Why Musataha matters for completion of an Istisnah contract

In-Depth Analysis

Hello there. I am back after an absence of a couple of weeks. I concluded article 58 with the discussion on a Musataha agreement. This agreement is entered into in a situation where the seller in the Istisna contract (Istisna seller) is undertaking to construct an asset, which is the subject matter of the Istisna contract, on the land which is not owned by the Istisna seller and which is either owned by the Istisna buyer or a third party. The Musataha right obtained by the Istisna seller will then facilitate the completion of the Istisna asset to be delivered on time to the Istisna buyer. In the UAE, the Musataha right is covered in the UAE Civil Code which has proved immensely helpful in getting the country to where it stands today with state-of-the-art real estate and infrastructure. How is the Musataha right different from the usufruct right? While we shall discuss the usufruct in detail in the future articles under the subject of Ijarah or leasing, the following differentiation will further assist readers to clearly understand the Musataha right. The Musataha rights and the usufruct rights are both, in fact, the property rights conferred by Shariah and recognized under the civil code in some of the Islamic countries. However, the Musataha right is different from the usufruct right in that it gives the holder of the Musataha right the authority to build, own and use the property during the defined Musataha period — which is up to 50 years in the UAE with the option to renew for another 49 years. As for the usufruct right, in simple terms, it is the right to enjoy somebody else's property for an agreed period of time at an agreed upon price, provided that the property remains in its original form, such as short of the destruction or waste of its substance, and is returned to the owner of the property on (or before) the completion of the usufruct period. For the usufruct, the period could be immediately up to 99 years. Another stark difference between a Musataha and usufruct is that the owner of a Musataha right owns the property he has developed over someone else's land and is also able to dispose it with or without the Musataha right. If the sale is with the Musataha right, the new owner will either buy the asset with the land or seek a new Musataha right from the landowner. Clearly, this is not the case with the usufruct right. If it is without the Musataha right, the landowner's consent shall be required. Taking our Istisna discussion to the next level, once the Islamic bank has entered into an Istisna agreement with a customer, in the capacity of the Istisna seller it has two options: one is to build the Istisna asset itself (such as through a group company) or to procure the Istisna asset to be built (such as to outsource the construction of the asset) by entering into a parallel Istisna contract with a third party. What is a parallel Istisna contract? It is also an Istisna contract but the word 'parallel' demonstrates that there exists a main Istisna agreement. It is similar to the parallel Salam phenomenon that we looked at in the discussion on Salam. In a parallel Istisna contract, the specification of the asset remains the same — or you may call it a mirror image of the specifications of the main Istisna contract. This is because the seller under the main Istisna contract is committed to deliver the asset with exactly the same specifications to the Istisna buyer. However, there are two aspects in the parallel Istisna contract which should be different from the main contract: the asset delivery date and the price. While the asset delivery date in the parallel Istisna contract must be adequately earlier than the main Istisna contract in order to ensure the timely delivery of the asset in terms of the main Istisna contract, the price in the parallel Istisna contract must be lower than the main Istisna contract enabling the Islamic bank to earn the desired profit from the main Istisna transaction. Moreover, both the contracts must be separate and independent of each other. In other words, the Islamic bank's responsibility to deliver the asset under the main Istisna contract must not be dependent upon the delivery of the asset to the Islamic bank under the parallel Istisna contract. We have earlier learned that the Shariah principles do not allow the charging of a penalty in the case of a delay in meeting the financial commitment by the customer to the Islamic bank since it is tantamount to applying interest. However, it will be interesting for readers to learn that a buyer under the Istisna contract is permitted under Shariah principles to levy liquidated damages (a form of financial compensation) on the Istisna seller in case of a delay in the completion and delivery of the Istisna asset by the seller to the buyer.