UAE

Federal National Council recently issued a Federal Law number 8 of 2018

governing financial leasing (the Law) within the country. The Law

prohibits any company from undertaking

activities of financial leasing without a relevant license from the Central

Bank of UAE. 

Corporate Lawyers of Dubai have elaborated the

Law including the rights and obligations of lessor and lessee through this

article.

The Concept

Financial leasing is a concept wherein a licensed company (the

lessor) purchases the asset of their customer (the lessee) on lease for a

certain period of time in return of a

mutually agreed payment schedule. Similar to

other lease agreements, the lessor is obliged to maintain the assets while the

lessee enjoys the possession of the asset for a said duration, bearing all

costs linked to the maintenance of the asset.

License Requirements

Article 2 of the Law strictly

prohibits the company from undertaking

financial leasing without the relevant license;

the law reads as follows:

“Engaging in financial leasing

activity

1. It is not

permissible to practice financial leasing activity in the State until after

obtaining a license from the Central Bank;

2. After each

contract of finance lease entered into with a person not authorized by the Central Bank;

3. Any person

not authorized by the Central Bank to

engage in financial leasing activity shall be

prohibited from using the term "finance lease" or any equivalent

in its trade name;

4. The Central

Bank shall establish regulations for the license of the lessor and carry out

the financial leasing activity in the State, including the license of the

foreign financial leasing company.”

In line with the foregoing, the Article 3 states that the lease

contract shall be written and should be registered or an indication thereof in

a special register in accordance with the provision of this law otherwise

it will be nullified.

Components of the Contract

The lease contract shall be

constituent of the following information as laid down by Article 4 of the Law:

a. Name of the

lessor and relevant address and details;

b. The description

of the leased property;

c. Duration of the contract;

d. Purpose of the

used property and limits on the usage of the property;

e. The amount of

the rent and the payment schedule;

f.

Conditions and provisions to be imposed on the

tenants;

g. The rights of

the tenants to the owned premise;

h. Information regarding the lessee;

i.

Rights and obligations of both the parties;

j.

Substantial obligations that may result from the

breach of contract or dissolution of contract;

k. Any statements,

conditions or provisions agreed upon between the parties in the manner not

contrary to this law.

The council of ministers shall

maintain a register detailing the lease contracts entered into by parties. The

register must include the parties managing the contract, the fees for

registration and the other relevant data as mentioned by Article 5 of the Law.

Rights and Obligations of the Lessor

and Lessee

Obligations of the Lessee (Article 6)

Unless otherwise agreed in the

contract, the Lessee shall abide by the provisions of the contract;

1. Taking

possession of the leased property from the lessor or the supplier when it is in

the case agreed upon in the contract;

2. The payment of

the property in accordance with the payment schedules as decided between the

parties;

3. The use of the

leased property for purposes specified in the contract and within the appropriate

use, subject to any terms and conditions, or referred to in the contract or

upon supply;

4. Maintain the

leased property as the agreed between the parties and to not make any changes

except with the consent of lessor;

Carry out the

normal maintenance required by the leased property in accordance with the

agreed terms of the contract;

6. Issue a notice

for the occurrence of symptoms that prevent the full or partial use of the

leased property and in accordance with the procedures provided for in the

contract.

Obligations of the lessor (Article 7)

Unless otherwise

agreed between the parties under the contract, the lessor undertakes to:

Deliver the leased property in the agreed condition,

and enable him to acquire and use it;

2. Notify the

supplier in writing at the conclusion of

the contract of supply of his intention to rent the property under the contract along with the name of the tenant;

3. Insurance on

leased premises.

4. Carry out the

essential maintenance required by the Leased Premises, in accordance with the terms agreed upon in the contract;

5. Vacating the

premises for the ownership of the leased property by the lessee;

6. Provide the

tenant with all the documents and information available to him regarding the

leased premises;

Rights of the

Lessee (Article 8)

Unless otherwise agreed in the

contract, the Lessee shall have the following rights:

1. The choice of the

supplier, and to determine the terms of the contract;

2. Selection of the leased property and to

determine the method of manufacture or establishment and specifications to be

provided, and negotiate with the supplier on these specifications either

directly or through the lessor under a written authorization

issued by the lessee;

3. Liaise with the

supplier directly for any contract or arbitral proceedings in relation to the lease contract between him

and the supplier, except for the action for the dissolution of the contract, without prejudice to the right of the lessor to

return to the supplier in respect of such claims and promissory notes.

Rights of the

Lessor (Article 9)

Unless otherwise

agreed in the contract, the lessor shall enjoy the following rights:

1. Inspection of

the leased property provided that such

action does not cause any damage to the lessee, and the lessor may give written

notice to any person to carry out this task;

2. Restoring the

possession of the leased property from the stores in the conditions stipulated

in the contract or in this law;

3. To transfer his

rights under the contract to third parties, taking into account notifying the

lessee in writing of the transfer, shall not result in any reduction of the

rights of the property contained in the contract or impose any new obligations

on it.

