Ijarah or leasing: key takeaways

In-Depth Analysis

After a gap of a few weeks (everybody needed a little vacation), the author endeavors to wrap up the long debate on Ijarah or leasing by picking the last few points. The Ijarah discussion has been from a financial leasing perspective whereby the lessee acquires the ownership of the leased asset upon the successful completion of the lease term. What if the lease is simply an operating one where the lessee shall return the asset to the owner upon the expiry of the lease term? The perspective here is from risk management. Many people have taken a car on rent or a good majority may be renting property, be it commercial or residential. Operating lease is permissible in Shariah law provided that the subject matter of the lease contract is Shariah compliant and the contract does not have any clause contradicting the Shariah principles. Another important aspect is that the tenancy contract should be compliant to the law of the land without which it will not be effective or enforceable even if it is Shariah compliant. The lessee, or the tenant (as it is generally referred to in the operating lease), has the responsibility to use the rented asset in a manner so as to prevent it from damage, save for normal wear and tear. Some of the owners would seek a deposit amount from the tenant to ensure protection from damage to the leased asset or non-payment of rent. There is no Shariah issue to do so except that it should be paid back to the tenant in full upon the return of the rented asset in the same condition when it was leased (excluding normal wear and tear). The discussion moves on to the financial lease on 99-year leasehold properties. Referring back to article 62 where the Ijarah chapter was commenced: 'It is possible that the provider of the usufruct is actually not the owner of the asset but a lessee in another lease agreement whereby he or she had obtained the usufruct from the owner of the property, and is now acting as the sublessor in terms of the second lease agreement. Nevertheless, this can only be possible if the owner under the first lease agreement has permitted for subleasing of the asset.' In some parts of the UAE, the author has observed the sale of leasehold properties with or without conventional or Islamic financing. In such cases, the developer obtains land from the state on a 99-year lease with the purpose of constructing homes for onward sale to prospective buyers. The purchasers of such residential or commercial property will occupy it only for a period of 99 years, after which the ownership of the land is returned to the state. The countdown for leasehold properties commences upon the developer signing the 99-year lease agreement with the state. By the time the properties are completed and handed over to the buyers, three to five years may have already been consumed from the tenure of the long-term usufruct. There is no Shariah issue for Islamic financial institutions to finance the purchase of long-term leasehold properties. This is because the land belongs to party A but the infrastructure on it is owned by party B. Islamic financial institutions financing long-term leasehold properties shall purchase the property erected on state land (along with the transfer of the remaining years of the usufruct from the developer) and lease it to the client together with subleasing the usufruct related to the land. The difference between the short-term lease and 99-year long-term lease is that in the latter, the lessee is not required to seek permission from the landlord (the state) for making any major changes to the property.