Dubai: Tenants in Dubai who want to terminate their lease contracts because of reduced income after the COVID-19 outbreak will soon know whether they can do so without a penalty imposed.
They will be hoping for the same clarity on penalty that is now there on leases where the tenant has lost his/her job.
The Rental Disputes Settlement Centre (RDC) is hearing cases brought by tenants occupying commercial properties, and who find they no longer have the business to sustain paying those rents. They are seeking the RDC’s intervention to help them exit the leases and not have to pay landlords penalties for early termination. These tenants had brought their issue to the RDC after COVID-19 struck and left their businesses with a negative cashflow.
“If RDC delivers a verdict that tenants and landlords can both agree to, the same principles can then apply to residential leases,” said a source. “Penalties are going to be a huge factor on lease terminations, and will be critical in determining landlord-tenant relationships.”
What the law says on lease terminations where the tenant loses a job
The RDC recently came out with a landmark verdict that clearly stated no landlord can impose any penalty on a tenant wishing to exit a contract because of a sudden loss of job.
We have started seeing more cases filed before RDC, especially seeking the termination of the lease as a result of the impact of COVID-19
According to the RDC, a lease contract can be terminated in two cases: either by applying the principle of "force majeure" or the theory of "exceptional circumstances". And that the termination of employment meets the criteria for "exceptional circumstances".
At a time when job losses have shot up after businesses and sectors got hit by the COVID-19 driven downturn, this was one respite that affected tenants could fall back on. And the RDC has emerged as the single most important entity in deciding the fates of tenants and landlords alike.
“We have started seeing more cases filed before RDC, especially seeking the termination of the lease as a result of the impact of COVID-19,” said Wael El Tounsy, Head of the Real Estate Dispute Resolution practice at Baker McKenzie Habib Al Mulla. “On residential leases, there are cases seeking termination as a result of the tenant’s job being terminated. And on commercial leases, as a result of the mandatory closure during the period of complete lockdown.”
Can ‘exceptional circumstances’ apply leases terminated because of salary cuts?
Now, this is what tenants – occupying commercial and residential premises - in Dubai are hoping to find out.
All things being equal, “The RDC has the authority to apply the same principle on residential leases as well,” said Marina Baher Gaballah, Associate, Dispute Resolution at Baker McKenzie Habib Al Mulla.
“In the judgments ordering the reduction of rent, the RDC relied on the theory of exceptional circumstances, which allows the court to reduce the obligation to a reasonable extent. This is the general rule and it is not restricted to commercial leases/agreements.
“The RDC would offer an option – waiver of penalty or rent reduction - in the dispute resolution phase before referring the matter to be registered as a case. The landlord must approve this reduction in the rent to be applicable.
“If the landlord does not approve it, then the claim will be registered before the RDC as a dispute and subject to the RDC's judgment.”
The penalty can be negotiated depending on the tenant’s situation
What are the penalties for early termination?
Lease terminations carry, as a rule of thumb, a penalty equivalent to two months’ rent. Now, in those rental agreements that do not specifically define the penalty, the landlord could seek compensation equal to the number of months left in the lease agreement.
The only time penalties can be waived is for a “loss of job”, according to John Stevens, Managing Director at Asteco, the property services company. “The penalty can be negotiated depending on the tenant’s situation - but it is in the best interests of the landlord to get the property returned so that he can re-rent it rather than be involved in a protracted legal case to secure the rights to the unit through the courts if the tenant absconds.
“Terminations increased in May and June, but some of this could be put down to the lockdown and those who would have terminated already. Those in “shared” accommodation were the most affected in the short-term. In the medium term, the state of the economy will be the major factor.”
How easy is it to approach the Rent Disputes Settlement Centre?
Easy enough. The RDC has set up sub-committees to fast-track rental disputes. And based on market feedback, the processing of cases is happening quite fast.
“A group involving all the parties in the dispute was set up on WhatsApp – and then the claims and counter claims were heard,” said one tenant who had sought rent reduction and deferment from the landlord for a commercial property. “In four days, the verdict was delivered.”
In RDC cases, the losing party has to pay 3.5 per cent of the rental value as court fees.
According to El Tounsy, “In the usual practice, the tenant would usually seek the RDC to waive these penalties. It is left to the discretion of the RDC to assess the damages of the landlord and to the landlord to substantiate the damages incurred.”
Will negotiating directly with landlords work?
What’s worse, I was told that he will call the police should I miss paying rent
Many Dubai tenants are still trying their hand trying to get their landlords to listen to their situation and offer some relief. But, as is to be expected, it has come with mixed results.
Some were given an option to pay monthly or every other month but the rent remained the same and only the payment was made flexible. The landlords, on the other hand, reasoned that they too were under pressure to fulfill their financial obligations.
A long-time Dubai resident, Rex Venard Bacarra, said: “I presented my case and got a reply that the landlord is also under huge pressure from financial institutions to keep up with his repayments. And since his business is privately-owned, they are not beneficiaries of government stimulus and that they have to support themselves while still continuing with the day-to-day running of their buildings, including paying staff salaries.”
“But the landlord offered me instead a flexible payment plan – to pay every two months instead of quarterly. But the amount remained the same.”
Bacarra, who lives in an apartment near Financial Centre Metro Station, said he could not opt for an early termination of his lease and look for cheaper accommodation, as it would cost him more because of the penalty.
“If things turn out for the worse, I would resort seeking a respite from the Rental Dispute Centre,” he added.
Danish Sheikh, who lives in Bur Dubai, is also seeking to get a rent waiver.
“I have been asking my landlord since April for a reduction, but was only promised a 10 per cent discount which did not materialize,” said Sheikh. “What’s worse, I was told that he will call the police should I miss paying rent.”
Some landlords are willing…
According to Helen Chen, co-founder of the Nomad real estate services portal, there are landlords who are more than willing to hear out tenants’ requests for adjustments on lease terms.
“We are seeing landlords being accommodating with regards to early terminations or rent reductions,” said Chen. “We would encourage tenants to reach out and have that discussion with their landlord if they are in this situation.
“Depending on the circumstance, there have been compromises on termination penalties and notice periods as well as agreements to delay cashing rent cheques. And in some extreme cases - rent waivers.”
Don’t let the cheques bounce
Landlord-owned businesses and property management companies have been sending SMS and emails informing tenants they need to check their bank accounts and ensure there are funds to clear the rental cheque.
And if the cheques bounce, “The bank fee is imposed on the account that issued the cheque, which is the tenant's account,” said Gaballah. “The landlords usually mention in the lease agreement a penalty to be paid by the tenant if the cheque bounces.
“The RDC has the discretion to apply this fee or not subject to damages to the landlord.
“The RDC have imposed penalties especially on tenants who stopped paying their rent even before the impact of COVID-19. In the normal course of business, the landlord's usual claim includes the overdue rent and the penalty for the delay.
“The judgments of the RDC usually terminates the lease and relieves the tenant from continuing in a lease that has become a burden.
“The judges can order the tenant to pay a penalty to the landlord – but this is subject to the landlord's ability to substantiate the damages incurred. And the RDC's discretionary power to assess these damages.”
So, for any tenant in Dubai hit hard by the current economic and personal circumstances, the best option for a rent negotiation or penalty waiver is to approach the RDC.
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