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Need for law to set ceiling on rent Parties required to respect period stipulated in tenancy agreement

THE right to lease is a key element of any business and significant in commercial transactions, according to Commercial Lawyer Abdul Razzaq Abdullah. He discusses the state of subleasing in Kuwait today and shares the importance of systematizing the relationship between the landlord and the tenant to bring a balance into the relationship as well as the pressing need to clearly define the rights and obligations of both parties. Abdullah is the Managing Partner and the leading commercial lawyer of Abdul Razak Abdullah & Partners (ARALF) Law Firm.

Question: What are the most pressing issues in leasing commercial real estate today?
Answer: In commercial real estate today, if the lease is associated with a promise of sale there will normally be an intervention of a third party contrary to the traditional seller/landlord and buyer/tenant relationship, and this third party usually be financing the lease. In such cases a financial institution will be assisting the tenant by arranging funds for the purchase of the property and those who contract with such financial institution will agree to repay the amount after a specific period of time or will pay as installments payable every month for a period agreed in the contract. At the end of this set time limit the tenant can buy the property. Therefore there arises a tripartite relationship of buyer and seller (financier) who is leasing the property to the tenant. This is different from the normal lease practices and the rent paid by the tenant will be higher than those in normal lease. In such situations, the tenant will have to bear the financial risks.

The landlord will have the right of restitution of the property if the tenant has become bankrupt or proved to have committed a crime of fraud/dishonesty or if he fails to pay and settle the entire amount as per the contract. The land lord in such a situation is entitled to sue the tenant and can expel him. However, the major concern is that though the financier’s role in this structure is limited (as it only finances the deal) it often becomes harsh on financial institutions to recover the money from the debtor, especially during an economic crisis. Another issue is the requirement of a deposit before entering into a lease contract. Mostly, the landlords charge a hefty amount just for allowing the tenant to occupy the premises. This can range from few hundred to several thousands. Due to the concern of repayment of huge loans from the banks and the skyrocketing rent big commercial areas remain vacant. This will affect Kuwait’s economy as a whole. It is to be noted that this peculiar system is not allowed under Egyptian law.

The landlord cannot vacate the tenant without obtaining a judgment in his favor, and if he resorted to force, threat or deception, he will be exposed to legal repercussions. The tenant can leave the leased premises without having to resort to the judiciary but it should be approved by the landlord or by the authorities and in the absence of the consent of the landlord tenant’s eviction will not terminate the lease agreement entitling the landlord to claim rent for remaining months as per the duration of the contract. However, if the contract has provisions which says that it can be terminated by any of the contracting parties, and if there are grounds to terminate the contract by the tenant he can have recourse to the courts to request termination of the contract and its dissolution. But it must be noted that the landlord retains the right for compensation for the loss he suffered due to termination of the contract or for consequential damage if it is against the terms of the contract. Consequently, if the tenant immediately after the evacuation leased the premises to another tenant, the land lord has the right to seek from the first tenant the rent for the remaining period of the contract.

Q: Explain the idea of subleasing. Who are the parties involved, what function does each play?
A: A lease or a rental agreement, as is commonly used is a contractual arrangement demanding a certain payment to the landlord (as rent) for acquiring possession of a property in his ownership, for a certain period of time. Usually the term ‘rental agreement’ is used to describe a lease where tangible property is involved. The possession of a license to use a computer program is an example of a lease where intangible property is involved. To sublet (sublease) is to lease to another person a house or apartment that is already in the possession of the tenant. In legal terms, the landlord is the lessor, the tenant is the lessee, and the subtenant is the sub lessee. Building, common areas, or systems may be subject to leasing. Even for the tenants who have the approval from the landlord to sublet, should comply with certain procedures.

Q: What are the advantages associated with subleasing?
A: As per Article 34 of the commercial law, a store or a shop of the merchant will include a set of elements tangible and intangible depending on the business he undertakes; this will include tangible things like goods, furniture, industrial machinery and intangible things of value like its goodwill, reputation, customer feedback, trademarks, trade data, patents, licenses, designs etc., Therefore, the occupancy of the place of lease or the right of lease is a key element of any business. The place occupied for the business is of utmost importance for the customers and therefore in the commercial transactions the location of business has importance. The growing commercial requirements demand an attractive business location and in such cases subletting can be considered as a viable option for finding a proper place of business.

Q: How popular is this phenomenon in Kuwait and in which sectors?
A: This phenomenon is common in all sectors.

