Foreign Companies Leasing Office Space in the UAE (Dubai and Abu Dhabi)

A Practice Note discussing the issues to consider when a foreign organisation leases office space in a multi-tenant building in the Emirates of Dubai and Abu Dhabi in the United Arab Emirates (UAE). This Note provides guidance for foreign counsel on the leasing process in Dubai and Abu Dhabi, including the workflow of the transaction, laws affecting the parties, and key documents, issues, and customs in leasing transactions.

Important Questions to Ask Your UAE Leasing Attorney or Lawyer

A company that is considering opening an office in a foreign jurisdiction must be informed about the local laws and customs related to office leasing. This Note provides a high-level overview of the office space leasing process in the Emirates of Dubai and Abu Dhabi in the United Arab Emirates (UAE), including discussion of:

• The professionals that should be engaged when opening a foreign office.
• Common leasing structures.
• The principal stages in a typical leasing transaction (including physical and legal due diligence).
• Restrictions on a foreign entity leasing or occupying property in Dubai and Abu Dhabi.
• Key lease terms for tenants.
• Lease registration requirements.
• Taxes applicable to leases of office space.

This Note is useful for counsel advising a foreign organisation in its home jurisdiction, on the key legal and practical points to consider when leasing an office in Dubai and Abu Dhabi. The UAE is a federation of seven emirates, of which Dubai and Abu Dhabi are the largest and most prominent. The UAE is run by a federal government and the local governments of the seven emirates. The UAE Constitution defines the powers and roles of the local governments of the seven emirates. Leases in the UAE are primarily governed by local laws of each emirate. This Note does not address the law applicable to leasing an office in the emirates other than Dubai and Abu Dhabi.

This Note is not intended to be a replacement for legal advice from a lawyer that is qualified in commercial property landlord and tenant law in Dubai or Abu Dhabi.

This Note assumes the tenant is leasing space in a completed multi-tenant office building. It does not address build-to-suit or single-tenant transactions. This Note also does not address the following topics:

• Current market conditions for office leases.
• Construction law, except as it relates to due diligence of the premises (see Country Q&A, Construction and projects in United Arab Emirates: overview).
• Environmental law, except as it relates to due diligence of the premises (see Country Q&A, Environmental law and practice in the United Arab Emirates: overview).
• Establishing a business presence (see Practice Note, Establishing a Branch Office or Presence in the United Arab Emirates and Country Q&A, Establishing a Business in the United Arab Emirates).
• Corporate registration and filing requirements (see Country Q&A, Doing Business in the United Arab Emirates: Overview: Foreign Companies).
• Financing a leasehold interest.
• Employment law (see Country Q&A, Doing Business in the United Arab Emirates: Overview: Employment and Country Q&A, Employment and Employee Benefits in the United Arab Emirates: Overview).
• Tax law (except as it relates to commercial leases) (see Country Q&A, Doing Business in the United Arab Emirates: Overview: Tax).

For an overview of commercial real estate in the UAE, see Country Q&A, Commercial Real Estate in the United Arab Emirates: Overview.

Workflow of a Leasing Transaction

In Dubai and Abu Dhabi, there are several steps involved in identifying appropriate office space and completing an office lease. These steps include the following, which can overlap depending on the particular transaction:

• Assemble the leasing team (see Leasing Team).
• Conduct market research.
• Define the lease and space criteria (see Office Location Considerations).
• Enter into a brokerage agreement (see Brokerage Agreement).
• Enter into a letter of intent, term sheet, or heads of terms (see Preliminary Agreements).
• Conduct due diligence of the premises, the property, and the landlord (see Due Diligence).
• Negotiate the lease and other related agreements (see Primary Documents and Box, Tenant Lease Negotiations).
• Execute the lease and register the lease (see Executing the Lease and Lease Registration).

Leasing Team

The critical first step when deciding to open an office in a foreign jurisdiction is to identify the key internal and external advisors. These advisors provide valuable input when defining the criteria for the premises and the lease.

