What is Finance Lease?

The Concept

Financial leasing is a concept wherein a licensed company (the lessor) purchases the asset of their customer (the lessee) on lease for a certain period of time in return of a mutually agreed payment schedule. Similar to other lease agreements, the lessor is obliged to maintain the assets while the lessee enjoys the possession of the asset for a said duration, bearing all costs linked to the maintenance of the asset.

License Requirements

Article 2 of the Law strictly prohibits the company from undertaking financial leasing without the relevant license; the law reads as follows:

"Engaging in financial leasing activity

1. It is not permissible to practice financial leasing activity in the State until after obtaining a license from the Central Bank;
2. After each contract of finance lease entered into with a person not authorized by the Central Bank;
3. Any person not authorized by the Central Bank to engage in financial leasing activity shall be prohibited from using the term "finance lease" or any equivalent in its trade name;
4. The Central Bank shall establish regulations for the license of the lessor and carry out the financial leasing activity in the State, including the license of the foreign financial leasing company."

   In line with the foregoing, the Article 3 states that the lease contract shall be written and should be registered or an indication thereof in a special register in accordance with the provision of this law otherwise it will be nullified.

   Components of the Contract

   The lease contract shall be constituent of the following information as laid down by Article 4 of the Law:

   1. Name of the lessor and relevant address and details;
   2. The description of the leased property;
   3. Duration of the contract;
   4. Purpose of the used property and limits on the usage of the property;
   5. The amount of the rent and the payment schedule;
   6. Conditions and provisions to be imposed on the tenants;
   7. The rights of the tenants to the owned premise;
   8. Information regarding the lessee;
   9. Rights and obligations of both the parties;
   10. Substantial obligations that may result from the breach of contract or dissolution of contract;
   11. Any statements, conditions or provisions agreed upon between the parties in the manner not contrary to this law.

The council of ministers shall maintain a register detailing the lease contracts entered into by parties. The register must include the parties managing the contract, the fees for registration and the other relevant data as mentioned by Article 5 of the Law.

Rights and Obligations of the Lessor and Lessee

Obligations of the Lessee (Article 6)

Unless otherwise agreed in the contract, the Lessee shall abide by the provisions of the contract;

1. Taking possession of the leased property from the lessor or the supplier when it is in the case agreed upon in the contract;
2. The payment of the property in accordance with the payment schedules as decided between the parties;
3. The use of the leased property for purposes specified in the contract and within the appropriate use, subject to any terms and conditions, or referred to in the contract or upon supply;
4. Maintain the leased property as the agreed between the parties and to not make any changes except with the consent of lessor;
5. Carry out the normal maintenance required by the leased property in accordance with the agreed terms of the contract;
6. Issue a notice for the occurrence of symptoms that prevent the full or partial use of the leased property and in accordance with the procedures provided for in the contract.

Obligations of the lessor (Article 7)

Unless otherwise agreed between the parties under the contract, the lessor undertakes to:

1. Deliver the leased property in the agreed condition, and enable him to acquire and use it;
2. Notify the supplier in writing at the conclusion of the contract of supply of his intention to rent the property under the contract along with the name of the tenant;
3. Insurance on leased premises.
4. Carry out the essential maintenance required by the Leased Premises, in accordance with the terms agreed upon in the contract;
5. Vacating the premises for the ownership of the leased property by the lessee;
6. Provide the tenant with all the documents and information available to him regarding the leased premises;

Rights of the Lessee (Article 8)

Unless otherwise agreed in the contract, the Lessee shall have the following rights:

1. The choice of the supplier, and to determine the terms of the contract;
2. Selection of the leased property and to determine the method of manufacture or establishment and specifications to be provided, and negotiate with the supplier on these specifications either directly or through the lessor under a written authorization issued by the lessee;
3. Liaise with the supplier directly for any contract or arbitral proceedings in relation to the lease contract between him and the supplier, except for the action for the dissolution of the contract, without prejudice to the right of the lessor to return to the supplier in respect of such claims and promissory notes.

Rights of the Lessor (Article 9)

Unless otherwise agreed in the contract, the lessor shall enjoy the following rights:

1. Inspection of the leased property provided that such action does not cause any damage to the lessee, and the lessor may give written notice to any person to carry out this task;
2. Restoring the possession of the leased property from the stores in the conditions stipulated in the contract or in this law;
3. To transfer his rights under the contract to third parties, taking into account notifying the lessee in writing of the transfer, shall not result in any reduction of the rights of the property contained in the contract or impose any new obligations on it.

