05 Jan 2014

REVOCATION OF ABU DHABI ANNUAL RENT INCREASE CAP

Authored by: Ahmed Nasser

REVOCATION OF ABU DHABI ANNUAL RENT INCREASE CAP

IMPLICATIONS FOR LANDLORDS AND TENANTS
 
The Abu Dhabi Executive Council has recently announced that a resolution (the “Resolution”) has been taken which provides that any increase in rent shall henceforth be determined pursuant to an agreement between the tenant and the landlord. The Resolution has accordingly abolished the Rent Cap by amending the provisions of Abu Dhabi Law No. (20) of 2006 which stated that “the landlord may not increase the rent specified in a rental contract (the “Law”), except once each year by no more than 5% of the said rent” (the “Rent Cap”) and is based on the authority granted by Article (16-2) of Law No. (20) of 2006 (as amended) which gives the Executive Council the authority to increase or decrease or abolish altogether the annual rent increase percentage.
 
The practical effect of the Resolution is that any increases in the annual rent will have to be negotiated between the landlord and tenant, and if agreement is not reached either party may exercise his/her/its right to terminate the lease by giving the prescribed period of notice which is 2 months, in the case of residential leases, and 3 months in the case of leases for commercial, industrial or professional purposes.
(Article 20(3) of the Law)
 
This recent development has left many landlords and tenants with questions that require clarification, and in this article we will provide answers to some of the questions raised by clients subsequent to the announcement of the Resolution:
 
1.     When does the Tenant have to notify the Landlord of his acceptance or non-acceptance to the changes of the terms of the lease (including the rent value)?
 
The Law does not specify any time limit for the tenant to announce its agreement or refusal to an amendment to the terms of the lease agreement, including the increase of the rent amount. If it is established that the tenant had received the landlord’s notice providing for the rent increase before the legal deadline the tenant, pursuant to Article (22) of the Law must vacate the leased property by the end of the lease term. In the event that the tenant has kept silent and continues the occupation of the leased property he will be bound by the rent increase as of the date of the end of the lease term to the date of actual delivery of the leased property to the landlord. The tenant will also be bound to pay for the used facilities (electricity, water, and phone) and any damages that he might have caused to the leased property.
 
In order to overcome this legal loophole, we recommend that the landlord specify in the notice a certain time limit (e.g. 15 days) during which the tenant may announce his approval of the rent increase requested by the landlord. The landlord may state in the notice that if he does not receive a reply from the tenant, or a request to reduce the increase, within such period, the tenant will be bound to vacate the leased property and deliver the same to the landlord by the end of the lease term.
 
2.     Can the tenant refuse to accept the rent increase imposed by the landlord?
 
The tenant can explicitly or implicitly refuse the rent increase imposed by the landlord. However, he will have to vacate the leased property and deliver it to the landlord by the end of the lease term. Subject to the Law and the Resolution, the tenant does not have the right to unilaterally amend the rent increase notified by the landlord, but will have to negotiate the rental with the Landlord and if agreement is not reached, will have to vacate the premises upon the expiry of the lease. The rental for the renewal period will have to be agreed at least 2 months prior to the expiry of the lease, so that the required notice period can be given if agreement is not reached.
 
3.     Is there a limit to the increase which the landlord may impose?
 
As the Rent Cap, which served as the mechanism for regulating increases in rental, has been abolished, there is no limit imposed upon the landlord. Abu Dhabi has not introduced a comparative rent index as is the case in Dubai, so it should be the market forces of supply and demand which will regulate the limit to which rentals will be increased in practice.
 
Furthermore, the Law does not authorize any entity to determine the market rent amounts. The rent amount agreed between the tenant and the landlord in the lease agreement is binding on both of them pursuant to the principle of freedom to contract. The Rent Committee, pursuant to Article (4) can only determine the rent amount when the lease agreement is silent as regards the amount of the rental and the method of determining the rent amount, or in the event the rent amount cannot be established. In this case a similar property rent amount will be applied.
 
The Resolution does not provide for any exceptions to the above method of determining the rent based on similar properties. Accordingly, the similar rent as determined by the Rent Committee pursuant to Article (4) of the Law shall be the valid rent amount binding on the contractors. Although the Law does not require the Rent Committee to seek assistance from real estate experts (real estate firms) when determining the similar property rent, the Rent Committee can seek guidance from such experts when determining the similar property rent amount.
 
4.     Does the tenant have any recourse if agreement cannot be reached with the landlord in regard to the increase?
 
Pursuant to the provisions of Article (11) of the Law the tenant can deposit with the Rent Committee the rent amount which the landlord refuses to accept for any reason. However, after the issuance of the Resolution, the Rent Committee has ceased acceptance of the rent amounts from the tenants until further notice.
 
5.     What if the lease reaches the expiry date and neither party has given notice to terminate and/or increase the rental?

 
Article 20(2) of the Law stipulates that where the tenant remains in the property after expiry of the lease with the landlord’s knowledge, and without any objection by the landlord, the lease shall be deemed to be renewed for a similar term and under the same conditions. It is therefore vitally important that a landlord wishing to impose an increase gives proper and timeous notice of his intention to do so.
 
6.     Under what circumstances can the landlord apply for the eviction of the tenant?
 
Article (23) of the Law enumerates the cases where the landlord is entitled to request the eviction of the leased property. The first case is when the tenant does not pay the rent amount during the periods specified in Article (11) of the Law, namely (21) days as of the due date if the lease is for residential purposes and (30) days if the lease is for commercial, industrial or craft purposes. Article (23) does not allow for the eviction of the tenant if he pays the due rent amount in addition to the litigation costs incurred by the landlord before the judgment, unless the delay in paying the rent amount has been repeated on part of the tenant which warrants the eviction decision.
 
The Resolution has not yet been published but is effective from 10 November 2013.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE.