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Rental Disputes amidst COVID-19 in the U.A.E.

Rental Disputes amidst COVID-19 in the U.A.E.

Lawgical with LYLAW and Tim Elliot

01 September 2020

Tim Elliot:  Hello and welcome to Lawgical, the regular legal podcast from the Dubai-based law firm, HPL Yamalova & Plewka, and still the Gulf Region’s first and only legal podcast.  I’m Tim Elliot, socially distanced from the Managing Partner, Ludmila Yamalova, here at Dubai’s JLT – Jumeirah Lakes Towers offices.  Good to see you, Ludmila.

Ludmila Yamalova:  Great to see you too, Tim.

Tim Elliot:  Today on Lawgical, we’re talking rental disputes, and very recent rental disputes as well.  Ludmila, if you’re ready, let’s get Lawgical.

Ludmila Yamalova:  Let’s do.

Tim Elliot:  Now, the RDC, the Rental Disputes Committee has been issuing a number of judgments recently in favor of the tenant due to force majeure and the effects of COVID-19, obviously, on the overall atmosphere of employment and financial stability on really Dubai’s economy.  I’d like to consider four recent judgments, if we can, each of which is from certainly within the last 10 days, two weeks or so.

Let’s begin with a dispute in one of Dubai’s very nice beachfront developments which offers restaurants, open spaces, etc., a place with a real laid back charm.  The problem with lots of these developments is that as soon as COVID-19 hit, as you would expect, people just haven’t been headed there so much.  Let’s start with this very specific dispute.  What’s the story?

Ludmila Yamalova:  Yes, this is very typical story, especially these days, and perhaps one that we will see more of.  In particular, it involves a retail shop, as you said, in a beachfront development.  The retail shop is selling clothing.  Obviously with the recent COVID-19 pandemic and in particular the lock-down, the shop was directly affected by the lock-down and by the aftermath, if you will, of just the pandemic since then.  In other words, for the time when the lock-down was in effect, the shop was completely closed and therefore not deriving any benefit from the lease, and since then the retail industry has shifted dramatically and the shop has been experiencing severe financial difficulties and a massive downturn to its business and does not really see the light at the end of the tunnel at this point.  As a result, the owner of the business, the owners of the shop decided or wanted to terminate the lease agreement for this particular shop because they had suffered tremendous losses and they did not see the business coming around in the foreseeable future for them to even continue to try to revamp, either the business or perhaps even to negotiate with the landlord.  It looks like there were some negotiations that were happening, or at least discussions with the landlord, and ultimately the landlord was not willing to either vary the least or to provide any other meaningful support to the tenant, the shop, and as a result the shop ultimately had to file a case with RDC which is the Rent Dispute Committee, ultimately requesting to terminate the lease.

Why this is important is because for retail businesses or for businesses in particular, most of the time leases are signed for a number of years.  Let’s say this could have been a lease for three years or five years, and what has historically happened is that if in the event the tenant wanted to terminate the lease early, let’s say on a five-year lease you wanted to terminate at year two, landlords were always reluctant to so-called release the tenant from the obligation of the five-year lease and in many cases in the past landlords would actually file a case against the tenant, forcing them ultimately to pay rent for the remainder of the lease period, let’s say in that could, that would be five years.  As you can imagine, for a business, in particular that has been suffering tremendously now in light of the COVID-19, for that result to have occurred would have been practically impossible.  It’s an impossibility because these days, they cannot even pay the monthly rent, let alone rent for the rest of the lease period.

This is particularly important for businesses in the U.A.E. because in most cases these lease agreements, they are supported, in addition to the signature on the agreement, by rental checks or checks for the future period.  In other words, they are often referred to as postdated checks or PDCs.  For a business, in most cases what you do, and perhaps this system or this practice still applies and exists today, and that is if you sign a lease of five years, you issue also postdated checks for the remainder of your lease period, i.e., into the future, for five years ahead.  This is serious because if you were not able to pay your rent today, imagine having all those checks being cashed in the next five years.  In the U.A.E. to this day, a bounced check is still a criminal offense.  Now you are suffering not only on a civil or commercial front, but also these transactions carry criminal implications, so these are serious issues that cannot be treated lightly.

