Dubai landlords try to get higher rents on new tenancy contracts before 3-year freeze takes effect

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Dubai’s proposed new Rental Law will represent the biggest change to landlord-tenant relationships in recent times. Image Credit: Ahmed Ramzan/Gulf News

Dubai: Landlords, especially the big ones, are starting to ask for a 5-15 per cent rental increase on new contracts so that they can better absorb Dubai’s upcoming three-year rent freeze on new tenancies. The new law is still in the draft stages, but represent one of the biggest changes ever for the emirate’s residential rental market.

By asking for higher rents now, these landlords expect to be better positioned to handle the non-hike period and the higher costs associated with the maintenance of their properties during those three years. The increased rents are being asked for in-demand villa and townhouse communities and also in the super-premium apartment category.

In return, these landlords are once again willing to offer an extra month or two as rent-free or offering free air-conditioning. There is also flexibility on the cheque payments. What landlords are trying to avoid at any cost is enter a new tenancy contract and then find they do not have the flexibility to ask for higher rents if the market suddenly picks up. (At the top end of the rental market, there are already signs that rents are on the increase.)

The next six to eight weeks is expected to see increased leasing activity as residents take a decision on whether to shift from their current premises or retain their contract.

Asking for high rents now comes with a certain element of risk for landlords, more so as asking rates remain is still under heavy pressure within the wider market. For the mid to more affordable rental options, landlords of these properties are in no position to ask for more – until demand stabilizes.

“There are talks [about increases] from landlords – but rents are still a function of supply and demand,” said Prathyusha Gurrapu, Head of Research at Core, the property consultancy. “Some residential units available in the market as new-leases are seeing multiple offers. But these are mostly for established villa communities and few key prime apartment districts and not reflective of the whole market.”

Rent status on new contracts in other emirates

* In Abu Dhabi, the tenancy laws do not include a rent-freeze provision. But a 5% annual rental cap was reintroduced, which allows landlords to increase the rent within the price cap.

* In Sharjah, the rent cannot be increased for first three years of tenancy contract. On completion of the three-year period, the landlord is permitted to increase the rent every two years.

* As for Fujairah, the relevant law reduces the annual rent increases to a maximum of 5 per cent.

* In Ras Al Khaimah, a law regulating landlord-tenant relationships is yet to be established. Thus, the UAE Civil Transactions Law No. 5 of 1985 shall apply to lease contracts in the emirate.

Credit: The Legal Group

‘Managed’ increase

At the Downtown and Dubai Marina, for newly vacated apartments, especially three-bedroom options, landlords are certainly starting to ask for more. Again, much depends on what will happen in the coming weeks when tenants take that final decision to stay on or move. (This summer should see more than the usual activity because a sizeable number of residents are unlikely to travel, and could be using the monies saved for a residency switch.)

We have seen a steady shift from one-year upfront rental payments to multiple cheques. In addition to providing liquidity and flexibility to tenants to spread their cash outflows through the year, monthly check payments are largely the norm in most mature markets.

– Prathyusha Gurrapu at Core

What does the new Law change?

The new law applies only to new rental contracts and comes at a time when another 30,000 plus new homes will be delivered and many of them will be added to Dubai’s rental market. “This [three-year freeze] will contribute greatly towards family stability, as the tenant will be aware of the rental expenses that he/she would incur at the time of entering into a tenancy contract and arrange affairs accordingly,” said Esraa Rhibani, Litigation Associate at the law firm TLG. “The tenant would not have to face unexpected rental increases by the landlord and would not have to frequently go through the hassle of renting a new apartment.”

As important as when the new Law comes into effect, landlords and tenants must keep an eye on whether the law will have a retroactive effect. That is, whether it applies to contracts already entered now or whether it applies only to new contracts drawn up after the Law is effected.

The new decree on the rental increase by the Dubai Emirate will balance the rights of both the lessee and the lessor

– Esraa Rhibani of TLG

“Currently, there is no provision on the specific number of years the parties are obligated to agree on for a rent freeze,” said Rhibani.

Dubai had in the past imposed temporary no-hike policies on new contracts, in particular during 2007-08 phase when rents had soared by 20-30 per cent within a short span. The new Law will thus be a breakthrough because it will be a permanent factor in all tenant-landlord transactions… at least for the first three years of a new contract.

So, when the new Law comes into effect is still the million-dollar question. Landlords are taking pre-emptive action by locking in new rental contracts at a rate they are comfortable with. At least those landlords who can demand more are doing so.

Equal rights for landlords

The new Rental Law will also empower landlords in managing their relationships with their tenants. While the mandatory 3-year rental freeze is the biggest change, landlords too will be vested with sufficient rights.

A landlord can, under the Law, file his complaint directly with an ‘execution judge’ rather than have to go through the Rental Disputes Centre or the lower courts first. He can do so “in case the tenant breaches his obligation to pay the rent,” said Esraa Rhibani of The Legal Group.

“This would greatly ease the process of rent collection for the landlord and reduce the time spent on obtaining a legal remedy.”