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Editorial

Understanding Commercial Leases in Qatar

Ian Bode of Al Tamimi & Company’s Qatar office introduces the issues relating to commercial leases in Qatar. [Note: depending on the lease form, references in a lease can either be to “landlord and tenant” or to “lessor and lessee”. In this article, “landlord” and“tenant” are used]. Property lawyers in Qatar assume substantial responsibility when preparing commercial leases. They establish contractual relationships between landlords and tenants which govern the use and occupancy of property often for a period of years. One inappropriate word in a covenant, could expose a tenant to an unintended financial liability or a landlord to an unintended obligation.

Frequently, the client only outlines the nature of a transaction and leaves the lawyer to negotiate the fine detail. Lawyers, therefore, not only preparethe documentation to give effect to the transaction, but also frequently negotiatecontractual terms on behalf of their client.

Some lease forms are more “landlord orientated” than others. Care must be taken to ensure that the lease form being used, whether for landlord or tenant, issuited to the client’s purposes.A variety of leases encountered in Qatar and the international market place arementioned in this article.

However, the most frequently encountered lease is the commercial lease of factory, warehouse, shop or office premises. Most of this article reviews the commercial lease form.

It must be appreciated that landlords and tenants, by the nature of their relationship, have an inherent conflict of interest. Consequently a lawyer’sview of any particular leasing proposition may well depend on which party is being represented.

TYPES OF LEASE COMMONLY SEEN IN QATAR

The leases most commonly encountered are: commercial lease of factory, warehouse, shop or office; and residential tenancy agreement. There is also the sub-lease, under which the tenant of a property sublets the whole or part of theproperty to a third party.

This article will focus primarily on the commercial lease. Brief comments are made in respect of the other leases types referred to above. Commercial Lease of Factory, Warehouse, Shop or Office The commercial lease form is used where factory, warehouse, shop or officepremises are to be leased.

In Qatar, parties to a commercial lease are largely free to contract on terms they mutually agree to. Residential Tenancy Agreement Residential tenancy agreements are prepared by both real estate agents and lawyers. Printed forms are used by almost all real estate agents and legal offices for documenting residential tenancies. The provisions of the form are, for the most part, straightforward and where they are not, comments in this article in respectof commercial leases will be of some assistance.

AGREEMENTS TO LEASE

These agreements record the basic contractual terms and are prepared upon the basis that they themselves comprise a binding contract to lease the premises, not withstanding that a formal lease document is still to be completed to finalise the transaction. Agreements to lease are usually entered into in situations where possession is not to be taken immediately, eg where the premises to be leased have yet to be built or they require alteration or fit out. The term of the lease will usually commence on completion of such work. The formal lease is then entered into once the premises have been completed. Obviously, the lease cannot be executed before the premises have been completed because until then they either do not exist or are not in an appropriate condition. The tenant will not want to commit itself to a lease for a term of years until this has been done and a landlord will not want to expend money on construction or alteration unless he/it has a tenant bound by an agreement to enter into a lease upon completion. Where a company is the tenant, ensure that whoever signs the document has theauthority to do so.As a general rule, the landlord should not let the tenant into possession unlessand until the formal lease has been signed. This should be clearly spelt outin the Agreement to Lease. Otherwise, it is debatable as to whether or not the landlord can refuse possession on this ground.

BASIC CONTRACTUAL TERMS

When a lease is being negotiated, it is necessary to establish certain basic contractual terms. These are:

• Description of premises and associated rights to use common areas, car parks etc

• Duration of term and its commencement date and renewal terms (if any)

• Annual rental and rent review periods (if any)

• Outgoings payable in addition to rent

• Lease covenants

It is important that the basic contractual terms be negotiated and agreed betweenthe parties and are not left to be implied by reference to a form of lease. Premises The premises must be described with sufficient accuracy as to be clearly identified. In many cases, a written description may be difficult. Therefore, it is common practice to attach to each copy of the lease, a plan of the property, showing the area to be leased by outlining it or by some other means ofidentification. It is desirable, although not always essential, that the lease contains a definition of the premises by reference to area dimensions.

The need for the definition is less essential for stand alone factory and warehouse premises, but is important in the case of office premises, particularly having regard to maintenance obligations where in-ceiling services such as air conditioning, fire sprinklersystems and the like are external to the dimension. Definition of area dimensionalso assists in rental determination on rental reviews and minimizes the risk of disagreement on the rentable areas included in the lease.In addition to the premises description, the lease must also specify the user rights in respect of “common areas” such as driveways, paths, passageways, conveniences and other areas in common use by other occupiers of the building. It is also necessary to define the right to use the parking spaces. Use of these will either be in an exclusive user basis, whereby the tenant has the exclusive right to park vehicles in a designated space, or merely gives the tenant the right to use the parking spaces servicing the building in common with other occupiers.