In this particular case, the tenant or the business wanted to terminate the contract early.  The landlord refused, so the tenant applied to RDC, requesting for the RDC or the court to terminate the contract early and to also waive penalties for the bounced checks that had resulted from the previous period during the lock-down when the shop was not operational and was not benefiting from the lease.  Subsequently after that as well, the tenant had asked the landlord not to cash the checks because they were just not making money, and as per the agreement, and this is very typical in modern leases, whenever the check bounces there is also a penalty that is attached to every bounced check.  In the case, the landlord not only did not want to lower the rent, did not want to terminate or allow the tenant to terminate the lease, but also wanted to collect all the penalties on the bounced checks and also rent for the previous months.

At the end, what the RDC has determined, and by the way this is quite interesting because the RDC issued or appointed an expert, and while appointing of experts in Dubai courts and in U.A.E. courts is a very typical practice, this has not really been the case in the RDC, on the Rent Dispute Committee it the past, but now experts are being appointed regularly and they are being appointed precisely to identify (1) the loss of the business as part of the COVID-19 and (2) the cause of this loss.

In other words, in this particular case, the expert was appointed to see (1) how much the business has suffered and (2) whether the suffering or the damage to the business was actually a result of the pandemic or some other mistake by the business itself.

Another interesting aspect to the appointment of this expert is that the expert in this particular case was appointed on June 30th and the judgment was issued on August 11th, so this is very encouraging and very positive for a lot of parties out there who are perhaps contemplating a similar path.

The landlord in this particular case actually counterclaimed for rejecting the termination of the contract and actually requesting the payment for the previous months and also enforcing the contractual penalties for the bounced checks and payment of all the other fees that were attached to this particular lease, such as service fees, chiller fees, and whatever other fees that the business would have otherwise had to pay under the contract under normal circumstances.

Tim Elliot:  If I could just put this into context, financial context, this is not an insignificant amount.  This is something like $750,000 dirhams.  That’s a large amount of money.

Ludmila Yamalova:  Yes, it’s closer to $200,000, absolutely, and for a business it’s massive, and for a business that’s already not making money, to pay from money that they don’t have, truly it’s impossible and drives the business and the people that are involved into bankruptcy and insolvency.  Yes, this is a very serious matter and one that is affecting a lot of businesses today.

At the end, what the RDC has decided is as follows, and this is really important, and that is:

  • COVID-19 does constitute what we often call in legal terms is a force majeure. Force majeure is often referred to as acts of God, so a pandemic, the courts has decided, that a global pandemic such as COVID-19 actually does constitute an event of force majeure, or an act of God that’s unforeseeable and outside of the control of, in this particular case, the tenant.  COVID-19 is a force majeure event.
  • This particular event of force majeure or COVID-19 is directly related or linked to the business’ inability now to pay rent, and that is because the business was truly directly negatively impacted on its day-to-day business operations and therefore subsequently on its ability to pay or not pay rent.

This is important because often what we have seen in the past with different circumstances, but in particular when somebody says this is an event of force majeure, yes, and the courts have actually, even the RDC, has held yes, COVID-19 is a force majeure, but in order to benefit or avail yourself of the benefits of this force majeure, the business must be impacted directly by this event of force majeure, i.e., the pandemic.  It could not be, for example, your business is suffering due to your own negligence or your own inability to run a business but rather directly related and is affected by COVID-19.  This is why they appointed the expert in this case to show (a) that the business did suffer tremendously and (b) that the results of their loss in revenues and sales were directly related to COVID-19.  It is fairly easy to determine because when you shop is closed and you are not able to operate, it’s fairly easy to draw the direct link between.

As a result, the court allowed the tenant to terminate the lease early.  Also, the court waived the penalties that contractually were otherwise due for every bounced check for the previous months, and also the court waived the other fees that the tenant would otherwise have to pay, such as chiller fees, and advertising fees that they would otherwise have contractually paid to the landlord.  However, the obligation to pay for the rent while the business was still benefiting from the property remained, though the court did waive, and this is important, the rent for the period during the lockdown, and this was because the business was not ultimately able to benefit from the premises during the period of lockdown, so the court did waive the rent obligations for that period of time, but as long as the business was still operating or occupying the premises after the lock-down, then they had to pay the rent amount for that period of time.

This is important as well because what we have seen from a number of clients that have approached us, they want to negotiate.  They are negotiating perhaps the exit from the lease altogether, but it’s really important to understand that as long as you remain in the premises that is still a colorable, defensible position for the landlord to expect payment of rent, perhaps discounted, but still payment of rent while you are occupying the premises.  This is for obvious reasons, because if you are still in the premises, even if you are not really operating a business, you can see that the landlord does not have the benefit of the premises, so they cannot even re-rent for whatever the new price might be.  It’s important for businesses to understand that.  Therefore, if you do want to terminate, the courts will apply force majeure as long as this was the true cause of your financial challenges, but you still need to be accountable for the time that you remain in the premises.

