subject to a cap of 10% of the annual rent;
  • The Leasing Law obliges the landlord to hold the deposit on trust for the tenant and pay the same to the DIFC registrar within 30 days of receiving the deposit (including any top up paid on renewal), who will in turn deposit the amount paid in an escrow account;
  • The security deposit may be used to compensate the landlord on termination of the lease for non-payment of rent, damage (excluding fair wear and tear) and damage for breach of contract, and may be used towards non-payment of rent during the term where expressly permitted in the lease (otherwise prohibited);
  • On expiry or early termination of the lease, where the parties are in agreement, they are required to sign a release form stating the amounts to be refunded/retained.Absence any agreement, either party can let the Registrar know that a dispute exists and the same will need to be resolved by the court by either party submitting a claim.The Registrar will not pay any amount unless the parties agree or the court orders the same, and where the security deposit is unclaimed for six years following expiry or early termination, it shall be forfeited to the DIFC Authority.

Condition report: the Leasing Law does not oblige the parties to prepare a condition report of the property; however where one is provided, the tenant is required to return a signed copy within 20 days of taking occupation of the property (either agreeing or disagreeing with the same).  Failure to return the report will render it evidence of condition (save where the court finds the tenant's reason for not complying valid).

Rent increase: unless specified in the lease, the landlord is not permitted to increase the rent during the term.  Where the landlord wishes to increase the rent at the end of the lease term, the landlord is required to give the tenant 90 days prior written notice of such proposed increase.

Repair and damage: the tenant is required under the Leasing law to take reasonable care to avoid damaging the property and the common areas and keep the same clean.  Where the property is damaged, the tenant is obliged to notify the landlord of such damage.  The Leasing Law also sets out the parties' rights and liabilities to make good any damage and the process for managing urgent repairs.

Provisions applicable to retail leases

The Leasing Law prohibits the landlord from requesting or accepting any consideration for the goodwill of any business carried on at the premises.  This does not include recovering reasonable costs incurred in investigating a potential assignee or sub-tenant, claiming goodwill following a sale of a business operated by the landlord from the property prior to its sale, receiving the rent in advance, securing a security deposit, seeking payment for fixtures and fittings sold by the landlord to the tenant, payment for the grant of a franchise and inserting performance clauses.  

The new Leasing Law offers various new protections to both landlords and tenants by providing clarity around termination of leases, and the introduction of new concepts to protect residential tenants. It follows a number of recent legislative changes introduced in the DIFC as part of its commitment to maintain a robust regulatory framework that aligns with international standards.