Term of Years - The term of the lease is generally a certain number of years commencing from a specified date. If a term is to run for a period of five years as from the 1st July 2008 then it will terminate on 31st March 2013.

It is common for leases to contain renewal terms. It is essential that renewal terms be expressly agreed. It is important that it be clearly stated that a renewal (or new) lease granted pursuant to a right of renewal does not itself include that right of renewal as a lease which is perpetually renewable can easily result.

To avoid any possibility of such a construction, a lease will provide that if the rights of renewal are exercised, the lease will expire no later than on a particular specified date. It should be noted that in Qatar Article (589) of the Civil Code provides that generally it shall not be permissible for the lease period (term) to exceed twentyfive years.

Rent and Rent Reviews -The rent is usually expressed as a specified amount per annum and is generally payable calendar monthly in advance.The rent may be subject to review at specified intervals. Review periods vary according to the market conditions prevailing when lease terms are negotiated.The particular wording of the rent review clause is of critical importance becauseit will affect the factors to be taken into account on review and, therefore, the outcome achieved. Such clauses are either objective assessments or subjective assessments. An objective assessment includes references to the rent to be reviewed to “full market rent” and “current market rent”. In such cases, the process of the review is to disregard the identities of the actual landlord and tenant and assume that rent is being assessed on the basis of a hypothetical willing landlord and willing tenant on a letting on the open market. A subjective assessment includes references to the rent to be reviewed to “fair rent” and“reasonable rent”.

By contrast to the objective assessment, this process of review determines what would be a fair rent for the particular parties to agree in all the ircumstances, taking into account all market conditions plus any specialcircumstances that would have influenced the parties’ decision on rental.

It should be noted that in Qatar the new Lease Law (Lease Law No (4) of 2008) came into force on 15 February 2008. The new Lease Law repealed and replaced the previous Lease Law No ( 2) of 1975 ( as amended) and any otherprovisions contrary to it. It governs leases of all types of property in Qatar save the state’s public and private properties, agricultural land, vacant plots of land, industrial land, tourist apartments hotels and units’ and residential units designated by the State or companies for employees and workers employed by them.Article (10) of the new Lease Law provides that the landlord may not request an increase in the rent value of any existing or new lease agreement except in accordance with a Council of Minister’s Decision.Council of Minister’s Decision No (9) of 2008 Setting Controls, Duration and Percentages for Rental Increases ( the “Rent Control Decision”) is effective from15th February 2008.Under the Rent Control Decision:

• Leases entered into on/after, 1 January 2005 may not have rental value increased until 15 February 2010, unless the contract provides otherwise;

• Leases entered into before 1 January 2005, may only have their rental increased according to the percentages set out in the decision being: Rent per Month Permitted Annual % IncreaseLess than QR 2,000 20%QR 2,000 to QR 5,000 15% QR 5,001 to QR 10,000 10% More than QR 10,000 5% Outgoings“Outgoings” or “operating expenses” should be carefully specified.

Some lease forms adopt the approach of obligating the tenant to pay all expenses properly or reasonably incurred by the landlord in respect of the building and then proceed to list particular expenses which are payable. It is important that the tenant be aware of the extent of expenses payable as these can reach substantial levels in city office buildings.

Outgoings which are commonly payable are service contract charges for air conditioning and lifts, provisioning of toilets and other shared facilities, the cost of painting and decorative repairs and the cost of ground and yard maintenance. The extent of the outgoings payable should be expressly negotiated between the parties against the rent which is negotiated.In Qatar Article (9) of the new Lease law (Lease Law No (4) of 2008) reinforces these obligations and states “ the Lessee shall be responsible to settle paymentsconcerning water, electricity and phone services pertinent to the lease property, and any other fees the Lessee is legally obliged with.”

Form of Lease - The choice of which lease form to use can be difficult. Frequently, a landlord requires the lease to be in the form of lease customarily used by the landlord’s lawyer. This requirement should always be resisted by the tenant unless a copyof the form of lease is made available for perusal by the landlord’s lawyer before the contract is binding. If this is not done, then the tenant’s lawyer may encounter difficulties in negotiating modifications to the lease form later if it is not satisfactory.Apart from including the form of lease as a schedule to the Agreement to Lease,the following are two approaches to identifying the lease form:

• Refer to a standard printed form if available in the market; or

• Provide that the lease form shall be that prepared by the landlord’s lawyerand that, in the event of any dispute, it shall be determined by the nominee of the President of the appropriate Chamber of Commerce.

