What is Finance Lease?

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Federal National Council recently issued a Federal Law number 8 of 2018
governing financial leasing (the Law) within the country. The Law
prohibits any company from undertaking
activities of financial leasing without a relevant license from the Central
Bank of UAE. 

Corporate Lawyers of Dubai have elaborated the
Law including the rights and obligations of lessor and lessee through this

The Concept

Financial leasing is a concept wherein a licensed company (the
lessor) purchases the asset of their customer (the lessee) on lease for a
certain period of time in return of a
mutually agreed payment schedule. Similar to
other lease agreements, the lessor is obliged to maintain the assets while the
lessee enjoys the possession of the asset for a said duration, bearing all
costs linked to the maintenance of the asset.

License Requirements

Article 2 of the Law strictly
prohibits the company from undertaking
financial leasing without the relevant license;
the law reads as follows:

Engaging in financial leasing

1. It is not
permissible to practice financial leasing activity in the State until after
obtaining a license from the Central Bank;

2. After each
contract of finance lease entered into with a person not authorized by the Central Bank;

3. Any person
not authorized by the Central Bank to
engage in financial leasing activity shall be
prohibited from using the term "finance lease" or any equivalent
in its trade name;

4. The Central
Bank shall establish regulations for the license of the lessor and carry out
the financial leasing activity in the State, including the license of the
foreign financial leasing company.”

In line with the foregoing, the Article 3 states that the lease
contract shall be written and should be registered or an indication thereof in
a special register in accordance with the provision of this law otherwise
it will be nullified.

Components of the Contract

The lease contract shall be
constituent of the following information as laid down by Article 4 of the Law:

a. Name of the
lessor and relevant address and details;

b. The description
of the leased property;

c. Duration of the contract;

d. Purpose of the
used property and limits on the usage of the property;

e. The amount of
the rent and the payment schedule;

Conditions and provisions to be imposed on the

g. The rights of
the tenants to the owned premise;

h. Information regarding the lessee;

Rights and obligations of both the parties;

Substantial obligations that may result from the
breach of contract or dissolution of contract;

k. Any statements,
conditions or provisions agreed upon between the parties in the manner not
contrary to this law.

The council of ministers shall
maintain a register detailing the lease contracts entered into by parties. The
register must include the parties managing the contract, the fees for
registration and the other relevant data as mentioned by Article 5 of the Law.

Rights and Obligations of the Lessor
and Lessee

Obligations of the Lessee (Article 6)

Unless otherwise agreed in the
contract, the Lessee shall abide by the provisions of the contract;

1. Taking
possession of the leased property from the lessor or the supplier when it is in
the case agreed upon in the contract;

2. The payment of
the property in accordance with the payment schedules as decided between the

3. The use of the
leased property for purposes specified in the contract and within the appropriate
use, subject to any terms and conditions, or referred to in the contract or
upon supply;

4. Maintain the
leased property as the agreed between the parties and to not make any changes
except with the consent of lessor;

Carry out the
normal maintenance required by the leased property in accordance with the
agreed terms of the contract;

6. Issue a notice
for the occurrence of symptoms that prevent the full or partial use of the
leased property and in accordance with the procedures provided for in the

Obligations of the lessor (Article 7)

Unless otherwise
agreed between the parties under the contract, the lessor undertakes to:

Deliver the leased property in the agreed condition,
and enable him to acquire and use it;

2. Notify the
supplier in writing at the conclusion of
the contract of supply of his intention to rent the property under the contract along with the name of the tenant;

3. Insurance on
leased premises.

4. Carry out the
essential maintenance required by the Leased Premises, in accordance with the terms agreed upon in the contract;

5. Vacating the
premises for the ownership of the leased property by the lessee;

6. Provide the
tenant with all the documents and information available to him regarding the
leased premises;

Rights of the
Lessee (Article 8)

Unless otherwise agreed in the
contract, the Lessee shall have the following rights:

1. The choice of the
supplier, and to determine the terms of the contract;

2. Selection of the leased property and to
determine the method of manufacture or establishment and specifications to be
provided, and negotiate with the supplier on these specifications either
directly or through the lessor under a written authorization
issued by the lessee;

3. Liaise with the
supplier directly for any contract or arbitral proceedings in relation to the lease contract between him
and the supplier, except for the action for the dissolution of the contract, without prejudice to the right of the lessor to
return to the supplier in respect of such claims and promissory notes.

Rights of the
Lessor (Article 9)

Unless otherwise
agreed in the contract, the lessor shall enjoy the following rights:

1. Inspection of
the leased property provided that such
action does not cause any damage to the lessee, and the lessor may give written
notice to any person to carry out this task;

2. Restoring the
possession of the leased property from the stores in the conditions stipulated
in the contract or in this law;

3. To transfer his
rights under the contract to third parties, taking into account notifying the
lessee in writing of the transfer, shall not result in any reduction of the
rights of the property contained in the contract or impose any new obligations
on it.