Internal Team

There are potentially many experts within the tenant's organisation who should be consulted when establishing premises criteria. The tenant should consider including internal representatives from departments including:

• Human resources.
• Information technology (IT).
• Operations and security.
• Finance and accounting.
• Legal.

Key External Advisers

Property Finder

If an organisation does not have detailed knowledge of the area in question, then it may be advisable and prudent to conduct market research to get a general understanding of the nature of properties available for rent, including their specifications and average rental prices in different locations. In Dubai and Abu Dhabi, good starting points to identify potentially leasable properties in the relevant area are online portals:

• Bayut.
• Property Finder Blog UAE.
• Simsari.

Leasing Broker

In Dubai and Abu Dhabi, brokers are real estate professionals with knowledge about the market. They typically introduce landlords to prospective tenants and vice versa. Brokers can provide useful information about market trends, prices, and practices in the location where the tenant is looking to lease property.

The same broker can represent both the landlord and tenant, or each party can have its own broker. The range of the broker's involvement can vary from merely identifying the most appropriate properties and introducing the tenant to the landlord to being fully involved in the transaction, including negotiating the lease terms, procuring the no-objection certificate (NOC) from the developer for the leasing transaction, and facilitating the execution and registration of the lease.

Typically, the services that the tenant's leasing broker can provide include:

• Advising on market trends and the average rental values of different kinds of properties in locations of interest to the tenant.
• Advising the tenant on the general market practice and commercial considerations in leasing properties in Dubai and Abu Dhabi.
• Helping the tenant identify the most appropriate property for its requirements.
• Reviewing and negotiating the lease terms on the tenant's behalf.
• Guiding the tenant in the leasing process.
• Procuring NOCs for the lease (and fit-out) from:
  • the developer of the community where the property is located; and
  • relevant authorities.
• Assisting with the execution and registration of the lease.

A broker must be licensed with the relevant authorities in the particular emirate where they operate and must abide by the rules and regulations governing the brokerage business. For example, Bylaw No. (85) of 2006 Regulating the Real Estate Brokers Register in the Emirate of Dubai regulates real estate brokers in Dubai. This bylaw requires brokers to register in the Real Estate Brokers Register with the Dubai Land Department. The name and registration number entered in the Register must appear in all correspondence and reports issued by the broker. Parties can access the list of all the licensed brokers in Dubai on the website of the Dubai Land Department.

Laws, rules, and regulations governing brokers in Dubai and Abu Dhabi set out a code of conduct that brokers must follow. Brokers also must make certain disclosures about their representation and the subject matter of the transaction to their clients.

A tenant should also consider consulting with local legal counsel familiar with the laws governing brokers in the emirate where the brokers and the real property are located.

Lawyers

Engaging a lawyer is an important component of the leasing process. A foreign company wishing to lease office space in Dubai or Abu Dhabi should engage the services of a lawyer early in the leasing process, so that they are well acquainted with the entire process as well as their rights and obligations in that process.

Ideally, the tenant should engage a lawyer around the time they start looking for potential properties to lease. The lawyer should ideally be a UAE-based legal counsel who is familiar with the laws of Dubai and Abu Dhabi regarding landlord-tenant matters.

The services a lawyer in the UAE can typically provide during the various stages in the leasing process include:

• In the pre-leasing stage:
  • advising on whether the broker is properly licensed and on the broker's general reputation in the UAE market;
  • advising on the terms of the agreement to be entered into with the broker, including negotiating the terms with the broker;
  • advising on any legal restrictions on the leasing of property in Dubai or Abu Dhabi by foreign individuals or entities and recommending alternative structures and solutions to enable the foreign individual or company to lease property;
  • assisting the tenant in incorporating any applicable corporate entities in Dubai and Abu Dhabi for leasing properties;
  • advising on the relevant landlord-tenant law and the tenant's rights and obligations;
  • advising on market norms and commercial considerations; and
  • advising on compliance with anti-money laundering and foreign-exchange-related laws of Dubai and Abu Dhabi.

