His Highness Sheikh Mohammed bin Zayed Al Nahyan, President of the United Arab Emirates, issued the Federal Decree-Law No. (32) of 2023 on Finance Lease (the New Finance Lease Law) on 25 September 2023, which will come into effect on 29 March 2024. Once it takes effect, it shall repeal the Federal Law No. (18) on Finance Lease (2018 Finance Lease Law) and any other provision repugnant to or in conflict with it (Article 29).
The key point that defines a lease as a finance lease for the purposes of the New Finance Lease Law continues to be, as was the case under the 2018 Finance Lease Law, the existence of a purchase option in favour of the Lessee, although the regulations which are yet to be issued under the New Finance Lease Law might provide more details on this point.
The provisions of the New Finance Lease Law apply in instances where either: (a) the asset in question; or (b) the lessee’s business headquarters, is, in each case, located “onshore” in UAE or in freezones where there are no special regulations applicable to finance leases and in instances where the lease agreement provides for UAE laws as the governing law thereof. The New Finance Lease Law will not apply to: (a) aircraft, helicopters, aircraft engines, marine vessels and other assets that are registrable in “special registers” either under UAE law or pursuant to the international treaties or conventions to which the UAE accedes; (b) cash; (c) investment bonds; and (d) land granted by the UAE government.
The New Finance Lease Law recognises two types of finance leases: (a) a bilateral finance lease between a lessor and a lessee; and (b) a tripartite finance lease between a lessor, lessee and a supplier – who is defined as a person from whom the lessor acquires the asset for the purpose of leasing it to the lessee. As such, this concept of tripartite finance lease appears to sync with a typical sale and (finance) leaseback common in the asset finance industry which typically involves the manufacturer of the asset (as a “supplier”), the financing entity (as a “lessor”) and the ultimate “user” of the asset (as a “lessee”). Article 5 of the New Finance Lease Law sets out the minimum details and information to be included in a finance lease agreement.
The requirement of a license to carry out a finance lease activity- and the provision of penalties for not being appropriately licensed where required- is continued from the 2018 Finance Lease Law. In a departure from the position under the 2018 Finance Lease Law, the New Finance Lease Law proposes a dichotomy of regulation (Article 4) – it is now envisaged that the UAE Central Bank (UAECB) shall regulate, license and supervise the finance lease activity that is practiced by “banks, companies and institutions governed by” the UAECB and shall issue the further regulations in this respect. For all other natural persons or entities seeking to engage in finance lease activity, it is envisaged that the UAE Federal Cabinet shall, at the proposal of the Minister of Finance, determine the relevant authority that will supervise and regulate the finance lease activity and shall issue the further regulations applicable to those persons. It is also envisaged the that the Minister of Finance shall issue the regulations relating to the accounting treatment of finance leases; this is similar to the Ministerial Resolution No. 76 of 2020 issued with reference to the 2018 Finance Lease Law. This means that we await further clarification and regulations for many SMEs that typically engage, or wish to engage, in finance lease activities.
It is also worth noting that several provisions of the New Finance Lease Law echo market practices in the lease financing industry, such as, but not limited to, the exclusion of lessor’s liabilities in Article 9, provisions dealing with the loss and damage to the leased asset in Article 12, provisions dealing with the acceptance of the leased asset in Article 13, the quiet enjoyment right in Article 16 and provisions dealing with the lessee’s obligations with respect to the leased asset in Articles 18 and 19.
Crucially, the New Finance Lease Law affirms the treatment of leases and related rights under the Federal Law No. (4) of 2020 on Guaranteeing Rights Related to Movables (the Movables Law) in that Article 15(2) of the New Finance Lease Law states that a transfer of a lessor’s right to collect rent and other amounts payable under a lease shall be subject to the provisions of the Movables Law and further, Article 25 of the New Finance Lease Law recognises the right of a lessor to “effect an execution to collect its rights” pursuant to the Movables Law (in light of the fact that a leasehold interest under a finance lease is included as a “security interest” for the purposes of the Movables Law).
In conclusion, the further regulations to be issued pursuant to New Finance Lease Law are expected to provide further clarity, in particular in relation to the licensing and regulation of the finance lease activity and the accounting treatment of finance leases. It will be interesting to see the result of the bifurcated approach taken by the New Finance Lease Law with respect to the regulation of financial institutions and other persons.
For any queries on this, please feel free to reach out to the Hadef & Partners Banking and Finance team.