Tim Elliot:  That’s the first of the instances that we’re looking at today, the first of four rental disputes on today’s edition of Lawgical.  The second, Ludmila, is the story of a tenant in one of Dubai’s shiny tower blocks.

Ludmila Yamalova:  Yes.  The second case actually relates to a residential lease.  The previous one was related to commercial.  This is residential.  In this case, the tenancy agreement was signed for a residential property by a tenant who ultimately also tried to exit from the agreement or terminate the lease agreement early because he was not able to pay for the remainder of the lease period.  Once again, the checks here were issued, the postdated checks were issued for the remainder of the period, and then when the tenant told the landlord he wanted to (a) exit or terminate the lease early and (b) get the checks back for the remainder of the period, obviously they didn’t agree and so the tenant was forced to file a case with the RDC.  The reason the tenant in this particular case was not able to pay was because he had lost his job.  The job was the source of his income from which he was ultimately paying for the rent.  Not only did he lose the job, but he also was not able to find a new one.

In this case, once again, the RDC issued a decision in favor of the tenant, allowing the tenant (1) to terminate the lease early and (2) ordering the landlord to return the postdated checks for the remainder of the lease after court ultimately from the terminated date.  The court looked at, once again, COVID-19 as the event of force majeure due to which the tenant here lost his job and also the tenant presented evidence he was not able to find a new job.  Therefore, the court held this event as an event of impossibility.  In other words, it was impossible for the tenant to perform the remainder of his obligations under the contract because he did not have a job, and therefore, no source of income, and he didn’t have any other realistic prospect of sourcing a new job to be able to maintain his obligations under this lease agreement and therefore pay for the remainder of his lease.  As a result, the RDC issued a decision, ordered the landlord to return the checks and terminating the contract.

Tim Elliot:  Before we move onto the third instance, could you give some idea or some example of the kind of evidence that you could not find a new job.  What would be appropriate in court?

Ludmila Yamalova:  Perhaps it depends.  It’s very subjective and depends on the circumstances.  Let’s say if you were in the airline industry, and you are a pilot or you are a flight attendant, when airlines are terminating employees en masse, and that is all you have ever done, therefore you can see how just the nature of your job is perhaps conclusive enough for the court to determine that, yes, this is not going to be easy for you to replace your job.  Similarly, if you are in the hospitality industry or in the hotel industry, same thing, it is the nature of your job speaks to your inability to find another job in the foreseeable future.  Let’s say if you were in the service industry, like the spas or the industries related to personal care, and there have been a lot of spas and salons that have closed their doors for this very reason because obviously social distancing and just the inability to provide personal services, a lot of those business have suffered and people have not been able to find jobs.  But again, purely on the basis of the job description, the courts can conclude that you do not have any realistic prospects of finding a new job.  That’s on the one hand.

On the other hand, you could also perhaps demonstrate that you have sent your cv’s to different recruiters and different jobs and you could maybe show, hey look, I have send my cv’s every day for the last three or four months and I have not received a single response, let alone offer.  There could also be messages, for example, from recruiters that would tell you:  Sorry, this is a very difficult time.  This is not the time.  Nobody is hiring in your industry.  So, there are different types of evidence.

Tim Elliot:  Let’s look at a commercial rental dispute, Ludmila.  This is actually a law firm.

Ludmila Yamalova:  Yes.  This is a very interesting case where a law firm actually tried to negotiate for a reduction in rent with its landlord, again due to COVID-19 affecting the business negatively and them suffering serious financial setbacks in their ability to generate income.  They wanted to reduce their rent and also asked the landlord to waive rent for the period during the lockdown when they were not able to benefit from the property and also any kind of penalties that would have resulted from bounced checks for the previous months when the firm was not able to pay.  There were negotiations between the law firm and the landlord which did not yield any meaningful discussions, and as a result the law firm filed a case with the RDC, asking ultimately for the RDC’s help in a rent reduction with the landlord.  The RDC, once again, held that COVID-19 was a factor and, as a result, because of this factor the financial situation was negatively affected.  They also appointed an expert.  The expert was appointed in July and literally just perhaps two weeks later the court issued the judgment, so once again, the expert was acting quite quickly.  As a result of the expert’s report, the court issued a judgment in favor of the tenant, ordering a reduction of the rent, and that was a 25% reduction, and also allowing for the waiver of the rent during the period of lockdown when the firm was not able to use the office.