• In the leasing stage:
  • once a property has been identified and the landlord and the tenant have negotiated the key commercial terms, preparing, reviewing the term sheet, heads of terms, or any preliminary documentation to be executed between the parties pending the finalisation of the lease;
  • if the property is shell and core, preparing and reviewing the agreements to be entered into with the contractor for fit outs;
  • reviewing the lease and making suitable amendments to protect the tenant's interests;
  • identifying the red flags or key risks in the landlord's template lease and advising the tenant regarding them;
  • negotiating with the landlord on the tenant's behalf;
  • assisting in procuring the NOC from the developer and relevant authorities for the grant of the lease in favour of the tenant;
  • facilitating the execution of the lease by the parties;
  • assisting with registering the lease on the relevant authorities' registration systems and procuring the certificate of registration of lease;
  • advising on payment mechanisms; and
  • liaising and coordinating with the landlord for all administrative processes regarding the lease.

• In the post-leasing stage:
  • advising on the tenant's continued compliance with obligations under the lease;
  • assisting with general asset management, for example liaising with the owner's association management company and the landlord for any approvals that the tenant requires regarding its use, occupation, and enjoyment of the leased premises, like carrying out repairs or refurbishment work in the leased premises; and
  • advising and assisting the tenant with resolving any disputes that may arise during the lease.

Architects, Engineers, and Design Professionals

If the tenant wants to lease the property shell and core to fit it out per their requirements, then the role of architects, engineers, and design professionals becomes essential.

At the outset, the tenant can have civil engineers inspect the property and the building systems, including the structural and loadbearing capacity, mechanical, electrical, and plumbing (MEP) infrastructure, heating, ventilation, and air conditioning (HVAC) systems, IT systems, firefighting, and safety measures. The inspection report helps the tenant identify whether the building's specifications of the building are suitable for the kind of office or commercial space the tenant wants to fit out in the leased premises and whether the tenant needs to make any design modifications to fit the building specifications.

Then, the tenant can engage an architecture and design team to prepare the designs for the office space in line with the landlord's fit-out manual and relevant authority requirements and to liaise with the landlord's design team to get their approval for the office designs. Once the tenant has approval from the landlord and the relevant authority's principal, the architecture and design team can prepare fit-out plans reflecting the approved design. The tenant's team can then get approval from the landlord and the relevant authorities for the fit-out plans.

General Contractors and Construction Consultants

If the tenant will fit out the property or if the tenant wants to make improvements to the property, then the tenant needs the services of a general or technical services contractor to carry out the fit-out or improvement works. The contractor steps in after the designs and plans are finalised and approved.

Services the contractor can provide include:

• Preparing an estimate of the costs and a budget for the works.
• Liaising with the landlord's team for approvals, access, and installing connections to the MEP and IT infrastructure.
• Performing the fit-out works in accordance with the approved plans.
• Liaising with authorities to procure permissions, approvals for carrying on the works.

In big commercial complexes, landlords often require tenants to either:

• Engage the services of the contractor the landlord has appointed for the entire building.
• Appoint a contractor from the landlord's previously approved list.

Accountants

Accountants can help the tenant assess the financial and tax impact of the leasing transaction on the tenant entity. This becomes particularly important when the leasing space is large and the tenant is paying the landlord a high amount of rent. The UAE has also recently implemented new VAT and corporate tax regimes. The accountant can advise the tenant on its registration, tax payment, reporting, and other obligations under the VAT and corporate tax regimes.

If the foreign entity plans to set up a local entity for leasing or other business or investment purposes, then the entity should engage the services of a local accounting firm that is experienced in taxation and preparing and filing financial statements in Dubai and Abu Dhabi.

In Dubai and Abu Dhabi, landlords often require post-dated cheques for the entire (or at least annual) rent to be paid in advance. The tenant also must make several other recurring payments, including service charges and utility charges, during the lease.

If the tenant is fitting out the premises or carrying on improvements, the tenant must pay fees that include fees to the architect, the contractor, and the competent authorities for approval. Therefore, it would be most helpful if the tenant set up a bank account in the UAE. The accountant can help with setting up and managing the bank account and with ensuring the tenant is compliant with anti-money-laundering and foreign-exchange-related laws in the UAE.

