Terminating a rental contract may not be easy

Rents in decline and you thinking of shifting to a new location in Dubai to make use of it? Think again, it may not be as straightforward as that.

“There has been a clear increase in rental disputes with the Property Court since February, where the current landlords are saying they haven’t been given sufficient notice,” said Nasser Malalla Ghanem, Senior Partner at the law firm of NM Associates. “Obviously, in many of these disputes, landlords are trying to get some sort of advantage for themselves. But they can be a drag on tenant plans to shift.

“The majority of these lease termination disputes are happening in the residential space – my estimate is that they have shot up by 2,000-3,000 since February.

“The increase in disputes is because tenants see that lower rents are available elsewhere in the city and they want to enter a contract and shift immediately. To tenants this would see an easy process – but their existing landlords may not necessarily see it that way.”

As per current legal requirements, tenants have to offer a 90-day notice to their current landlords to be in the clear when terminating an existing lease. Any breach on these would strengthen the landlord’s hand in a dispute.

Dubai is currently working on a new Rental Law covering all property classes. It is felt that the Law would strike a better balance between managing landlord expectations and a tenant’s capacity to pay. (The Law could have a significant impact on the retail sector in particular, with retailers saying the current structure of fixing and raising rents leaves them with limited options for redressal.) Until such law comes into effect, it will be up to the Property Court – operating under the Dubai Land Department – which will have the final say in a tenant-landlord dispute.

For Dubai’s tenants, for every landlord unwilling to consider cutting their rents, there are many who would go the extra mile to win them over. “Some landlords offer an initial 14-month rental for the price of 12 months, effectively discounting two months from the first year,” said Haider Tuaima, Head of Real Estate Research at ValuStrat. “Others prefer increasing the number of payments, in some cases on a monthly basis.” (And there are landlords, market sources say, who would add a sweetener by offering gift vouchers that can be redeemed at the nearest mall. Anything, it seems, to win over that tenant.) For good reason too – “Vacancy on a rental property is something most landlords face, as a result of which certain of their costs would not be offset, such as their mortgage payments, insurance and service charges,” said Tuaima.

Could it be that Dubai’s current residential Rent Index is completely at odds with what is happening in the market, with landlords willing to make more cuts on their asking rates?

Tuaima says that is definitely not the case. “There’s no major variance between Rera’s (Real Estate Regulatory Agency) rental index and prevailing market rents. Let’s remember that the Rera Index provides a low and high value for each location.

“Our research has found that in the vast majority of freehold locations, market rent are within the Rera Index. There were very few exceptions, and those were for two-bedrooms in Discovery Gardens, three-bedrooms in JLT (Jumeirah Lake Towers) and The Views.”

The passage of the new Rental Law could provide a clearer legal picture for tenants and landlords alike. Because no one would want to see a situation whereas market conditions improve, landlords go back to raising their rents unilaterally and again placing their tenants at a disadvantage. Dubai needs a secure rental and leasing structure that can hold its own in both upturns and downturns.

On the off-plan sales side, a legal safety net is in place. Specific percentages on project construction will decide whether a property buyer is entitled to repayments or not.

“If a project is stopped for any reason, a special committee will check the funds in escrow for that particular development and they will divide it according to percentage of completion,” said Al Ghanem. “But there are other factors that can impact decisions – such as the correspondence between the developer and property buyers and upon the sale and purchase agreement (SPA) itself.

“If the focus is only on the project construction percentage, the court may decide not to refund and the buyer will have to take the case to the Court of Cassation. He will have to show the monetary losses he has suffered from the project’s delay. It is then up to the court to determine the size of the refund.

“Ideally, these types of disputes should be heard by the Property Court – it has the best internal processes to handle all disputes related to real estate.”

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