Relationship with

the Supplier (Article 10)

1. Prior to the conclusion of the contract, the lessee may, upon the prior written consent of the

tenderer, negotiate with the supplier regarding the specifications of the

leased property, the method of its manufacture or establishment, provided that

such approval includes the matters negotiated between the lessee and the

supplier.

2. At the end of

the negotiations, a supply contract shall be concluded between the lessor and

the supplier, specifying the leased property and its specifications as

requested by the lessee and any other conditions

agreed upon by the parties in the supply contract.

3. The leased property

may be owned by the lessee prior to the conclusion of the contract.

Usage of the property

The tenant may take any legal action

against any third parties who restrict his rights to use the property subject

to the following conditions, in accordance with Article 12 of the Law:

a. Written consent

from the owner;

b. The tenant remains

committed under the terms of the contract;

c. The period of

legal disposition exceeds the duration of the contract.

Further, the property shall be

returned in the same way as received by the lessee and any changes shall be at

the cost of the tenant. The lessee may

compensate for any changes made on the leased property even with the written consent of the lessor if it cannot be separated from the rented property without

damaging them (Article 13). Lessee not entitled to any compensation for

fortifications it has made on leased property at its own expense regardless of

written consent from the lessor. Lessor

if also entitled to transfer the premises to another lessor, taking written

notice from the lessee and it shall not

result in a reduction of rights or any

new obligations.

The law empowers the tenant to waive

of his rights and obligations to another tenant for replacing him, provided

that the following conditions are met:

1. Prior written consent of the lessor;

2. A declaration of

waiver in accordance with this law;

3. Such waiver

shall not conflict with the legislation in force in that Emirate;

4. The new tenant

shall replace the original tenant with all rights and obligations arising out

of the contract from the date of assignment.

Termination and revocation of the

contract shall result in the revocation or invalidation of the legal suit filed

by the tenant.

Impact of Liquidation

Liquidation of the lessor (Article

23)

In the event of

liquidation or bankruptcy of the lessor, the lessee shall have the right to exercise either of the

following two options:

A. The contract

shall continue to be executed in accordance with its terms and conditions,

provided that the liquidator or the trustee of the bankruptcy is notified

thereof;

B. Delivery of the

leased property to the liquidator or the trustee of the bankruptcy and the

entry with the rest of the creditors in the collection of amounts due to him if

any - in accordance with the accounting standards. The new landlord who has

ownership of the leased property as a result of the liquidation of the previous lessor or declaring bankruptcy shall

continue to execute the contract if the renter declares his desire to do so.

Liquidation of the

lessee (Article 24)

Without prejudice to any rules

governing liquidation and bankruptcy in the State, the liquidation of a lessee

or the bankruptcy or death of a person shall be taken into consideration as

follows:

1. Leased property

shall not be included in lessee’s creditors;

2. The liquidator,

bankruptcy trustee or his heirs shall return the leased property to the lessor

within 90 days from the date of the decision of

liquidation;

3. If heirs wish to continue, they may differ in accordance with terms and conditions.

Termination of the Contract

Either party has the

right to terminate the contract on relevant conditions as prescribed by the Law. Article 26 of the Law

lays down the rights of the lessor to terminate which are as follows:

a. If the Tenant

breaches the obligations under Articles 1, 2, 3, 4 and 5 of Article 6 of this

Law;

b. If the Tenant breaches any substantial obligation

stipulated in the Contract;

c. If the lessee is

seriously injured by the leased property.

The lessee shall be notified in

writing, and the contract will be

terminated should the lessee fails to remedy the

breach within 60 days from the date of notification.

On the other hand, Article 27 of the

Law provides for Lessee’s right to terminate the contract under the following circumstances:

If the Lessor

breaches the obligations stipulated in Articles 1, 3 and 4 of Article 7 of this

Law.

If the lessor

fails to comply with any obligation stipulated in the contract;

The lessee shall provide 60 days written notice

to the lessor for remedying the breach, and

the contract can be dissolved upon the

failure of the lessor to perform his

obligation. The lessee shall be entitled

to his claims due to him upon the dissolution of the contract.

Apart from the termination of the

contract, the Law also grants the Central Bank of UAE to cancel the license of

the lessor under the following conditions as mentioned under Article 31 of the

Law:

1. If Lessor does not commence activity within 6

months from the date of the license;

2. If lessor ceases

to exercise his actual activity for more than 6 months

3. If the financial

position of the lessor has not been changed

or corrected in accordance with the instructions of the bank.

Penalties

The law imposes strict punishments

including fine and imprisonments for those who violate any provision of this

law. Article 33 of the Law imposes of imprisonment and a fine of not less than

two hundred thousand dirhams and not exceeding ten million dirhams or one of

these penalties on anyone engaged in financial leasing activity or using a

lease term Finance in its trade name without a license.

Furthermore, a fine of not more than AED

500 000 shall be punished by a fine on any person who violates any of the provisions

of this law shall be liable to the decisions issued and the Council of

Ministers shall issue a decision specifying the irregularities and the amount

of the fines prescribed for each.