Office Location Considerations

Although financial requirements are of primary importance when opening an office, establishing an office in the right location for the organisation can be a significant driver in delivering a positive culture and success in the business. A suitably experienced and qualified broker can assist the tenant in formulating and prioritizing the tenant's lease criteria. Some factors the tenant should consider include:

• The number of employees in the office and how they will work in the office. The human resources department should consult on the plans to staff the office and plans to allow hybrid or other flexible working arrangements. This dictates the size and layout of the space that the tenant requires and allows the tenant to prepare cost projections that are based on the rentable square footage of the premises.
• Business requirements. The tenant's specific needs for its business, including:
  • a particular office layout;
  • security;
  • specialized technology or other equipment;
  • delivery and visitor access; and
  • parking.

• Commuting and transportation access. Where the employees are likely to live and how accessible the office is from those locations.
• Tax incentives. Whether there are local tax or other incentives to lease space in a particular area of the Emirate-mainland or freezone.
• Safety and security. Whether the building is in a safe and secure location.
• Amenities and services. What amenities and facilities the tenant expects to have in the building and services it expects the landlord to provide.
• The landlord's financial condition and reputation. Whether the landlord is viewed favourably in the market and has sufficient financial backing to satisfy its lease obligations.
• Character of surrounding area. What services, restaurants, and stores are accessible in the surrounding area for employees.

Principal Types of Leases and Structures

A leasing arrangement usually is one of three types:

• A direct lease between the landlord and tenant. This is the simplest arrangement because the tenant has direct privity of contract with the landlord and there are no third parties involved.
• Sublease between the head tenant and the tenant. Subleases (or underleases) are usually seen where an owner has leased the entire building or project to one head tenant, who then sub-leases individual premises to third-party tenants.
• Licensed property management companies also often take a lease of an entire building from the owner and then sublet offices to individual tenants. In these arrangements, the tenant should request that the head tenant provide a copy of the head lease so the tenant is aware of the principal lease for the premises. The tenant must ensure that the sublease and the tenant's occupation of the premises do not contravene the headlease. The tenant must ensure that head tenant has the written consent of the owner and the relevant authorities for the sublease. The tenant must also be aware that termination of the headlease could lead to automatic termination of the sublease.
• Assignment or novation of a lease. A tenant may choose to take over an existing lease. In these cases, the tenant must get prior written consent from the landlord and relevant authorities for this arrangement. The tenant must carry out due diligence to ensure that it does not assume any of the outgoing tenant's liabilities or obligations regarding the lease of the premises. Where possible, the tenant should enter into a tripartite assignment agreement with the landlord and the outgoing tenant. This assignment agreement should clearly identify the rights and obligations of each party, and the tenant should get appropriate indemnities from the outgoing tenant for the period of its tenancy.

In Dubai and Abu Dhabi, office leases are usually gross or net leases, depending on the commercial arrangement between the parties and the market practices in the emirate or area where the property is located.

While the parties generally are free to negotiate the terms and provisions governing their relationship, these terms cannot contradict landlord-tenant laws that affect the lease when they apply. These statutory provisions include aspects relating to registration, early termination by the landlord, non-renewal rights, maintenance obligations, and caps on rental increases on renewal. For example, in Abu Dhabi, under Executive Council Resolution No. (14) of 2016, landlords cannot increase rental values more than 5% per year. Similarly, Dubai Decree No. (43) of 2013 Determining Rent Increases for Real Property in the Emirate of Dubai sets out the permissible rent increases by providing a rental index for Dubai.

Unless agreed otherwise, the tenant usually is responsible for paying internal property maintenance costs, utility charges, and taxes levied on the premises. Landlords usually are responsible for VAT on the rent, insurance, and service charges for the maintenance and upkeep of the common areas of the building.

Where the parties agree that the tenant is responsible for VAT or service charges, these amounts can be a component of the rent (and therefore fixed) or charged separately. Where the landlord reserves the flexibility to modify the service charges or levies service charges on actuals, the service charge is usually separate from the base rent under the lease.

