Rental Relationships – Have they changed due to Covid-19?

We have previously talked about force majeure clauses, discussing how if the performance of an obligation is affected by an unforeseen event, then the party may be relieved of that obligation. This time, we thought it would be useful to look at the biggest unforeseen event of 2020: Covid-19 – and what recourse you have if it affects your rental relationship.

Real estate situation in Dubai due to Covid-19 – Whilst the UAE economy seems to be on the path to recovery, or at least stability, the impact of Covid-19, with the temporary closure of public spaces, along with the shift to home working, has left the retail and commercial real estate sectors in a precarious situation. In this article we discuss rent suspension and if there is any legal scope for renegotiating rental relationships.

Current legislation – The next question then, would be, is there any room for negotiation and do I have any legal remedies if I’m unable to pay my rent? Under Article 267 of the UAE Civil Code, a valid and binding contract, signed by both parties, may not be varied, modified or revoked, unless by (i) mutual consent, (ii) an order of the Court or (iii) an updated law invalidating its predecessor. However, the best policy is always to check the contractual terms of the lease and open a frank and honest dialogue in an effort to maintain a relationship and resolve any issues amicably.

UAE Courts approach – The Rental Disputes Committee (RDC) have traditionally embraced a strict application of the Landlord and Tenant Law but since the outbreak of Covid-19, they have adopted a principle of natural justice and fairness. In June this year the director of the RDC stated that tenants experiencing ‘unexpected external circumstances,’ may be able to request early termination of contracts.’ However, such exceptional circumstances are considered on a case by case basis.

Legal remedies for a tenant? If a lease agreement contains a force majeure clause then a party may, in exceptional circumstances, be permitted to suspend or terminate contractual obligations. This can usually only be implemented where performance is physically or legally impossible. The RDC accepted the force majeure argument in a recent case where a tenant lost his job and was unable to pay his rent. They ruled that upholding the obligations under the lease would cause hardship tantamount to impossibility of performance. This is rare, however, and each case would have to be carefully assessed in light of the lease agreement and the individual facts.

Rent relief negotiations – One question that commercial and residential tenants may be asking is, will my landlord temporary suspend or defer rental payments, as a result of Covid-19 reducing my income or revenue. There is no legislation compelling a landlord to voluntarily terminate the lease, reduce the rent or postpone collection of the rent. That said, we have seen that several of the free zones have offered support packages for businesses in Dubai, agreeing to rent free periods, rent waivers and rent deferrals. This, however, is entirely at the discretion of the free zone in question and there is no legal obligation to do this. Article 249 of the Civil Transactions Law provides another potential recourse for tenants. The law states that if exceptional circumstances of a public nature, which could not have been foreseen, occur, and as a result the performance of the contractual obligation becomes so ‘oppressive’ as to threaten the obligor with a grave loss, a judge may reduce this obligation to a reasonable level. The RDC cited this law when ordering the waiver of rental arrears for a professional sportsman who was unable to play due to government restrictions to curb the spread of Covid-19.

Landlord’s remedies – As we advised for tenants, the best policy is to check the terms of the lease agreement and try to open a negotiation to resolve the matter amicably. Where this fails, under the Landlord and Tenant Law , the landlord may seek eviction where the tenant has failed to pay rent within 30 days after the notice has been given. However, as we’ve discussed, the RDC’s policy is to maintain natural justice and to seek to assist all parties to move past the adverse economic effects of Covid-19 with minimal financial loss and social disruption.

Conclusion – No one can say how long the global pandemic will last. The commercial and residential real estate sector is rapidly evolving, and we must not rule out the possibility that in the future, rental disputes will be decided not just on the law, but also on ancillary factors such as the nature of the tenant’s business or employment and the impact of Covid-19. Right now, it’s important for both landlords and tenants to maintain communication and remember that the overriding aim of the RDC is to preserve fairness and protection for both parties in a climate where those commodities are essential for the wellbeing of our society as a whole.