This week we turn to
, head of the property practice for
Ashurst
, for his thoughts on lease renewals in Abu Dhabi:
T
he lease renewal process is a tortuous procedure that confronts most expats at some point whilst they are out in the UAE, usually on an annual basis.
For the first time ever in this market, or at the least for the first time in a long time, the protagonists are undertaking the process in an atmosphere where rents are falling and, in Dubai, supply is out stripping demand. This has lead to an interesting, and new, paradigm where the renewal process has, in some ways, became more confrontational.
In the years of rising rents and rent caps everyone pretty well much knew where they where. Barring any particular market oddities the chances were that if you wanted to stay where you were the rent was going to increase in line with the cap. A few rouge landlords, would try and get increases over and above the cap by using strong arm tactics. The tenants' appetite for a fight would usually determine how successful the landlord was.
Read the rest after the jump ...
The falling rental market has meant greater uncertainty over rental levels on renewal. This has lead to a great potential for disputes. Landlords are not used to a market going down and in some cases have not been able to manage their expectations. Landlords' refrains such as "I will not insist on the 5% rent uplift I am entitled to" have recently been heard across the residential renewal market. This is, of course, completely misguided. The rental cap was introduced to help curb inflation and ensure Abu Dhabi and Dubai remained vaguely affordable. It is a cap on the uplift, not an indication of what the uplift should be. The change in rent, year to year, is to be determined (within the confines of the cap) by the market, not the law. However, if you are a landlord familiar with getting an uplift, a falling rental market takes a bit of getting used to. Tenants on the other hand are delighted to see rents falling from the very high peaks of late last year.
A friend of mine has recently tried to renew his lease for a villa in Abu Dhabi, off the island. Having been told by a "benevolent" landlord that they would not insist on "the 5% uplift" he then pointed out to them that the market rent for his property has, as evidenced by advertisements for identical properties in the same compound, fallen by about 30%. When he suggested that he should pay the market rent this year (as he had last year) he was told by his landlord that he was "greedy" and the landlord would not entertain any discussions of a renewal at such a level. At this point he did what most us would do; he started looking somewhere else. But what could he have done if he had really wanted to stay?
Well in Abu Dhabi the most important law is Law 20 of 2006 as amended by Law 6 of 2009. A lease is renewable unless either party serves notice indicating a desire to terminate the lease at the end of its term. The landlord is not entitled (save in circumstances which cause the landlord serious damage) to serve such a termination notice within the first four years. The tenant is entitled to renew a lease of less than four years but on the same terms and conditions as the existing lease. If the tenant wishes to renew the lease on different terms, such as at a revised, lower, rent the tenant must serve a written notice on the landlord two months prior to the expiry date of the lease.
Having served the notice the landlord and tenant can then seek to agree a new lease at a revised rent. However if the parties cannot agree a new rental level the Abu Dhabi Rent Committee will not step in and impose a market rent. Just as was the case in a rising market where landlords would serve notice requiring a rent increase (in line with the cap, of course) it would be for the tenant to decide if he wanted to renew at the level proposed. If he did not then he would pack his bags. Now if the landlord does not wish to accept the revised rental offer from the tenant, as he does not believe it is in line with the market (or for any other reason), then the lease will come to an end and the tenant will vacate. The Rent Committee will not in these circumstances act as arbitor of the market rent. Of course this some what erodes the right of the tenant to renew; the absolute right only exists where neither party seeks to change the terms of the lease.
