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Insights

14 April 2020

The Impact of COVID-19 on Leases in the Middle East

As businesses across the world act to mitigate the effect of COVID-19 on the economy, this article focuses on the impact COVID-19 has on key provisions in a residential and/or commercial lease and the options available to landlords and tenants to minimise its impact.

The position may change in the coming days or weeks as the various jurisdictions continue to introduce new legislation and directives.

Force Majeure

Force majeure is an event that is outside the control of one or both contracting parties that renders the performance of their contractual obligations impossible (or impractical). The UAE, Bahrain and Qatar Civil Codes generally follow a similar approach in that force majeure events and exceptional circumstances may relieve parties from the performance of their contractual obligations.

Certain Civil Codes may also provide additional relief, such as article 249 of the Civil Transactions Law in the UAE which provides that a Court may modify the obligations of the parties if an event of a public nature occurs which makes the obligations of the parties commercially impossible.

It is important to note that each of the jurisdictions above do not provide a fixed definition of force majeure or exceptional circumstances. Therefore, it is likely that each jurisdiction may treat COVID-19 differently. For example, we note that the Intellectual Property Protection Directorate in Qatar recently declared that the COVID-19 pandemic constitutes an event of force majeure whereas we are not aware of other authorities in the UAE or Bahrain specifically declaring an official event of force majeure (which would typically be unusual).

In general and based on our previous experience, it is relatively uncommon for leases in the Middle East to provide for express provisions dealing with force majeure events, let alone the suspension of rent arising from force majeure.

Where a lease does expressly provide for a force majeure event then it is not necessarily the case that a party can simply invoke the force majeure provisions and legal guidance should be sought. For example, does the definition of force majeure include an 'epidemic or pandemic' or is there a sufficiently wide 'sweeping' provision within the definition that would capture the current circumstances?

Ultimately, if the lease is not clear as to whether COVID-19 constitutes as a force majeure event, the parties will need to seek a determination by a Court in the context of applicable legislation or ultimately, the relevant Civil Codes within the above jurisdictions.

However, and for the remainder of this article, we will focus on in the impact of COVID-19 on key obligations within a lease where there are no express force majeure provisions.

Payment of Rent

In the absence of express provisions within a lease allowing for the suspension of rent, a tenant will continue to be contractually bound to pay rent during the period of disruption caused by COVID-19. In accordance with the terms of a lease, a failure by a tenant to pay rent will be a breach of contract giving rise to a potential right by a landlord to forfeit the lease and to seek an order from the Court for possession of the premises.

However, one of the key differences between civil law and common law jurisdictions is that most civil law jurisdictions provide that force majeure affects all obligations whereas the common law position is that force majeure will not typically apply to payment obligations.

This is important as it means that provided a tenant can prove that it has been impacted by COVID-19 and COVID-19 is determined by a Court as a force majeure event, a tenant may be able to invoke the wider interpretation of force majeure under civil jurisdictions to relieve itself from the payment of rent during this period.

Other Material Obligations

Whilst the payment of rent will be a key area of concern during this period, there are a number of other obligations contained within a lease which may be impacted by COVID-19 and where the provisions of force majeure may apply. For example, a tenant may be prevented from carrying out its obligations to maintain and repair the premises or a landlord may not be able to provide a tenant with either access to the premises or enjoyment of the premises (or certain services to the premises).

Again, the wider interpretation of force majeure under civil jurisdictions may enable the parties to relieve themselves of such obligations during the current period but guidance from a legal professional with significant experience of all types of leases should be sought.

Moratorium from Eviction

It should also be pointed out that both Dubai and Abu Dhabi have introduced a moratorium on evictions, other than where a property has been abandoned. Therefore, even if a landlord is entitled to seek an eviction due to a breach of covenant by a tenant (such as non-payment of rent), the relevant Court will not issue an eviction order for the next 2 months.

This may therefore afford tenants some short term protection from eviction but it does not provide a long term solution and is, of course, a risky strategy for a tenant as it means being in breach of a lease in the first place.

Practical Solutions

Where a lease is silent as to force majeure, the parties would need to go to a Court to seek a determination as to whether COVID-19 can be interpreted as a force majeure event and, if so, whether relief will be granted from the abovementioned obligations under a lease.

Such a course of action is usually the last resort and will usually bring to an end the commercial relationship between the parties.

Therefore, we have highlighted some alternative strategies which may be considered to enable the parties to a lease to reach a mutually beneficial outcome:

  • Consider any current or new government policies relating to rent and other concessions that may be applicable from relevant regional stimulus measures. Please see our previous article in this respect – Covid 19 and it's impact on the Real Estate sector in the Middle East;
  • Negotiate a rent reduction or a suspension of rent. These are fundamentally different as the former provides an absolute reduction to the level of rent being paid whereas the latter simply defers the obligation to a future point in time. Both have merits at a time when cash-flow is critical. However, it is likely that either may require some commercial negotiation with a landlord in the form of:
    • A extension to the term of the lease;
    • An agreement to take additional premises or to surrender part the premises back to a landlord where the landlord wishes to utilise that space for other purposes;
    • A removal of a key concession in favour of a tenant such as a break clause or a limited repair obligation; or
    • Agreeing to a fixed increase in the rent (whether through a rent review or otherwise) beyond the time reasonably anticipated as being the period disrupted by COVID-19; and
  • Check any insurance policies in place for coverage in respect of business disruption.

We have been particularly busy advising a number of our clients (both landlords and tenants) in relation to the impact of COVID-19 and helping them manage their lease obligations during these difficult and challenging times. Therefore, please feel free to contact us should you have any particular concerns under your leases which you require support and/or guidance on.

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