The advantage of the second approach is that it accommodates a landlord who wishes a specially tailored lease to be used. Special or Particular TermsIn addition to the basic contractual terms, there are further matters on which the parties should agree before a binding commitment to lease is given. Landlord’s Chattels Where the landlord is providing chattels such as carpets or blinds, then these should be identified. It is usual for the tenant to be liable to clean and replace all worn or damaged floor coverings. In some leases, an obligation is imposed onthe tenant to pay the landlord an annual levy as part of a sinking fund towardst he ultimate replacement of the carpets when they wear out. There are a variety of formulae which have been used for this purpose, none of which are entirely satisfactory.

Tenant’s Maintenance Obligations - The parties must agree whether the tenant is responsible for the maintenance of the whole of the premises both interior and exterior, or merely for the interior of the premises. As a general rule, most leases of part of a building limit the maintenance obligation to the interior of the premises. The landlord then covenants to keep the exterior walls and roof of the building in good repair and also (but not always) all the building services.

However, even if the lease is just of a part of a building, the landlord will often pass the exterior maintenance and repair costs on to the tenants in proportionate shares as part of the operating costs. Again, this depends on prevailing market conditions. A separate but related matter is the liability for decorative repairs, (ie) painting and redecorating the premises. It is generally provided in a lease for a reasonable term (ie 6 years or more), that the tenant should repaint and redecorate the premises when the condition of same reasonably requires such work to be carried out and, in any event, during the last 6 months of the lease term or any renewed term.Article (8) of Qatar’s new Lease Law requires (inter alia) the Lessee to “be responsible for preserving the lease property, and use it in the agreed upon manner, in accordance with the property’s purposes”.

Use of Premises - It is usual to restrict a tenant’s use of the premises. In the case of factory or warehouse premises, the use restriction tends to be somewhat generalized and not unduly restrictive. In the case of shop premises, however, the use provisions tend to be quite restrictive as the “tenant mix” as it is called, is important to the landlord. For example, it would be inappropriate for premises to be used as a takeaway restaurant if they were next door to a high fashion boutique. In office leases, the user provision will be generalized (ie) use for commercial offices, but at times may be restricted if the landlord itself has business interests to be protected. For example, where the landlord is a bank or insurance company, it will not necessarily want another bank or insurance company, which is carryingon business in competition with the landlord’s own business, in the same building.

Tenants should be aware that a restrictive use clause can act as a de facto restriction on the right to assign. Where a tenant under a lease with a restricteduse wishes to move (perhaps because he/it needs larger premises) he/it may only be able to assign to someone in the same line of business (ie) a competitor.This will impact on the salability of the tenant’s business.

Guarantees - Where the financial substance of a prospective tenant is questionable, particularly in the case of private companies with either little capital or where the shareholders’ funds are unknown, it is the practice of landlords, in various overseas jurisdictions, to require the lease to be guaranteed. In the case of a company, the guarantee(s) of the principal shareholders are usually required. Guarantees of directors are not necessarily appropriate as they may not be principal shareholders of the company, or have any financial interest in the company.In the UAE, for commercial transactions, it is not uncommon for personal / parent company guarantees to be provided.

In Qatar, however, they are rarely required at present. We consider that as the leasing market matures there is a distinct possibility that guarantees of one form or another will become more prevalent inthe future.

Signage - All leases should contain restrictions on tenants erecting signs, nameplates and advertising posters on the building. In the case of shop leases, advertising signage can be of considerable significance to the tenant’s business. Signage is also important to office and factory tenants, not so much from the point of view of advertising, but so that the customers/clients can readily locate the premises. It is usual for the lease to require reinstatement and repair of damage caused by removal of signs at the end of the term of the lease. In the case of inner city buildings, there is also the question of naming rights for which considerable sums of money (either by way of lump sum payment or additional rental) are payable. Leases may restrict signage by providing that it should not be erected without theprior consent of the landlord as to size, location and style of signage and by thenproviding that such consent shall not be unreasonably withheld. The consent of a municipal authority, or a provision that signs comply with municipality regulations, may also be required. Where signage is of significance to the business interests of the tenant, then his/its lawyer should ensure that appropriate consents have been obtained from the landlord before the leasing contract is finalized, or include in the preliminary agreement express provisions covering the tenant’s signage requirements.

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