Due Diligence

Legal Due Diligence

Office or commercial units can be owned by individuals or UAE-licensed entities. Ownership of office or commercial units can be by an absolute freehold title or leasehold title. The landlord should have a Dubai Land Department (or relevant authority) title deed to reflect this.

Offices or commercial buildings may also be owned by a developer or an individual owner of a plot, who may have constructed the building themselves. Often, developers or owners of commercial buildings engage a property management company for the management and leasing of the units in the building. In some instances, entities engaged in commercial leasing take a bulk of units in the building on lease from the developer or owner and then let out individual units on sub-leases to tenants.

In all of these arrangements, the tenant should undertake due diligence of the title and status of the property proposed to be taken on lease so the tenant is aware of matters including the various stakeholders involved and the rights and interest of the landlord in the property.

During the due diligence process, if the tenant's lawyer discovers anything of concern, then the lawyer can either advise the tenant to consider other prospective premises or suggest the inclusion of representations, warranties, and indemnities in the lease so that the tenant is adequately protected. A property can be used only in accordance with its permitted use and the permitted activities in the tenant's trade licence. The municipality of the relevant emirate or other relevant authority, for example a free zone or local development authority, determines the extent of the uses in these permissions/licences and they are usually stated on the property's affection plan. The tenant should request a copy of this plan from the landlord to ensure that its use of the property will not contravene the property's permitted use.

In Dubai and Abu Dhabi, the property registers of the relevant land department authorities, which record details about matters including property ownership, leases, and mortgages, are not open for public inspection. To view these registers, the lawyer conducting the due diligence must either be accompanied by the property owner at the land authority office or have a notarised power of attorney from the owner to investigate the property registers, obtain copies of the property documents (including the title deed, lease registration certificates, and affection plan) and to be able to make enquiries about the property with the land department authorities.

Certain information is available only if the lawyer is accompanied by the landlord. Examples include, information relating to:

• Expenses in connection with the property, including utility charges, service charges, taxes, community charges, and purchase price instalments.
• Contracts executed by the landlord regarding the property (annual maintenance contracts and fit-out contracts).

The requirement for the tenant's lawyer to be accompanied by the landlord makes the title due diligence process tedious, limited in scope, and dependent on the landlord's cooperation.

The tenant's lawyer should request that the landlord or the landlord's lawyer provide at least the following information or documents to conduct due diligence before executing the lease:

• The title deed of the property.
• The affection plan and site plan of the property.
• If the property is being managed and leased out by a property management company, the agreement between the property owner or developer and the property management company.
• Building management rules.
• Receipts showing payment for property expenses, for example utility charges, service charges, taxes, community charges, and purchase price instalments.
• Copies of annual maintenance contracts or any other ongoing contracts regarding the property.
• If there is any mortgage on the property, a copy of the certificate of registration of mortgage.

In Dubai and Abu Dhabi, landlords (whether developers or individual owners) are usually reluctant to share information or documents about the property. They prefer to contract on an as-is basis and, usually, to provide only the title deed. If the landlord does not provide enough information to allow the tenant to conduct satisfactory due diligence on the property, the tenant's lawyer should include representations, warranties, and indemnities regarding the landlord's title and condition of the property in the transaction documentation (see Legal Documents).

Restrictions on Leasing by Foreign Tenants

In Dubai and Abu Dhabi, there are free zones. Some of these are financial free zones like the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM)) where they have their own landlord-tenant laws, which are separate and distinct from the landlord-tenant laws of other onshore areas of Dubai and Abu Dhabi.

Depending on the property location, a tenant may have to incorporate a legal entity through a specific authority or licensing body. For example, a tenant seeking to lease an office located in the DIFC most likely must establish a DIFC entity to lease the property. A UAE-based legal counsel can provide detailed legal advice on this issue.

The ability of a national or entity from outside the Cooperation Council for the Arab States of the Gulf (GCC) to acquire long-term leasehold rights in non-freehold areas (that is, areas not designated for acquisition of property interests by non-GCC foreigners) is also subject to separate legal considerations.