Relationship with the Supplier (Article 10)

1. Prior to the conclusion of the contract, the lessee may, upon the prior written consent of the tenderer, negotiate with the supplier regarding the specifications of the leased property, the method of its manufacture or establishment, provided that such approval includes the matters negotiated between the lessee and the supplier.
2. At the end of the negotiations, a supply contract shall be concluded between the lessor and the supplier, specifying the leased property and its specifications as requested by the lessee and any other conditions agreed upon by the parties in the supply contract.
3. The leased property may be owned by the lessee prior to the conclusion of the contract.

Usage of the property

The tenant may take any legal action against any third parties who restrict his rights to use the property subject to the following conditions, in accordance with Article 12 of the Law:

1. Written consent from the owner;
2. The tenant remains committed under the terms of the contract;
3. The period of legal disposition exceeds the duration of the contract.

Further, the property shall be returned in the same way as received by the lessee and any changes shall be at the cost of the tenant. The lessee may compensate for any changes made on the leased property even with the written consent of the lessor if it cannot be separated from the rented property without damaging them (Article 13).

Lessee not entitled to any compensation for fortifications it has made on leased property at its own expense regardless of written consent from the lessor. Lessor if also entitled to transfer the premises to another lessor, taking written notice from the lessee and it shall not result in a reduction of rights or any new obligations.

The law empowers the tenant to waive of his rights and obligations to another tenant for replacing him, provided that the following conditions are met:

1. Prior written consent of the lessor;
2. A declaration of waiver in accordance with this law;
3. Such waiver shall not conflict with the legislation in force in that Emirate;
4. The new tenant shall replace the original tenant with all rights and obligations arising out of the contract from the date of assignment.

Termination and revocation of the contract shall result in the revocation or invalidation of the legal suit filed by the tenant.

Impact of Liquidation

Liquidation of the lessor (Article 23)

In the event of liquidation or bankruptcy of the lessor, the lessee shall have the right to exercise either of the following two options:

1. The contract shall continue to be executed in accordance with its terms and conditions, provided that the liquidator or the trustee of the bankruptcy is notified thereof;
2. Delivery of the leased property to the liquidator or the trustee of the bankruptcy and the entry with the rest of the creditors in the collection of amounts due to him if any - in accordance with the accounting standards. The new landlord who has ownership of the leased property as a result of the liquidation of the previous lessor or declaring bankruptcy shall continue to execute the contract if the renter declares his desire to do so.

Liquidation of the lessee (Article 24)

Without prejudice to any rules governing liquidation and bankruptcy in the State, the liquidation of a lessee or the bankruptcy or death of a person shall be taken into consideration as follows:

1. Leased property shall not be included in lessee's creditors;
2. The liquidator, bankruptcy trustee or his heirs shall return the leased property to the lessor within 90 days from the date of the decision of liquidation;
3. If heirs wish to continue, they may differ in accordance with terms and conditions.

Termination of the Contract

Either party has the right to terminate the contract on relevant conditions as prescribed by the Law. Article 26 of the Law lays down the rights of the lessor to terminate which are as follows:

1. If the Tenant breaches the obligations under Articles 1, 2, 3, 4 and 5 of Article 6 of this Law;
2. If the Tenant breaches any substantial obligation stipulated in the Contract;
3. If the lessee is seriously injured by the leased property. The lessee shall be notified in writing, and the contract will be terminated should the lessee fails to remedy the breach within 60 days from the date of notification.

On the other hand, Article 27 of the Law provides for Lessee's right to terminate the contract under the following circumstances:

1. If the Lessor breaches the obligations stipulated in Articles 1, 3 and 4 of Article 7 of this Law.
2. If the lessor fails to comply with any obligation stipulated in the contract;

The lessee shall provide 60 days written notice to the lessor for remedying the breach, and the contract can be dissolved upon the failure of the lessor to perform his obligation. The lessee shall be entitled to his claims due to him upon the dissolution of the contract.

Apart from the termination of the contract, the Law also grants the Central Bank of UAE to cancel the license of the lessor under the following conditions as mentioned under Article 31 of the Law:

1. If Lessor does not commence activity within 6 months from the date of the license;
2. If lessor ceases to exercise his actual activity for more than 6 months
3. If the financial position of the lessor has not been changed or corrected in accordance with the instructions of the bank.

Penalties

The law imposes strict punishments including fine and imprisonments for those who violate any provision of this law. Article 33 of the Law imposes of imprisonment and a fine of not less than two hundred thousand dirhams and not exceeding ten million dirhams or one of these penalties on anyone engaged in financial leasing activity or using a lease term Finance in its trade name without a license.

Furthermore, a fine of not more than AED 500 000 shall be punished by a fine on any person who violates any of the provisions of this law shall be liable to the decisions issued and the Council of Ministers shall issue a decision specifying the irregularities and the amount of the fines prescribed for each.