Readers, I am back after a gap of a few weeks since, like everybody else, I too needed a little vacation. Today, I shall endeavor to wrap up the long debate on Ijarah or leasing by picking the last few points.

We have discussed the subject of Ijarah from a financial leasing perspective whereby the lessee acquires the ownership of the leased asset upon the successful completion of the lease term. What if the lease is simply an operating one where the lessee shall return the asset to the owner upon the expiry of the lease term? My point is from the risk management perspective.

Many of you must have taken a car on rent or a good majority may be renting property, be it commercial or residential. Operating lease is permissible in Shariah law provided that the subject matter of the lease contract is Shariah compliant and the contract does not have any clause contradicting the Shariah principles. Another important aspect is that the tenancy contract should be compliant to the law of the land without which it will not be effective or enforceable even if it is Shariah compliant.

The lessee, or the tenant (as it is generally referred to in the operating lease), has the responsibility to use the rented asset in a manner so as to prevent it from damage, save for normal wear and tear. Some of the owners would seek a deposit amount from the tenant to ensure protection from damage to the leased asset or non-payment of rent. There is no Shariah issue to do so except that it should be paid back to the tenant in full upon the return of the rented asset in the same condition when it was leased (excluding normal wear and tear).

In the case of the operating lease, the tenant shall be obliged to keep the property away from any safety hazards, apply care in using the gadgets (if any), adhere to cleanliness and no subleasing the property besides respecting the right of the next-door neighbors and the larger community. These are neutral values equally applicable in law as well as Shariah.

I will now move on to the next issue which is the financial lease on 99-year leasehold properties. Readers may refer to article 62 from which I commenced the chapter of Ijarah. To clarify, I quote in the following a paragraph from that article: “It is possible that the provider of the usufruct is actually not the owner of the asset but a lessee in another lease agreement whereby he or she had obtained the usufruct from the owner of the property, and is now acting as the sublessor in terms of the second lease agreement. Nevertheless, this can only be possible if the owner under the first lease agreement has permitted for subleasing of the asset.”

In some parts of the UAE, I have observed the sale of leasehold properties with or without conventional or Islamic financing. In such cases, the developer obtains land from the state on a 99-year lease with the purpose of constructing homes for onward sale to prospective buyers.

Here, the purchasers of such residential or commercial property will occupy it only for a period of 99 years, after which the ownership of the land is returned to the state.

The countdown for leasehold properties commences upon the developer signing the 99-year lease agreement with the state. By the time the properties are completed and handed over to the buyers, three to five years may have already been consumed from the tenure of the long-term usufruct. Normally, the second or third generation of the original buyer is able to witness the completion of the 99-year lease if the property has not been sold by the original purchaser. At this point, either the state converts the leasehold land into freehold upon the payment of an amount, or the lease of the land is renewed for another 99 years.

Here, I would like to mention that there is no Shariah issue for Islamic financial institutions to finance the purchase of long-term leasehold properties. This is because, as already explained in detail, in Shariah, it is possible that the land belongs to party A but the infrastructure on it is owned by party B.

As such, Islamic financial institutions financing long-term leasehold properties shall purchase the property erected on state land (along with the transfer of the remaining years of the usufruct from the developer) and lease it to the client together with subleasing the usufruct related to the land.

Here, the readers should also take note that the difference between the short-term lease and 99-year long-term lease is that in the latter, the lessee (the developer or its buyer) is not required to seek permission from the landlord (the state) for making any major changes to the property built over such land whereas in the short-term lease, the lessee is not allowed to make any changes unless the owner has provided the consent.

How does an Islamic financial institution deal with the default by a customer under the financing for the leasehold properties? Shall we keep it for next week?

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 wrap-up points on Ijarah.