If a foreign company wants to lease premises in Dubai or Abu Dhabi, it must incorporate an entity in Dubai or Abu Dhabi (or free zone if applicable) in whose favour the lease will be executed and registered. This entity can be a branch or subsidiary of a foreign company and can have foreign shareholders. Each emirate has its own laws and processes regarding foreign ownership and leasing of property, and a local lawyer can assist with structuring corporate ownership of non-GCC entities to enable them to procure registered leasehold rights in properties in the UAE. A local lawyer can also assist with other commercial and legal considerations like tax.

Physical and Financial Due Diligence

Financial due diligence on the landlord is not common in Dubai and Abu Dhabi. Most landlords do not agree to share their financial information or documents with the tenant. Instead, the tenant should make general inquiries about the landlord's reputation with the broker and lawyer.

The landlord may permit the tenant to conduct limited physical due diligence of the property before handover of the property.

Where possible, a tenant can arrange for an architect and technical team to inspect the property and its condition, whether all the utilities are properly connected, and building systems, including the structural and load-bearing capacity, MEP infrastructure, HVAC systems, IT systems, and firefighting and safety measures. This inspection helps the tenant identify whether the specifications of the building are suitable for the kind of office or commercial space it wants to fit out in the leased premises and whether it needs to make any modifications in its design to fit the building specifications.

Legal Documents

Preliminary Agreements

Brokerage Agreement

The first agreement that a company looking to lease property in the Dubai or Abu Dhabi should enter is a brokerage agreement with the broker. The brokerage agreement should be executed as a first step before the broker recommends any potential properties and before executing any documents with the landlord.

The brokerage agreement should cover these fundamental aspects of the engagement:

• The duration of engagement.
• Whether the engagement is exclusive or non-exclusive.
• The brokerage fees payable, which are usually a percentage of the total transaction value. Each party pays its own brokerage fees.
• The timing of payment of the brokerage fees. Ideally, the fees should be paid on the consummation of the transaction, that is, on execution of the definitive documents.
• There should be no fee payable if the transaction does not materialise or falls through at any stage, whether, for example, before or after signing any letter of intent, heads of terms, or term sheet.
• The scope of the engagement, including whether the broker is involved only in identifying available properties or is also involved in the leasing process by negotiating the lease terms, procuring the NOC from the developer, and executing and registering the lease.
• The broker's duties.

Letter of Intent, Term Sheet, or Heads of Terms

After the tenant has identified a property that meets its principal requirements, the landlord and tenant negotiate and agree on the fundamental terms, including rent, rent review, term of lease, and early lease break. These fundamental terms are usually captured in a term sheet or a letter of intent executed between the parties before the finalisation of all the terms and execution of the lease.

Letters of intent are executed where the tenant wants to lock in on a property while continuing to negotiate the terms of the lease with the landlord. Certain landlords may also require the tenant to execute a letter of intent as part of their leasing process.

Letters of intent are a useful step in the leasing process if:

• The tenant company is still incorporating or setting up its business. As part of the process for incorporation of a company in Dubai and Abu Dhabi, the entity under incorporation must demonstrate that it has secured a lease of a premises that can be used as the company's registered address. This address is then used on the trade license or commercial licence that the relevant authority issues to the entity, which permits the entity to carry on the activities in the UAE stated in the licence. Entering into a letter of intent early in the incorporation process allows the tenant to manage the timelines for incorporating the entity and registering the lease by setting agreed deadlines in the letter of intent to accomplish specific milestones.
• The tenant needs to get specific consents, approvals, or licenses from a government authority for the tenant's lease of the premises, for example because of the particular nature of the tenant's business. In this case, the tenant can apply for the consent, approval, or license between the execution of the letter of intent and the lease.

The landlord's lawyer or team usually prepares a draft of the letter of intent or term sheet. Typically, the letter of intent or term sheet is a non-binding document, and only certain provisions (for example, confidentiality, governing law, exclusivity, and termination) bind the parties. Some landlords may require the tenant to pay a fee or the security deposit (or part of it) on the execution of the letter of intent. This usually occurs where the parties execute a binding letter of intent. The landlord reserves the right not to repay the fee paid by the tenant if the transaction does not materialise and the letter of intent expires or is terminated.

