New UAE’s Finance Leasing Law
The United Arab Emirates is set to enact a new law, replacing the existing finance lease law (Federal Law No. 8 of 2018). Despite its publication in the Official Gazette, the new law is scheduled to take effect six months after its publication, specifically on March 29, 2024. The Current Law will remain in operation until the Effective Date, after which it will be automatically annulled.
The new law explicitly states that laws and decisions implemented under the Current Law will persist until they are supplanted by new legislation or decisions. Notably, the UAE Cabinet Decision No. 76 of 2020, which addresses accounting standards relevant to finance leasing, plays a crucial role as an implementing regulation under the Current Law. This decision has been pivotal in assisting court-appointed experts in finance lease disputes, particularly in matters concerning rental calculations and claims adjudicated by UAE Courts.
Financial Leasing Law
Essentially, this law governs finance leasing activities in the UAE and delineates the commercial agreements between parties involved in a leasing contract. The Law introduces several key principles and enhancements, including:
Registration with the UAE Central Bank : Entities engaging in financial leasing activities (Leasing Companies) in the UAE must obtain a license from the UAE Central Bank. Non-compliance may result in imprisonment or fines.
Contractual Arrangements : Financial leasing is regulated by
- A supply contract between the Leasing Company and a supplier, covering the acquisition of specific equipment, movable assets, or off-plan real estate property. Although the borrower may not be a party to the supply contract, it retains the right to select the specifications of the Leased Assets, influencing the supply contract. The Lessee has direct recourse against the supplier and can enforce the terms of the supply contract.
- A leasing contract between the Lessee and the Leasing Company, outlining the use of the Leased Assets for a specified duration and purpose in exchange for the payment of lease amounts (plus interest) to the Leasing Company. While the legal title to the Leased Assets remains with the Leasing Company, the Lessee can choose to purchase them by making premium payments and relevant fees throughout the leasing period, subject to approval.
Registration of Leasing Contract : The leasing contract must be registered in the relevant register in the Emirate where the Leased Assets are located.
Enforcement on Leased Assets : Any third party owed amounts by the Lessee cannot enforce against the Leased Assets. However, in cases of bankruptcy or liquidation of the Leasing Company, the Lessee is entitled to either:
- Continue the leasing contract in accordance with the terms, with the assets transferred to whomever is designated after the liquidation or bankruptcy.
- Hand over the Leased Assets to the liquidator and collect any potential amounts payable as an unsecured creditor.
Features of the New Law
- Ownership of Asset: The New Law defines a 'Finance Lease' as an arrangement where the Lessor leases the Asset to the Lessee for a specified term, with the Lessee potentially having an option to own the Asset as per the New Law's provisions. Importantly, the New Law eliminates the requirement for the lessor to own the asset and engage in a separate contract with the lessee. This change aligns with the introduction of bilateral and tripartite finance lease agreements.
- Bilateral and Tripartite Finance Leases: The New Law introduces bilateral finance leases between the lessor and the lessee, incorporating a purchase option for the leased asset, either in whole or in part. It also introduces tripartite finance leases involving the lessor, lessee, and a supplier. In a tripartite lease, the lessee selects the asset and the supplier, and the lessor owns the asset for leasing to the lessee. A tripartite lease may include a purchase option for acquiring the leased asset. The New Law covers sale-leaseback arrangements, a common practice in asset finance transactions.
- Sub-lease Arrangements: The New Law recognizes sub-lease arrangements, encompassing sub-lessors and sub-lessees within the broader definitions of 'lessor' and 'lessee.'
- Leased Asset: Departing from the Current Law, the New Law explicitly excludes certain assets like aircraft, airframes, helicopters, aircraft engines, marine vessels, and assets registrable in "special registers" under UAE law or international treaties. This exclusion aligns with international best practices. Additionally, the New Law excludes cash, investment bonds, and granted land in the UAE from its scope.
- Scope of Application: The New Law applies to all finance lease contracts, irrespective of whether the lessee is licensed by the Central Bank. Notably, it seems to recognize cross-border finance leases and assets located in the UAE, excluding financial free zones like DIFC and ADGM.
- New Licensing Requirements: While the Central Bank continues to regulate finance leasing by banks and licensed financial institutions, the UAE Cabinet will determine the regulatory framework for non-licensed financial institutions involved in such business. This is a significant departure from the Current Law, which mandates Central Bank licensing for anyone conducting finance lease business in the UAE.
- Registration: The requirement for a special register for finance lease contracts is removed from the New Law. Instead, finance lease contracts should be registered in the register of the leased asset in the UAE. Unlike the Current Law, the New Law does not render a finance lease agreement void if unregistered, although registration remains necessary for enforceability against third parties.
- Enforcement: The enforcement of rights for movable assets under a finance lease is governed by the Movable Asset Security Law (Law No. (4) of 2020)
- Allocation of Risk: In a tripartite lease, unless agreed otherwise, the risk of loss of the leased asset transfers to the lessee, except when the asset is pending delivery. In a bilateral lease, the lessor is liable for the loss, and this liability cannot be transferred to the lessee unless caused by the lessee.
- Maintenance Obligations:Unlike Ijara leases where maintenance is the lessor's obligation, the lessee is responsible for maintaining the asset under the New Law unless otherwise agreed by the parties.
- In summary, the forthcoming regulations to be issued under the New Finance Lease Law are anticipated to offer additional clarity, particularly regarding the licensing and regulation of finance lease activities and the accounting treatment of such leases. The outcome of the differentiated approach adopted by the New Finance Lease Law in regulating financial institutions and other entities will be intriguing to observe