Shariah-compliant way to cover major maintenance cost by lessor

In-Depth Analysis

To recall, the Shariah position to deal with the major maintenance of a leased asset includes the following rules: the owner of the leased asset is required to bear the cost of recurring major maintenance to the asset; the owner may appoint the lessee as its agent to do so on its behalf should the owner find it difficult or if the nature of the asset is complex; in such a case, the owner should pay the amount to the agent in advance so as to carry out timely major maintenance; the agent may carry out the major maintenance by utilizing its own funds in order to keep the leased asset in working condition in case the owner does not pay him the amount beforehand; however, the agent should immediately claim the reimbursement of the amount it has spent on major maintenance by submitting the bill to the owner; and the owner should reimburse the major maintenance cost to the agent without delay. The question that arises is that while an Islamic bank, acting as the lessor (owner), charges the market rate as the rent on the financial lease of the asset, how will it cover itself from the large major maintenance cost on a recurring basis? Would it not turn out to be a deficit financing proposition for the bank? On the other hand, what if the owner, acting as the principal, does not reimburse the lessee who is acting as its agent for the cost of major maintenance incurred by it despite lodging the claim? The Shariah guidance on managing the major maintenance by the lessee as the agent is as follows: (1) if the agent (lessee) has incurred the cost, it will submit the bill to the principal (lessor) for instantaneous reimbursement; (2) the principal (lessor) shall make the payment of the major maintenance bill amount to the agent (lessee) as soon as it receives the bill; (3) while ascertaining the rent for the next lease period, the lessor shall add the amount paid by it to the agent (lessee), being the cost of major maintenance, as the supplementary element together with the fixed and variable elements so as to arrive at the total rent amount for the next lease period; (4) the lessor shall advise the lessee the total rent amount for the next lease period at least two working days in advance of the commencement of the next lease period. The author had put a question to the scholars upon reviewing the lease agreement and the servicing agency agreement while dealing with the first Islamic financial leasing transaction of his career. He asked: why should the lessor recover the cost of major maintenance from the lessee through a supplementary element when, as per Shariah, it is the lessor's responsibility to provide the leased asset in perfect working condition to the lessee? The learned scholars responded in the shape of a counter question: 'If I own a property and have spent a considerable amount of money to refurbish the same, would I not want to recover such an expense through future rentals?' There are two other ways to recover the major maintenance cost by the lessor for the entire duration of the financial lease. The first is to enter into a service contract with the technical party responsible for major maintenance for the entire lease term, and proportionately divide the amount over the periodical lease rent for recovery. The second one is to obtain the best estimate from the technical party for major maintenance of the leased asset during the course of the financial lease and spread it into all lease periods to be added with fixed and variable elements. Any actual surplus or shortfall shall be on the lessor's account. The Shariah compliant remedy for the situation where the principal (lessor) does not reimburse the agent (lessee) for the cost of major maintenance: if such an amount is outstanding against the principal (lessor), the agent (lessee) shall have the right to deduct the cost of major maintenance carried out by it from the periodical rent under advice to the lessor.