The tenant should have their attorney review the letter of intent because it forms the basis of the lease that will later be finalised and executed.

Primary Documents

Lease

The lease is the most important document executed by the tenant in the leasing process. The lease sets out all the material terms of the agreement relating to the premises.

Legislation governing landlord-tenant relationships may include essential terms that must be incorporated in the lease. These landlord-tenant laws vary by emirate. For example, Law No. (26) of 2007 (as amended by Law No. (33) of 2008) Regulating the Relationship between Landlord and Tenants in the Emirate of Dubai, which governs landlord-tenant relationships in Dubai, provides that all leases must contain:

• A description of the leased premises.
• The term of the lease.
• The amount of rent and mode of payment.
• The purpose of the lease.
• The name of the owner of the premises, if the landlord is not the owner.

The lease is usually a template prepared by the landlord. In Dubai and Abu Dhabi, landlords generally do not agree to make material changes to their template leases. Any changes requested by the tenant that the landlord accepts are listed in a schedule to the lease titled Special Conditions. Therefore, tenants should engage a local lawyer to review the template lease and advise on the terms that are not market, standard, or customary so the tenant can choose whether to negotiate amendment or exclusion of these terms in the Special Conditions schedule. The local lawyer can also advise the tenant about red flags, onerous conditions, hidden costs, and penalty clauses in the lease so that the tenant's operations and commercial team is aware of these terms and can ensure compliance with them.

Where the premises are not fitted out by the landlord, the lease can contain terms for:

• The fit-out of the premises.
• The approval of the plans by the landlord.
• Payment of a fit-out deposit to the landlord.
• Appointment of contractors approved by the landlord.
• The duration of the fit-out.

If the landlord has a fit-out manual, the parties can annex the manual to the lease and incorporate it by reference.

Guarantee

Landlords may require the tenant to procure a corporate guarantee where:

• The tenant entity is a special purpose vehicle, subsidiary, or branch that does not have any material assets in the UAE.
• The rental and other payment obligations under the lease are high and the landlord is concerned about the tenant's credit worthiness.

The tenant entity's corporate parent usually provides the guarantee, the purpose of which is to secure the tenant's payment duties under the lease. Unlike in other jurisdictions, guarantees in the UAE generally extend only to the tenant's payment obligations. The guarantee can be provided in a separate agreement, or the guarantor can be made a party to the lease through execution of a tripartite lease by the landlord, tenant, and guarantor.

Works or Fit Out Contract

Where the tenant is responsible for fitting out the premises, the tenant can engage the services of a contractor to carry out the fit-out works in the premises. The tenant and contractor execute a works contract that details:

• The scope of work, including:
  • preparing drawings and plans;
  • procuring approvals from the landlord and relevant authorities; and
  • carrying out the works in the premises.

• The payment of fees.
• Other material terms.

Executing the Lease

Preparing for Lease Execution

Before signing the lease, the tenant should ensure:

• The execution version of the lease reflects all the terms as agreed and finalised between the parties.
• The lease contains all the schedules and any annexures intended to be annexed to the lease, including the fit-out drawings, plans, and user manual, are prepared and actually annexed to it.
• It has obtained, if applicable, consent to the lease from:
  • the developer;
  • the head lessor;
  • the landlord's mortgagee; and
  • other relevant entities or government authorities.

• The landlord and tenant have all necessary corporate authorisations for the grant of the lease, for example resolutions from the board and shareholders.
• The signatories to the lease are authorised to sign and register the lease in the relevant authorities' records. This requires the translation into Arabic of all the tenant's corporate documents and the attestation and notarisation of those translations before the UAE Ministry of Foreign Affairs.
• It has prepared the cheques or set up an agreed alternative payment mechanism, for example, direct debit, for the amounts payable at lease execution, including if applicable:
  • security deposit;
  • annual rent in advance;
  • post-dated cheques for the rent for the entire rent term; and
  • advance payment of service charges.