So once again, another very positive case for tenants in this particular case, but ultimately if you ask me, I think from a business perspective, it is also a positive result for the landlord because, at least under this judgment, he still has an active lease and still can collect rental payments, albeit at a discount.

Tim Elliot:  The fourth and final case details how the RDC, the Rental Disputes Committee, ordered the termination of a tenancy contract for a shisha restaurant, a café, as it was under liquidation.  All shisha cafes were ordered to be closed under lockdown, of course.  What happened in this specific case?

Ludmila Yamalova:  Yes, once again, another case that ended up at the RDC.  This time it was brought by the shisha restaurant, a café, on account of once again COVID-19 affecting its business negatively, and as a result of the pandemic the restaurant ultimately had to go through liquidation.  It’s not just closing the door and restructuring, perhaps moving to cheaper premises, but ultimately the restaurant had to file for liquidation because the lockdown directly affected its ability to generate money and continues to do so due to current COVID-19 related measures that continue to affect restaurants such as shisha services because to my knowledge still to this day they are not able to operate because of the current measures that are put in place.  A restaurant that relies heavily on shisha services, and by the way, also restaurants pay quite significant fees and especially in insurance and licenses just to be able to provide shisha services.  It’s not just a restaurant that’s just closing its door, but for restaurants to provide shisha services there is all sorts of insurances and additional premiums and fees that have to be paid and licenses that have to be issued for them just to provide that service.  The expenses of running a restaurant like that are very, very high.  Now, all of a sudden, the very essence of your business has now been taken away from you by virtue of just government regulations on account of the pandemic, the restaurant stood no chance.

In this particular case, once again, the RDC issued a judgment in favor of the tenant, i.e., the restaurant, and one of the essential pieces of evidence that it relied on is the fact that the restaurant actually had applied for liquidation, for bankruptcy.  In this case, sadly, the restaurant realized it just could not operate anymore in any premises and therefore filed for liquidation because it could not even satisfy its liabilities to other creditors.  The RDC looked at that as conclusive evidence that the restaurant was directly impacted by COVID-19 being a force majeure and allowed it to terminate the contract early and waive the penalties that the restaurant would have otherwise had to pay under the contract for early termination and for unpaid rent for the previous periods of time in bounced checks.

Tim Elliot:  I should point out to anybody listening to this podcast, wondering what a shisha café is, a shisha café is a licensed café where you can go and participate in a water pipe flavored tobacco smoking experience.  They are prevalent across the Gulf region, in Turkey and beyond, and are licensed specifically in Dubai.  They have been very affected by the effects of the coronavirus pandemic.  All these examples, Ludmila, the four that we’ve taken today, beg some fundamental questions.  They’re all similar, but unique in their own ways.  The coronavirus has impacted all of us in so many ways, but let’s start with exactly what current rights of tenants or people leasing properties are in the time of COVID-19.  As far as I’m aware, tenants’ rights are as they were before, but we’re starting to see differences in judgments.  Is that a fair way to summarize it?

Ludmila Yamalova:  Well, interestingly, from a legal perspective, not much has changed and not much needs to be changed by way of, for example, a codified resolution or some sort of codification in law.  That is because the legal principles that are being relied on, they are relied on under the existing laws and existing jurisprudence.  That is, on the one hand, from the legal perspective that you have a contract and the contract is subject to the U.A.E. contract law and also, for example, in this case, the Dubai rental laws.  Those laws remain as they are, but then also in the U.A.E. jurisprudence there is a legal notion, a legal theory that exists which is the force majeure, and ultimately in relevant terms the force majeure refers to an act or an event that gives the parties to a contract a legitimate right to exit the contractual obligations early without paying penalties.  That’s what it’s about.  It’s really applying an existing jurisprudence, an existing legal principle that has been part of the U.A.E. jurisprudence from the very beginning to the current circumstances.

The contractual laws remain, but it’s also even under the contract law in the U.A.E. there is a possibility for a party to exit its contractual obligations if it is no longer possible for them to continue to comply with this obligation.  It is a principle called impossibility of contract.  It is the same laws that apply, the same legal principles.  It is just they are being applied under the current factual backgrounds, the current circumstances where businesses and individuals are being affected to the point where it is no longer possible for them to comply with their obligation or where the coronavirus or COVID-19 has caused such significant detriment to the business that it now constitutes a valid reason for that business or for that individual to exit from their contractual obligations because it’s either impossible or unfair for them to continue with the current contractual setup because of the global pandemic.

