The Banking Litigation team at Al Tamimi continues to assist
many of our clients with enforcement of finance documents before
the UAE Courts. To date, we have obtained a number of successful
judgments in relation to the enforcement of conventional and
Islamic finance transactions for our clients.
In terms of Islamic finance, the Dubai Court of First Instance has
recently issued the first few judgments in connection with Ijara
finance transactions. The Ijara finance documents considered by the
Court related to property finance provided by an Islamic financial
institution. The properties in question were located in the newly
created free hold designated areas in Dubai. The following is a
brief analysis of the facts of one of the cases and the judgment
rendered by the Court.
Facts of the Case
The Ijara finance documentation included an Ijara (lease) agreement
entered into between the financial institution and the customer
(being provided with the finance), a purchase undertaking provided
by the customer and a sale undertaking provided by the financial
institution. The lease term under the Ijara agreement was equal to
the finance period. The customer was required to service the debt
by paying rental (consisting of fixed rental being the principal
amount and variable rental being the profit element). The documents
provided that if the customer complied with all of its obligations
under the Ijara agreement, the customer would be entitled to
exercise its rights under the sale undertaking provided by the
financial institution and request the transfer of the property in
its name in consideration of payment of the sale price (being a
nominal amount). However, the customer defaulted on its rental
payment obligations and as a result, the financial institution
exercised its rights under the purchase undertaking requiring the
customer to purchase the property from the financial institution
for the outstanding amount.
The financial institution requested the court for a judgment for
specific performance, to require the customer to purchase the
property and for removal of the interest of the customer from the
title deed issued by the Dubai Lands Department.
Summary of Judgment
The Court held that the Ijara finance documentation described above
constituted an agreement for sale of property, whereby, the
customer had agreed to purchase the property from the financial
institution. The Court further directed (a) the customer to
purchase the property from the financial institution for the
outstanding amount (constituting the purchase price of the
property) and (b) that the reference to the Ijara arrangement to be
deleted from the Dubai Lands Department's records.
The above judgment will now be executed through the Dubai Courts,
Significantly, the Dubai Courts have exercised jurisdiction over
Ijara finance matters. Previously, there was uncertainty as to
whether this would be the case. The reason for the uncertainty was
the existence of a Dubai government Decree requiring all matters
relating to leases to be transferred to the Dubai Rent Committee.
However, the Ijara transaction described above was clearly a
finance transaction and therefore should be distinguished from an
operating lease contract. The recent judgments have confirmed our
conclusion that all Ijara finance transactions are to be dealt with
by the Dubai Courts and not the Rent Committee.
Ijara Finance Transaction- A Sale Contract
The Ijara finance documentation described above is also commonly
known as a lease agreement with a promise to sell. The Dubai Court
has taken the view that, the transaction viewed in its entirety is
a contract for sale of property on deferred payment terms, rather
than a lease. The Court stated that the parties' intention was
evidenced by (i) the initial application form completed by the
customer requesting finance to purchase the property (ii) the sale
undertaking and the purchase undertaking which when read with the
lease agreement culminated in a sale of property; and (iii) the
rental payments which were effectively payments of installments of
the purchase price.
To date the courts have been consistent with this approach
(treating the Ijara as a sale), as confirmed by the Court of Appeal
in one of the cases on which we have acted.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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