The parties should confirm with the registration authorities the list of documents and information required for the registration of the lease and should also prepare those documents and information.

Lease Execution

The parties to the lease (that is, the landlord, tenant, and guarantor if applicable) must sign the lease in the signature blocks provided in the document and affix their respective company stamps. All ancillary documents, for example guarantee agreements, receipts, and handover letters, can be signed at the same time. The documents can be signed either physically or electronically, on a single document, or in counterparts, as agreed by the parties in the lease.

The best practice is to have witnesses attest the parties' execution of the lease. The witnesses must sign in the appropriate signature blocks and write their names and designations next to their signature for identification purposes.

While notarising a lease a is not mandatory, if the parties require notarisation for their internal record keeping requirements, they can arrange for a notary public to be present at the execution of the lease.

After Lease Execution

After the execution formalities are complete, the tenant must hand over cheques (or make payments as agreed) to the landlord for the payments to be made simultaneously with the execution of the lease.

The landlord must provide the keys for the premises to the tenant so the tenant can access and occupy the leased premises.

The parties should complete the registration formalities (see Lease Registration).

Taxes Payable on Leases

Value-added tax (VAT) applies on leases for commercial real estate. The current rate is 5% on the total consideration received by the landlord. If the consideration is paid in instalments, then VAT is levied on each instalment.

As supplier of the leased property, the landlord is liable to pay the VAT to the Federal Tax Authority in the UAE.

The landlord and tenant can agree on who bears the VAT liability on the lease. Usually, landlords require the tenant to pay VAT on all payments the tenant makes under the lease or in connection with the lease. This includes the VAT on the rent and on service charges, master community charges, and all other payments under the lease. Generally, landlords require that the VAT be due for payment at the same time as the principal payment.

In Dubai and Abu Dhabi, the standard market practice is that, if any amount is stated as payable in connection with the sale or supply of any good or service and it is not stated whether VAT is levied or payable on the amount, the assumption is that the amount payable includes VAT. Therefore, if a lease does not contain any specific provisions regarding VAT liability, or if the lease does not state that amounts payable are exclusive of VAT, then the tenant is arguably not liable to pay VAT.

Lease Registration

Generally, leases must be registered after execution, though the specific requirements and authority for registration vary based on the location and term of the lease (see Abu Dhabi and Dubai). In in Dubai and Abu Dhabi, commercial or office leases are usually short-term leases for one to five years. The tenant usually bears the cost of registration and all related expenses (for example, agent fees). A tenant should work with a local lawyer in the relevant emirate to understand the exact process, documents required, and fees payable for the registration of a lease.

If a lease is not correctly registered, then the tenant may find it difficult to enforce its rights arising from it in any court of law or before any judicial or quasi-judicial authority. For instance, Article 4 paragraph 2 of Abu Dhabi Executive Council Resolution No. (4) of 2011 provides that any transaction that requires a lease will not be accepted and will be suspended if the lease is not registered with Tawtheeq, the registry for tenancy contracts in Abu Dhabi.

Proof of registration is also required for connecting the premises to utility services, for example water, gas, and electricity. Usually, in commercial leases, connecting the premises to utility services and paying utility bills is the tenant's responsibility.

A tenant that does not have a registered lease may also face difficulties in procuring or renewing its trade license and securing visas for its employees.

Abu Dhabi

Short term commercial or office leases of less than four years in Abu Dhabi must be registered with the Abu Dhabi Municipality on its register of leases, which is known as Tawtheeq (see Tenancy Contracts Services for Abu Dhabi Emirate).

Dubai

In Dubai, leases for less than ten years must be registered on a system of the Dubai Land Department known as Ejaari (also spelled Ejari; see Government of Dubai: Welcome to EJARI). The Dubai Land Department has its own standard format Ejaari lease that the parties must sign and register on the Ejaari system. However, the parties can supplement the standard form lease with additional terms, either in the Additional Terms section of the standard lease or by executing a separate addendum.

Reproduced from practical law with the permission of the publishers. For further information, visit www.practicallaw.com