Tim Elliot:  Let me ask you kind of the same question, but in a few different ways.  As we record this, around about five months since lockdown was enforced, what’s changed in that five months, if anything?  What do you see perhaps changing?  Because the economic effects are here for some time.  I think we all have to face that.  For example, are you finding that proceedings are being expedited more quickly?

Ludmila Yamalova:  Well, a number of things have changed and perhaps continue to change from a legal standpoint and a practical standpoint.  From a legal standpoint, if you recall, and we even covered it I think in the previous podcast, the word temporary measures that were put in place by the government, for example, disallowing evictions, evictions from either residential premises or commercial premises because of COVID-19.  They were in fact in addition to the previous existing rules and regulations.  They were temporary measures, temporary regulations that were put in place, that were giving tenants, for example, relief from the threat of being evicted on account of not being able to pay their rent.  Those measures were put in place.  By definition, they were going to be temporary.  Now, it’s not necessarily the case that they have not expired or those measures no longer apply, but now we’ve gone beyond just the hard, fast lockdown that we were all experiencing, so it’s perhaps not as clear whether those particular measures would still apply because they were certain periods they were put in place back then.  It was three months, for example, but there were a few extensions that might have applied.  Now, those measures are still in place but beyond that the courts have now clearly come down and clarified the rules and regulations as they apply, in this particular case, to residential or the real estate aspect of the economy.  This is the one change that has happened.

The other change that has happened is that, yes, even bringing these cases before or during the lockdown was not possible because the courts were closed, physically closed.  That is one of the upsides of the COVID-19 is that the regulators, and including the courts, have now embraced technology more so and are now offering a lot of these hearings online.  You are able to attend the hearings, even if, for example, you are a landlord or a tenant that is based outside of the U.A.E.  You can now attend these hearings virtually, so that has changed.

From a practical or from a business standpoint what has changed is that we are seeing more landlords becoming more pragmatic and more realistic about what they can should do under the circumstances versus taking this very hard line approach of like:  No, here is the contract.  You signed the contract, five years, we are going to hold you to it.  A lot of the landlords, instead of going to court or being dragged through the courts, they are taking a more pragmatic and more realistic approach of okay, so now, we are in this together, so what can we do?  Okay, we will give you a break in the rent.  We will either reduce your rent significantly, or we will work out some other kind of an arrangement perhaps where you pay a percentage of your rent gradually or we will ultimately let you terminated the contract early because we know you cannot pay.  So, instead of being dragged through the courts and having the court issues these judgments and paying for legal expenses and such, we will just release you early and with the hope that we can find a new tenant, albeit at reduced rent, but without having to pay for the legal expenses.

Legally yes, there have been changes specifically related to COVID-19 regulations and more importantly, I would say, finally we are seeing a real shift in landlords’ mindset and parties’ mindset in general of trying to reach a compromise without having to resort to legal formal means.

Tim Elliot:  Let me ask you about whether or not you would expect actually codified changes to the law.  One thing is clear here.  We haven’t seen the worst yet of the pandemic, certainly from a human economic perspective.  Do you expect or anticipate any actual codified changes that surround the residential or commercial aspects of rental agreements?

Ludmila Yamalova:  To be honest with you, not right now, not given these RDC judgments.  I do not see necessarily any upcoming regulations that either are warranted or necessary given how the courts are actually adjudicating these cases.  If, for example, the courts felt restricted by the existing laws to issue judgments like the ones we just discussed, that the RDC has been issuing, if the courts did feel restricted because the laws were not available to them to allow for these kind of modifications of contractual relationships, then I would have said, yes, I see the need for codified changes to add flexibility to the market.  But right now, given what the laws are and have been and how the courts have interpreting them or applying them, I’d say there isn’t really any kind of necessary need or necessary legislation that the society would benefit from in order to help us all through these challenging times.

Tim Elliot:  That’s another episode of Lawgical.  Ludmila Yamalova is the Managing Partner here at Yamalova & Plewka.  As ever, it’s been a learning experience talking to you.  Thank you.

Ludmila Yamalova:  Thank you, Tim.

Tim Elliot:  If you have a legal question you need answered in a future episode of Lawgical, or if you’d like consultation with a qualified and U.A.E. experienced legal professional, all you have to do is click the Contact button at LYLawyers.com.  Plus, you can WhatsApp us as well, 00971 52 525 1611.