After a long hard winter, the property market is at last seeing “concrete” signs of recovery. Cranes and building sites can be seen across the major cities of the UK; something that had become very rare especially outside London. As lending volumes increase and the world starts to clamber out of the recession, overseas investors are constantly looking for more property opportunities in the UK. This has caused shari’ah-compliant financing and investment to gain in prominence. In many cases Middle Eastern investors want an income producing asset, not just an expensive second home!
Shari’ah law prohibits investment in businesses whose main activities include alcohol, some theatres and entertainment venues which have a pornographic element, sale of pork-products, gambling, pawn shops or interest-based banking (amongst other things). Therefore, tenants in properties owned and leased by a shari’ah-compliant investor will be forbidden to carry on such activities. This will be more complicated where such an investor acquires existing investments.
The implications of being a shari’ah compliant tenant could be significantly more far-reaching than first considered. As such, the provisions of a lease will have to be carefully negotiated and worded to ensure that both the landlord and the tenant have the certainty and protection they need. In particular the landlord will not be able to rely on what is a ‘reasonable’ ground for refusal, but will need to have absolute discretion in relevant areas.
The landlord will need to ensure:
- That the use of the premises strictly prohibits non-shari’ah-compliant activities;
- That the tenant will be unable to assign or sub-let the lease to an entity which may not be shari’ah compliant; and,
- That they are able to impose penalties and actively enforce the above.
- The tenant will need to ensure that:
- It is clear what is, and what is not, acceptable under shari’ah law;
- What will, and what will not, constitute a breach of the lease even if they are technically breaches of shari’ah law; and,
- What type of penalty can be imposed for a non-compliant activity e.g. an injunction or damages claim.
Repair and Insurance
In Islamic law, leasing is treated as a kind of sale but shari’ah only allows the sale of tangible assets (with a few limited exceptions). For example, a debt cannot be sold. The Landlord ‘sells’ the temporary possession of the property. This may seem like a very subtle difference, however, the implication is that the landlord cannot pass on structural maintenance obligations or buildings insurance obligations to the tenant. In short, full repairing and insuring leases, which have become a staple in English law, are prohibited.
Shari’ah-compliant finance is one of the fastest growing sectors in the industry and shari’ah-compliant investment is predicted to increase greatly in European properties. The results will mean that some forms of the lease could be quite different from the leases used in the majority of transactions. Shari’ah-compliant investors will of course have to complete with UK law and cannot force a tenant to amend an existing lease. Whether a new lease is being granted or an existing lease is being varied, the implications of shari’ah compliance must be carefully considered when negotiating and drafting all relevant documentation.