27 Apr 2020

Tenancy Contracts – Rent Reductions, Waivers and Termination in the COVID-19 Pandemic

Authored by: Michael Lunjevich and Philip Sequeira

In brief:

  • There has been wide ranging coverage of the COVID-19 Pandemic and its potential effect on the residential and commercial tenancy markets.
  • The best advice is to do what is right for you, and make sure you are ready with and understand your underlying objectives before entering into negotiations with a landlord or a tenant. This means getting a clear understanding of your legal strengths and weaknesses.
  • In this article, we take a brief look at the burning questions for residential and commercial tenancies and provide practical guidance for both landlords and tenants in these uncertain times

There has been wide ranging coverage of the COVID-19 Pandemic and its potential effect on the residential and commercial tenancy markets. It is no secret that a large part of monthly outgoings relates to rent both for wage earners and business owners alike. Many have suffered drastic consequences given the events of the last two months and in this article we take a look at practical issues and guidance for both landlords and tenants in these uncertain times.
 

Are residential tenants legally entitled to rent waivers or reductions due to the wide ranging effects of the COVID-19 Pandemic?

A recent news article suggested that if a tenant cannot pay their rent because they lost their job because of the COVID-19 pandemic then they could rightfully terminate their tenancy contract and walk away. If this was true it would certainly heap huge pressure on landlords to renegotiate and give in to tenant’s demands in order to keep tenants happy. However, there is an old saying that one should not believe everything they read in the newspaper, and this old saying is even more relevant in the digital age where there is a free flow of information (both good and bad).

If a tenant assumes they hold all the cards and have the upper hand completely then this could make things much worse for them as most landlords have cheques which they may simply keep banking. This might mean a tenant finds they are eventually facing criminal prosecution along with a civil claim for the rent from the landlord for any cheques that bounce.

However, it is not all doom and gloom for tenants, because other extraordinary circumstances provisions of the law (i.e. Article 249 of the Civil Code) as well as other tenant specific provisions in the Civil Code (i.e. Article 783, 794 or others) may assist tenants to renegotiate with landlords on the basis of hardship or loss of use but those have to be considered based on each tenant’s particular circumstances.
 

Can a residential tenant seek termination of a tenancy contract due to job loss or reduction in salary?

As stated above this is not the case. It is not a tenants “right” to demand termination, rent reductions or waivers any more so than it would be a landlord’s right to demand eviction or rental increases. The key thing to keep in mind is that a tenancy contract is a contract and therefore it cannot be altered or terminated unless by mutual agreement, by court order or (in the case of Dubai) by order of the Rental Disputes Centre (RDC) or by operation of law.

Force majeure in the general UAE Civil Code sense brings about termination of a contract by operation of law, however, this requires several factors to be present including that the obligations themselves have to have become impossible to perform in order for termination to result, and not that a particular person has found it difficult to perform. Tenant’s should be very careful about their interpretation of “impossible” and whether that extends to catch a situation where a tenant is unable to pay because they don’t have enough money after losing their jobs.

In respect of a residential tenancy, the tenant still has access to the property and in fact under current lock down regulations the tenant is confined to that space far more now than ever before, so the tenant must pay the rent unless: (i) the tenancy contract allows them to terminate early; (ii) they reach an agreement with the landlord for a reduction or early termination; or (iii) they get an order from the RDC that they do not have to pay all of the rent.
 

What about commercial tenants?  Is anything different for them?

Largely the same principles apply to commercial tenants as stated in respect of residential tenants above with a few exceptions and there maybe some more rays of light at the end of the tunnel.

Commercial tenancy contracts are generally far more detailed and therefore more likely to have specific force majeure clauses that redefine the types of events that constitute force majeure and also the flow on affect between the parties if a force majeure event happens. The terms of the tenancy contract maybe more or less helpful than the general UAE law depending on what the tenancy contract says, however, many contracts in use do seem to be more generous than the Civil Code requirements. Therefore, commercial tenants and landlords alike are going to have to pour over their tenancy contracts and review such clauses in detail and ensure they apply those objectively against the factual circumstances they each find themselves in.

Given the current scenarios there are possibly other clauses of the Civil Code that might also be helpful for tenants including Articles 781 – 783 of the Civil Code, however, again tenants should be very careful about making assumptions about what is meant by loss of enjoyment, impossible to derive full benefit, or events preventing performance, as these relatively simple words can have very complex meanings legally.

An objective assessment has to be made on the specific circumstances applicable to the tenancy arrangement and a trusted legal professional should be consulted by both landlords and tenants alike before heading into a negotiation or full on confrontation with each other. It will quickly become evident to well informed people if landlords or tenants are operating under misguided assumptions of strength based on the current situation.
 

So what’s next and what is the best cause of action?

It is never easy to be definitive about what is best for a particular landlord or tenant as there will be many different objectives and priorities between each individual person. It is also near impossible to predict the future or predict highs or lows in markets.

In addition, the current market conditions and the length and/or outcome of the COVID-19 crisis is incredibly fluid and hard to predict at this point. There could be a huge oversupply of properties with landlords competing over an ever smaller pool of tenants and those that have renegotiated to keep longstanding tenants may prove to be the long term winners. Conversely, the World and its population is very adept at transforming and meeting new demands and we could quickly see the World adapt to a new COVID-19 normal with social distancing rules pushing the demand for space ever higher.

So, should you take a long term view and seek to protect good tenants or a desirable property or do you want to react and act tough given the many hardships faced by wage earners and businesses right now? Again, there are many variables and there are no “one size fits all” solutions, although there is one constant that does apply to almost every situation and that is: that the tenancy contract is already formed and has agreed terms and conditions.

Some landlords will want evidence of hardship such as evidence of loss of job, loss of revenue or insufficient funds before they commit to rent delays, waivers or reductions. There is no obligation on tenants to provide such information but likewise there is no obligation on the landlord to cede to the tenant’s rent demands either. So it is a negotiation and it should be approached as such by building trust and creating goodwill so everyone accepts that the pre-COVID-19 World might look a lot different to the post-COVID-19 World, and this may mean that everyone has to take a little bit of pain now but with some wins in the long run.

The best advice is to do what is right for you, and make sure you are ready with and understand your underlying objectives before entering into negotiations with a landlord or a tenant. This means getting a clear understanding of your legal strengths and weaknesses and if you don’t yet have a clear understanding of these then seek professional guidance from a trusted lawyer who knows what they are talking about on these matters.

If no compromise can be reached, then landlords and/or tenants will have to take the matter up with the RDC and file a case to seek their contractual remedies and any other remedies that they may be entitled to at law.

If you need help or would like to discuss any of the above, then please contact the authors, Michael Lunjevich and Philip Sequeira.

 
 

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 developing jurisdiction of the UAE.