Q: What is the predominant nature of the sublease?
A: Both long term and short term leasing is common in Kuwait.

Q: What does the law say about subleasing?
A: The Real Estate Law of Kuwait regulates commercial and residential real property transactions, and landlord-tenant relationships. Law No 35 for the year 1978 deals with the real estate in Kuwait. However, agricultural plots are excluded. Undoubtedly, BOT will not work for residential projects, where the land lord usually expect either a freehold or long term return from his units. The law clearly states that, the period stipulated in the contract must be respected and followed by both parties in the contract i.e., the land lord shall not be entitled to evict the tenant and the tenant cannot vacate the premises, before the end of the contract term.

Q: How is the law interpreted and enforced in Kuwait?
A: The law clearly states that, the period stipulated in the contract must be respected and followed by both parties in the contract i.e., the land lord shall not be entitled to evict the tenant and the tenant cannot vacate the premises, before the end of the contract term. The law also says that the rent cannot be increased for a period of five years, from the date of signing the contract.  The landlord has the liberty to deny the sub lease or can impose certain conditions for the lease. Only with the landlord’s written/oral consent, the tenant can transfer the tenancy under a tenancy agreement to another person, or sub-let the premises (or part) to another person. However, there is no provision under the Kuwaiti law which prevents the land lord from unreasonably withholding his consent when the tenant asks to transfer the lease to another tenant or when he asks to sub-let a portion of the premises which he occupies. The landlord can forcefully (by police force) evict the tenant if the tenant violates the terms of the lease agreement.

Q: Does the tenant ultimately, have the right to sublease?
A: Yes he has the right to sublease subject to the consent of the landlord.
The law makers give the landlord the right to terminate the lease agreement in the event of sublease of the leased premises. However, he cannot claim that he is not informed of the sub tenancy, if the circumstantial evidence does not support his claim. It should be noted that if landlord authorized the tenant to sublease the property it is a direct relationship between landlord and the subtenant.

Q: What are the procedures involved in subleasing a space? Can you give us a step by step run down of the process?
A: The tenant needs to obtain a written (preferably) consent from the land lord and should enter into a proper sublease agreement with the concerned party.

Q: What problems do the tenants face in the given framework?
A: Most lease contracts specify the duration of the lease agreement as one year or five years or specify that it is “automatically renewed”. However, the phrases used should be clearly checked and verified before signing the contract  as the distinction must be made between the words “automatically renewed for another” or “other periods” or whether the word “automatically” is only been used. If the contract provides that it is renewed automatically for a similar period, it is constantly renewed each time for the same term unless a notice of non- renewal is delivered by the concerned party within the specified time frame in the contract. If the contract provides that it is renewed automatically, it will be renewed and if the tenant desires to vacate the leased premises after the end of the term of the contract but did not notify the owner to terminate the contract he should pay the rent for the remaining period also as the contract got automatically renewed.

Q: What proposed changes in law and practice would remedy this?
A: It is a common practice in Kuwait that the landlord will charge an amount as compensation for giving his approval to sublease the property. I am of the opinion that the landlord should not charge the tenant exorbitantly for giving his consent to sublease his property. Another problem faced by the tenant is that the land lord can prolong the matter for a long period without giving his consent.  If the landlord does not meet the required deadlines to respond to the tenant’s sublet request, the tenant should be given the option to proceed with the sublet. If the landlord fails to send such a response within the predefined time, it should be deemed as consent or approval of the sublet request. 

The Egyptian law is not similar to Kuwaiti law in this respect as it is more liberal to the tenant. As per Article 594(2) of the civil law of Egypt the court is given the discretion to decide on such issues based on the principles of good faith. In Egyptian law the court can order the landlord to retain the lease agreement and not to cancel the lease contract if setting up of a workplace or extension/modifications of the shop is necessary for the smooth functioning of the tenant’s business, even if it makes the sub-tenancy inevitable for the tenant. This rule is applicable even if the prior consent for sublease from the land lord is not obtained by the tenant. However, it is subject to the condition that proper guarantee to compensate any loss will be given to the landlord, in this effect. Therefore, in Egyptian law the owner of the leased property can give it to another without the landlord’s consent if there is proper justification for doing so as is mentioned above.

The relation between tenant and landlord as prescribed in the common provisions of Kuwait’s civil law No. 37 of 1978 is in contradiction to the above mentioned provisions of the Egyptian law. The law makers failed to make any special mention in the law about the rights of the tenant to sublease. Article 14 of the law merely mentions that the tenant cannot sublease the leased property or any part thereof without the consent of the landlord in writing and the land lord has the right to ask the court to vacate the tenant if he has subleased the property without his consent. Further, the law provides that the right to sublease the property by the tenant is subject to the consent of the land lord and he can express his consent either expressly or impliedly i.e., if the land lord accepts the rent from the tenant that means he accepted the transfer, even if there is no written confirmation from the land lord. However, in effect, if there is no express consent from the landlord it will create further problems for the tenant as it will be difficult for him to prove it.

Another area of concern is that the land lord in many cases will agree to give his consent only after obtainment of a hefty amount as compensation or with a steady increase in the rent amount thereby putting the tenant in a difficult financial situation, which affects both his business and future prospects. Therefore, I am of the opinion that it is important to systematize the relationship between the landlord and the tenant in order to balance the relationship and define the rights/obligations of the subtenant-landlord relationship. Law makers should make some efforts to set a ceiling for the rent which the land lord can impose on the tenant or should amend the law by adapting the provisions of the Egyptian law so that the tenants can approach the court to transfer the lease agreement or to sell his shop to another tenant.

Q: How does Kuwaiti law compare with that of other Gulf or Arab countries in this regard?
A: The new Law No. 14 of 2008 formulates and defines the organization and the relationship between the lessor and the lessee in the Emirate of Ras Al Khaimah. This law applies to the provisions of the law on the premises leased for residential or other purposes but excludes agricultural land and such facilities. The law also permits a temporary lease by public authority in the free zones, ports and other public facilities in addition to the land space. Moreover, the law provides protection to tenants for a three year period or for a period agreed upon in the lease contract, whichever is longer. Article 3 of the law explicitly states that the law does not entitle the landlord to evacuate the rented premises except due to specific reasons, that is if the tenant fails to pay rent in accordance with the provisions of this law within 15 days from the date assigned for payment of rent or if the tenant  leased or sublet his premises without the express written permission of the lessor or if used or allowed to use it in a manner inconsistent with the terms of the lease accepted as per public order and morality or if it is detrimental to the safety of the building.

If the lessor demolishes the place to rebuild it more elaborately and if the duration of the lease per the lease contract has ended but there is an urgent need to occupy the place by the tenant himself or one of his legal heirs, the judgment of eviction cannot be implemented before the lapse of a deadline set by the court (this is usually a minimum two months from the date of announcement of the verdict) and the tenant has the right to claim compensation if it is proved that he is wrongly evacuated. However, the law requires that the eviction should be as per the date agreed upon in the lease contract and the lessor has to obtain prior approvals for the demolition and construction of the building from the concerned authorities, including a building permit,  in order to claim compensation for eviction. Article 4 of Law No. 14 of 2008 confirms that the rent can be increased in a fair manner but only after the expiration of an existing lease agreement.

Q: Does rent ceiling come into play at any point?
A: There is no rent ceiling in Kuwait. However, the law provides that the rent cannot be increased for a period of five years from the date of entering into a lease agreement, thereby giving protection to the tenants.

Q: What is the status of illegal sublets in Kuwait? Is it a growing concern? Under what circumstances are they currently found?
A: Yes. Illegal sublets are a growing concern. They have no legal protection and are under constant threat of eviction. Illegal subletting is mainly found in apartment leasing.

Q: What is the future of subleasing and real estate in general?
A: The implementation of new laws to cover the lacunae in this sector is highly recommended and the economy will flourish only if there is equal protection for all before the law.

biography

Abdul Razzaq Abdullah is the Managing Partner and the leading commercial lawyer of Abdul Razak Abdullah & Partners (ARALF) Law Firm, licensed to practice before the Court of Cassation and the Constitutional Court of Kuwait having practiced law since 1972.  He has a Bachelor Law Degree from Kuwait University in 1972 and Masters of Law in Intellectual Property from London. In 1975 he opened his own Legal Practice and is a notable lawyer within Kuwait and the Gulf as well as a legal adviser for major clients, specializing in commercial law.  He has been called upon to act as one of the legal advisers for the Parliament to assist them in drafting new Legislation. The firm currently represents clients in multi-million dollar cross border transactions. His professional memberships include the International Bar Association, Kuwait Lawyers Association, the Union Internationale des Avocats, Human Rights Institute of the International Bar Association. He has also served as a member of the Board of Trustees of the American University of the Middle East (AUM) and American Middle East College (ACM).
 

By Cinatra Fernandes
Arab Times Staff


By: Abdul Razzaq Abdullah

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