Islamic Finance: How to make use of usufruct

Last week, after having learned different types of asset ownerships allowed under Sharia, we were in the middle of examining how a usufruct can be traded.

To recap, a lessee can sub-lease the usufruct if he has been permitted to do so by the lessor by way of a provision in the lease agreement. In that case he would be called a sub-lessor. A lessor or a sub-lessor cannot sign several lease agreements with different lessees where the lease commences concurrently and for the same or different periods. However, it would be in order for the lessor to do so provided these lease agreements take effect successively.

In the case of sub-leasing, Sharia allows a lessee to form a consortium of co-lessees by assigning them shares in the usufruct in proportion to their contribution to the lease rent before the usufruct has been sub-leased at a higher rent. The co-lessees then earn their return pro-rata from the sub-lease rental.

Time-sharing concept

The time-sharing concept found at various holiday resorts is permissible under Sharia. In this situation, a lease contract is signed with several lessees without specifying a particular period of time for a particular lessee. Each lessee is then allowed to enjoy the usufruct on a first-come, first-served basis.

There is a misconception in some quarters that an Islamic leasing should be restricted to Muslims only. This misconception must be alleviated on the basis that the Prophet Mohammed (PBUH), being a trader himself, had successfully conducted various business transactions with Jews and Christians of Arabia. The important aspect to be taken care of while allowing usufruct of an asset is that it should not be utilised for any Sharia-prohibited purposes.

Relevant question

A question, relevant from the regional perspective, may arise in some readers' minds as to whether the leasing of residential units to non-Muslims is allowed under Sharia since they may consume liquor and pork within the premises.

The reply provided by the scholars is that such leasing falls within the Sharia parameters since the purpose of taking the property on lease is to reside and not to sell liquor or pork. Moreover, the lessee's right includes enjoyment of the usufruct and as such the lessor does not have the right to intervene in this respect.

The scholars further state that the lessee is required to use the residential property in a manner that conforms to the relevant common practices which include, inter alia, avoid creating nuisance for the neighbours and not damaging the property by misusing it.

If the usufruct is lost by the lessee due to his own negligence whereby the leased asset is impaired wholly or partially, the lessee would be obliged to repair the property and restore the usufruct at its own cost. The lease rent would continue to be payable by the lessee during the repair period.

Maintenance

Scholars are unanimous that if the usufruct is lost due to impairment of the asset, partially or wholly, but without lessee's negligence, it would be the responsibility of lessor to repair the asset so as to restore the usufruct for lessee or provide him with alternate same quality asset. The lease rent will cease to exist during the time of repair or until such time that the lessee is provided with an alternate asset.

In addition, the lessor cannot shift his responsibility for any structural repairs and major maintenance — necessary to keep the asset in good working order — to the lessee's shoulders. However, Sharia permits the lessor to delegate such services to the lessee by appointing him the lessor's agent. This would require a servicing agency agreement which would be governed by the standard Sharia rules for agencyship.

As regards operational maintenance to an asset, this would be the responsibility of the lessee in his capacity as lessee. Such maintenance may include taking care of the landscape, replacement of fused electric bulbs, etc.

(To be continued)

- The writer is the vice-president of Sharia structuring, documentation and product development at Dubai Islamic Bank