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Do landlords in the UAE have to decrease or postpone rental payments due to COVID-19? And can tenants terminate tenancy contracts immediately without paying penalty?

These are the questions that will be asked a lot more of in the coming days as the COVID-19 situation impacts on the economy and, by extension, its residents.

Article 249 of the Civil Code provides that if exceptional circumstances of a public nature that could not have been foreseen occur — i.e. a force majeure — as a result of which performance of a contract becomes oppressive for a party, but not necessarily impossible, the judge has discretion to reduce the obligation to a reasonable level.

The tenant must go to court if he seeks to obtain relief under Article 249.

If your income has been reduced due to COVID-19 and the landlord does not want to act with fair solidarity, then you can ask the court to find the fair level of rental relief (decrease or postponement) and let it be legally ordered to the landlord.

Other provisos kick in as well

Article 273 (1) stipulates that if a force majeure event makes a contract impossible, all contractual obligations will cease, and the contract will be automatically terminated.

Article 273 (2) stipulates that in cases where the force majeure event makes only part of the obligations impossible to perform, only that part of the contract will be cancelled. The remainder will continue in effect.

It, however, also permits the tenant to cancel the entire contract on giving notice to the landlord.

If a contract is cancelled under Article 273 (1) or 273 (2), the landlord and tenant are to be restored to the position they were in before they entered into the contract. If that is not possible, damages may be awarded by way of compensation to a party that has suffered a loss as a result of the inability to unwind the contract.

The Civil Code does not exactly specify any definition of what “force majeure” is. The court will decide whether the COVID-19 classifies as one in the context of the specific contract.

In general there are two factors the court looks at while making its evaluation — is there a contract in place and whether the extenuating circumstances made it impossible to fulfil the contract.

What’s pertinent

If your income as a tenant dropped to a level that makes it impossible to pay the rent, you may terminate the contract without having have to pay the penalty on giving a notice to the landlord. And you should pay only pro-rata until the day you vacated the property.

In case the landlord disagrees then he may raise the matter to the court, which will decide whether the tenant’s situation qualifies as force majeure. If landlords do apply penalties for terminating contract regardless of being given the notice by tenant referring to the force majeure, the tenant can forward the matter to the court, which will evaluate the situation and decide whether force majeure is applicable or not.

The following rule of thumb can be used: in case the income of the tenant dropped to a level where he is unable to pay the rent due to COVID-19, this will justify the impossibility condition stipulated by the law. And therefore, the tenancy contract can be terminated immediately without any applicable penalty.

1. Do landlords have to decrease or postpone rents due to COVID-19?

No. But upon tenant’s request (whose income is negatively affected by COVID-19) to the court, the rent relief will be ordered by the court under article 249.

2. Can tenants terminate tenancy contracts without paying penalty?

Yes, in case tenants have been impacted to the level that makes it impossible to pay for rent. For instance, if tenant’s income is smaller than costs in a given month and he cannot pay the rent, the rental contract can be terminated without further obligation.

3. What should landlords do?

Negotiate fair rent relief with tenants if they ask for it. If the tenants are affected, they can walk away from the contract on the spot and leave you without rental income or they can ask the court to provide a fair relief.

In both cases the tenants will obtain a relief which you will not control the financial impact of. To control the conditions of the relief, the best approach is to negotiate and come to fair conditions. For example, a fair relief may constitute an agreement that for the months through which the income of the tenant is affected the rent will be decreased proportionally.

For instance, if a commercial tenant’s revenues decreased by 50 per cent year-on-year due to COVID-19, agree to a 50 per cent rent reduction for three months and visit the agreement after three months or sooner depending on the situation’s development.

Under such an approach you will not risk losing 100 per cent of your rental income for several months and can agree on terms which are in your control catering to your cash needs

4. What should tenants do?

Negotiate with landlords a fair rental relief if your income dropped temporarily, or terminate your tenancy contract in case the loss of income is permanent due to the pandemic. Present the landlord a fair proposal supported by documents you are willing to share year-on-year comparison of revenues to showcase the percentage drop in sales, seeking a proportional relief on rent from the landlords.

For instance, three months with option to revisit the agreement if the situation gets better or takes longer by both parties. In case you do not reach an agreement, approach the court to obtain the relief from the judge or you can terminate the contract without paying any penalty to the landlord.

Ground reality

If tenants cannot pay their rental obligation due to COVID-19 they can terminate their tenancy contracts without having have to pay a penalty or they can ask for a fair relief from the obligations of the tenancy contract the court.

It is better for landlords to negotiate a fair relief with tenants in order to avoid loss of rent for multiple months or to obtain a court order for relief landlords will not have a control over and which may not fit their cash flow needs.

— Tomas Dolezal is CEO of Elite Royal Apartments.