In the long debate on this very important Islamic financing tool named Ijarah contract, I have covered almost all aspects, including the impact of the total loss of the leased asset where the lease gets terminated immediately irrespective of whether it was the lessee’s negligence toward utilizing the leased asset or the lessor’s fault in not carrying out (or procuring to carry out) the major maintenance of the leased asset or a force majeure event or an act of God.
Well, that was in an ordinary lease contract where the lessee is handed the immediate possession of the leased asset to start the lease. What about the total loss of the leased asset occurring in a forward lease contract where, first of all, the lease does not get commenced forthwith, but only upon the completion and delivery of the asset? Does the same rule apply in a forward lease contract as well? What do you think?
For those of you who think ‘yes’, the lease gets terminated immediately upon the leased asset getting totally destroyed under a forward lease contract, I would advise ‘think again’.
To your surprise, the lease in terms of a forward lease contract does not get terminated upon the total destruction of the leased asset. Yes, that is true. Let me explain.
You see, when a forward lease contract is signed between the parties, the asset purported to be leased does not exist but is merely ‘described’ or ‘specified’ at best in the schedule attached to the forward lease contract. For example, a forward lease contract is entered into by an Islamic bank with a customer for a two-bedroom hall apartment on the 15th floor of a new project just launched by a developer.
Since the apartment is nonexistent at this stage, it cannot be ‘identified’ — in the manner that it is categorized in the case of a ready property under an ordinary lease contract. The lease of an identified ready asset is called Ijarah Ain in Shariah terms which means ‘this’ particular asset which can be seen, touched, felt, visited and acquired — then and there.
Explaining this important point further, let me use the jargon of the Shariah scholars when they say “the one and the only” asset. They further explain by way of the chassis and engine numbers of a car which are unique to it, or the manufacturer’s serial number on an aircraft which is dedicated to only one inimitable airplane.
On the other hand, the lease of a nonexistent property in terms of a forward lease contract is termed as Ijarah Mawsufah Fi Dhimmah or lease of an asset whose characteristics can only be ‘described’ since it is nonexistent at the time of signing the forward lease contract.
The asset under a forward lease contract is therefore not considered ‘unique or inimitable’ under Shariah since it has not come into being as yet. Borrowing the example of a car and airplane, the engine and chassis numbers of the car, or the manufacturer’s serial number of the airplane, are not available as yet to make them unique, and that is why it is essential that the asset under the forward lease contract is described in complete detail in order to avoid any dispute upon its completion and delivery.
Well, the important point to recognize is that in terms of the lease of an identified asset, if such an asset is destroyed, it is not possible to replace it since it was ‘one and the only’ and as such, Shariah principles require that the lease is terminated forthwith, irrespective of why and how the asset got destroyed.
Nevertheless, in the case of the forward lease contract, the asset was not ‘unique’ or ‘one and the only’ since its features were not ‘identified’ but ‘described’. As such, if that is the case, an asset which gets totally destroyed under a forward lease contract can be replaced by the lessor with the asset having the same description.
This is the Shariah reason that the lease under a forward lease contract does not get terminated upon the destruction of the leased asset. In fact, the Shariah principles regard it as the lessee’s right over the lessor under a forward lease contract to replace the destroyed asset with one having the same description.
The Shariah principle of termination of the lease in the case of total destruction of the leased asset in an ordinary lease contract of an identified asset gets transmuted into ‘pausing’ the lease rent under a forward lease contract until such time that the lessor replaces the asset with another one having similar specifications in order to ‘resume’ the lease.
However, Shariah principles provide flexibility that if the lessor is unable to produce the alternate asset with similar specifications, the lessor shall request the lessee to either accept another asset with different specifications or agree to terminate the forward lease contract.
So, if the lessee under a forward lease contract of a financial lease nature agrees to terminate the lease upon the total destruction of the asset, how will he be compensated for the payment of the fixed element (article 72) that he has so religiously made since the commencement of the lease under the forward lease contract? Shall we discuss it in article number 78?
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: We shall continue with our discussion on the last few points on Ijarah.