Relationship with
the Supplier (Article 10)

1. Prior to the conclusion of the contract, the lessee may, upon the prior written consent of the
tenderer, negotiate with the supplier regarding the specifications of the
leased property, the method of its manufacture or establishment, provided that
such approval includes the matters negotiated between the lessee and the

2. At the end of
the negotiations, a supply contract shall be concluded between the lessor and
the supplier, specifying the leased property and its specifications as
requested by the lessee and any other conditions
agreed upon by the parties in the supply contract.

3. The leased property
may be owned by the lessee prior to the conclusion of the contract.

Usage of the property

The tenant may take any legal action
against any third parties who restrict his rights to use the property subject
to the following conditions, in accordance with Article 12 of the Law:

a. Written consent
from the owner;

b. The tenant remains
committed under the terms of the contract;

c. The period of
legal disposition exceeds the duration of the contract.

Further, the property shall be
returned in the same way as received by the lessee and any changes shall be at
the cost of the tenant. The lessee may
compensate for any changes made on the leased property even with the written consent of the lessor if it cannot be separated from the rented property without
damaging them (Article 13). Lessee not entitled to any compensation for
fortifications it has made on leased property at its own expense regardless of
written consent from the lessor. Lessor
if also entitled to transfer the premises to another lessor, taking written
notice from the lessee and it shall not
result in a reduction of rights or any
new obligations.

The law empowers the tenant to waive
of his rights and obligations to another tenant for replacing him, provided
that the following conditions are met:

1. Prior written consent of the lessor;

2. A declaration of
waiver in accordance with this law;

3. Such waiver
shall not conflict with the legislation in force in that Emirate;

4. The new tenant
shall replace the original tenant with all rights and obligations arising out
of the contract from the date of assignment.

Termination and revocation of the
contract shall result in the revocation or invalidation of the legal suit filed
by the tenant.

Impact of Liquidation

Liquidation of the lessor (Article

In the event of
liquidation or bankruptcy of the lessor, the lessee shall have the right to exercise either of the
following two options:

A. The contract
shall continue to be executed in accordance with its terms and conditions,
provided that the liquidator or the trustee of the bankruptcy is notified

B. Delivery of the
leased property to the liquidator or the trustee of the bankruptcy and the
entry with the rest of the creditors in the collection of amounts due to him if
any – in accordance with the accounting standards. The new landlord who has
ownership of the leased property as a result of the liquidation of the previous lessor or declaring bankruptcy shall
continue to execute the contract if the renter declares his desire to do so.

Liquidation of the
lessee (Article 24)

Without prejudice to any rules
governing liquidation and bankruptcy in the State, the liquidation of a lessee
or the bankruptcy or death of a person shall be taken into consideration as

1. Leased property
shall not be included in lessee’s creditors;

2. The liquidator,
bankruptcy trustee or his heirs shall return the leased property to the lessor
within 90 days from the date of the decision of

3. If heirs wish to continue, they may differ in accordance with terms and conditions.

Termination of the Contract

Either party has the
right to terminate the contract on relevant conditions as prescribed by the Law. Article 26 of the Law
lays down the rights of the lessor to terminate which are as follows:

a. If the Tenant
breaches the obligations under Articles 1, 2, 3, 4 and 5 of Article 6 of this

b. If the Tenant breaches any substantial obligation
stipulated in the Contract;

c. If the lessee is
seriously injured by the leased property.

The lessee shall be notified in
writing, and the contract will be
terminated should the lessee fails to remedy the
breach within 60 days from the date of notification.

On the other hand, Article 27 of the
Law provides for Lessee’s right to terminate the contract under the following circumstances:

If the Lessor
breaches the obligations stipulated in Articles 1, 3 and 4 of Article 7 of this

If the lessor
fails to comply with any obligation stipulated in the contract;

The lessee shall provide 60 days written notice
to the lessor for remedying the breach, and
the contract can be dissolved upon the
failure of the lessor to perform his
obligation. The lessee shall be entitled
to his claims due to him upon the dissolution of the contract.

Apart from the termination of the
contract, the Law also grants the Central Bank of UAE to cancel the license of
the lessor under the following conditions as mentioned under Article 31 of the

1. If Lessor does not commence activity within 6
months from the date of the license;

2. If lessor ceases
to exercise his actual activity for more than 6 months

3. If the financial
position of the lessor has not been changed
or corrected in accordance with the instructions of the bank.


The law imposes strict punishments
including fine and imprisonments for those who violate any provision of this
law. Article 33 of the Law imposes of imprisonment and a fine of not less than
two hundred thousand dirhams and not exceeding ten million dirhams or one of
these penalties on anyone engaged in financial leasing activity or using a
lease term Finance in its trade name without a license.

Furthermore, a fine of not more than AED
500 000 shall be punished by a fine on any person who violates any of the provisions
of this law shall be liable to the decisions issued and the Council of
Ministers shall issue a decision specifying the irregularities and the amount
of the fines prescribed for each.

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