By Arjun Ahluwalia, Maheen Qasim and Hisham Aboukoura

Globally, the consequences from COVID-19 have led to extreme pressures on many brick-and-mortar businesses with some facing little or no revenue generation during the period of the mandatory lockdown and leaving them saddled with high rental obligations.  This note looks at the issue from the generic perspective of tenants and offers some starting points for relief.

Landlord Negotiation. Attempt to negotiate with the landlord to provide rental relief such as a rent-free period for an agreed time, or to remove any fixed rental payments and replace them with variable revenue based rental payments for an agreed “affected period”.  Other measures offered may include rent payment deferment or reductions.  It is important for the tenant to prepare and present documented evidence of the detrimental impact of COVID-19.

Contractual Assessment.  Assess the situation by reviewing the commercial lease agreement to evaluate whether any remedies exist such as a break clause or a well-drafted Force Majeure clause.   While reviewing the lease, one ought to assess the factual situation as well and keep in mind any defaults or breaches by the landlord historically which may not have been waived by the tenant.

Statutory Assessment.  Assess the statutory protections afforded to you as a tenant under your jurisdiction’s laws.  Some key statutory provisions may include statutory Force Majeure, protections against impossibility of performance and protections against oppressive performance of a contract given an exceptional situation.  While in most jurisdictions, courts shy away from being very activist in re-opening contractual clauses, there is a possibility that given the unprecedented nature of the COVID-19 crisis that courts may be more willing to entertain substantiated claims.

A note relevant to the UAE jurisdiction from our UAE based lawyers:

The UAE’s Federal Law No. 5 of 1985 (the UAE Civil Code) contains the following provisions that may be useful for tenants seeking to vary, suspend or terminate their rental obligations:

Statutory Force Majeure.  Art. 273 of the UAE Civil Code permits cancellation of a contract upon the occurrence of an event of force majeure, which while undefined is generally accepted to be events that are unforeseeable and unavoidable.  Recent developments suggest it may be possible to obtain either a full cancellation or a partial cancellation of obligations (depending on whether some or all obligations are frustrated).

Oppressive Performance.  Art. 249 of the UAE Civil Code permits a contractual party to argue that a contract has become unfair and unbalanced given the occurrence of exceptional circumstances, leading to oppression of the claimant which merits a re-opening of the contractual terms.  If the courts agree, the courts have the discretion to “re-balance” the contractual obligations between the parties.

Impossibility.  Art. 782 of the UAE Civil Code may be used by a tenant to argue for cancellation of a lease where it can show that circumstances have occurred whereby it is impossible to fully (or potentially even partially) enjoy the benefits of the lease due to an act of any governmental authority.

The Emirate of Dubai has been proactive with implementing measures to provide a well-thought out framework for dealing with commercial leases affected by COVID-19. Under the recent Administrative Resolution No. 5 of 2020 “Regarding Formation of New Judicial Committees in respect of Disputes Related to the Cancellation of Contracts and Decrease of Rental Value”, the Rental Dispute Settlement Centre in Dubai (RDSC) has formed two primary committees (with a third appellate committee) to review applications and requests to terminate lease agreements or reduce the rental amounts due under the lease agreements.  This new development potentially opens the door for tenants to appeal to the RDSC to intervene and reduce the value of rental payments owed to landlords.