Financial Leasing Law | Ibrahim Al Banna Advocates

12
Apr

Financial Leasing Law

UAE Federal Law No. 8 of 2018 on Financial Leasing (the “Law”) came into effect on 1 January 2019, with the aim of regulating the provision of leasing activities in the UAE. Leasing of assets is fundamental to businesses in the small to medium enterprise (“SME”) space, by allowing SMEs to have the benefit and use of those assets without the need to incur significant upfront capital expenditure (either through working capital or through bank financing) to purchase those assets themselves. Finance leases are defined in the Law as “a relationship between lessor and lessee, whereby the lessor shall own the leased asset for the purpose of leasing it. The lessor shall lease the asset to the lessee for a limited period and through an independent contract with an option to the lessee to own the leased asset according to the provisions of this law” (‘Finance Lease’).

Some of the salient features of the new Law are as follows:

  1. Registration with UAE Central Bank. It means that this Lease activity can be carried out only if the Lessor is licensed by the UAE Central Bank. Any other arrangement would be considered null and void.
  2. A Supply Contract between the Leasing company and the supplier
  3. A leasing contract between the Lessee and the Leasing Company for the use of the Leased Assets for a specified duration and purpose in exchange for payment of the lease amount (plus interest) to the Leasing Company. The Lessee can opt to purchase them by paying the premiums and relevant fees throughout the leasing period to the Leasing Company, subject to its approval.
  4. The leasing contract must be registered at the relevant register in the Emirate where the Leased Assets are located
  5. Only, in the event of liquidation or bankruptcy, the Lessee shall hand over the Leased Assets to the liquidator and collect any potential amounts payable to it as an unsecured creditor. From a Lessee point of view, the Law grants the Lessee a quiet enjoyment right, by making clear that the Leased Property cannot be seized by third parties in the execution of a debt owed by the Lessor.
  6. It is the obligation of the lessee to maintain, pay the relevant duties, and take out insurance for the asset.

The Law is applicable to all finance leases in relation to any immovable and movable assets (including real estate, aircraft, vessels, vehicles, plant, machinery equipment, etc).

The Law provides a grace period of one year for full compliance with the provisions of the Law from 1st January 2019.

Some of the glaring inconsistencies in the law arise from the fact that in practice since there is no register available to register a Finance Lease contract for movable assets and no systems are in place in the land departments of the relevant Emirates (other than the Dubai Land Department) to register a Finance Lease contract for immovable assets, a lessor would be unable to register, and therefore cannot comply with this requirement of the Law.

For more information on this subject, you may get in touch with Ibrahim Al Banna Lawyers

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.