Stuck with tenants paying 40% below market value

[Jim International City]

Can someone please help clarify something for me.

I let my 2 International City apartments out last January on a 1 year contract to a company who then tenanted them. However, the rent is now 40% below market value and when the contract ran out I intended to readvertise the properties.

Now my agents tell me that according to Dubai property law, we cannot get new tenants, as despite the contract running out in January, we can be taken to court by our tenants (the owners always lose) if we don't renew the contract, and I can only then up the rent by 5% in the 2nd year of the contract. The agents then said we're tied with tenants until the 4th year before we can get market value.

Now I know the law was brought in to stop unscruplous landlords, but this seems incredibly unfair. Can someone please advise if the above is correct.

 

[kennyhubbard]

Hi Jim,

Also see my response to your other thread.

I am not sure why you have a problem. If the contract period is stated then you may tell the tenants to move out at the end of the contract period.

However, law 26 article 6 states the following :-

If the tenant continues to occupy property after expiry of the contract period without any objection by the landlord, then the contract shall be renewed for similar period or for one year, whichever is less, with the same terms and conditions

This means that you are stuck with the tenant until January, after that, just tell them to move out.

The law specifically excludes you from amending the terms within the period of the contract, so if you sign a 3 year contract you may only increase in accordance with the rent cap.

Oh, and find a more clued up agent.

Regards

Kenny

 

[Jim International City]

Hi Jim,

Also see my response to your other thread.

I am not sure why you have a problem. If the contract period is stated then you may tell the tenants to move out at the end of the contract period.

However, law 26 article 6 states the following :-



This means that you are stuck with the tenant until January, after that, just tell them to move out.

The law specifically excludes you from amending the terms within the period of the contract, so if you sign a 3 year contract you may only increase in accordance with the rent cap.

Oh, and find a more clued up agent.

Regards

Kenny

Hi Kenny,

You sound very knowledgeable, but are you sure about just letting the contract run down? The agents seem to be very confident that I have to renew the current contract when it runs out in January unless I can prove we will instead move in (which isn't a possibilty). The onus seems to be on the landlord to prove that the current tenant has done something wrong, if they don't intend to renew (or so says our agent).

Similarly, the other posters seem to accept the situation as fact - which worries me. On the face of it, though it doesn't seem to make sense that if a contract is for one year, that it has to be renewed .. eg. that's why we wanted a one year contract.

 

[kennyhubbard]

Hi Jim,

As always, I stand open to correction, however........

I am not sure where the others get their info from, but here is a link to the text of the actual law.

Welcome to the Official Dubai Real Estate Community

Th one you are looking for is about halfway down and is called law no 26.

It looks pretty specific to me......says that the period must be specified and that the tenant must move out at the end of the agreed period. It says nothing about the contract must be 4 years or that you are obliged to renew.

The law does say you may not increase the rent or change the conditions for a period of 2 years since the contract began......however, it does not state a minimum length of contract.

The law does seem to contradict itself. It is not well written as is typical in Dubai. Article 21 says that the tenant is obliged to return the property to you at expiry of the contract, however, article 25 implies that you may never ask the tenant to move out.....EVER, and that is not reasonable so I would be inclined to think that 25 is the article at fault.

I would say that you should act on this.....and let the tenant take it to the committee. There is an excellent chance they will not take it any further but if they do, you have sound defences on 2 counts, first the agreed length of the contract and secondly the committee also has to consider the rates of similar properties in the surrounding areas. If your place is at 40% below market then I would guess that you have a good shot at them ruling in your favour anyway.

Bottom line is the upside benefits far outweigh the downside risk.

Hope it helps.

Regards

Kenny

 

[zombie]

HI there, I am stuck in the same situation, however tenancy rights are quite specific. As far as I know, we as landlords have no right to evict the existing tenant / ask them to pay the current market price(btw for me is 60% more than the rent I receive).

You can ask them to move out if you have to occupy the property yourself, but you must give 90 Days Notice to said tenant. The tenany may then file a case with the Rent Committee at Dubai Municipality, in which you/your appointed property manager must be present.

The rent committee may / may not rule in your favour(I don't have specifics on this).

For Renewal the Decree passed by His Highness for the year will be valid, e.g. last year 7% & this year 5%. Also more importantly for you, as this could be the FIRST renewal of tenancy contract, you as landlord are NOT allowed to increase the rent.

Rgards

Vikram

 

[iced]

the reality of the situation is that even if the tenant has a 1 year contract then unless the landlord has no other property and wants to live in the place themselves then the tenant can stay. He can stay for 2 years without any rent increases and then in the third year the rent can go up by the index which is currently 5%.

This is the reality which is why a lot of people dont rent out their places

 

[Propy]

Stuck with same scenario.

Hi Jim, I am going through the same unfair scenario and nothing seems to be clear at this stage ? Does anybody knows that when RERA is planning announce New Rental index and when it comes out will we be able to give our tenant a choice of paying either a fair market rent or look for any other accomodation which suits them. Any Input guys......... and especially thanks to kennyhubbard for his valueable post.

Regards

 

[anil]

The current rents are much higher right now simply becuase landlords know that they will not be able to increase for 2 year or more.

If you take a new tenant now, you have to price it with the understanding that there will be no rent increase for 2 years.

So, althought the spirit of the law is to protect the tenant from rent rises...
the net effect is ZERO.

But, of course, it is upsetting if the law came in after you took a tenant.
In which case, like me, you are providing social housing (those of you from UK will understand!).

 

[zombie]

I don't think the rent charged by a landlord today takes into account any increase in rental returns in the future, if that were the case we all would've known that rental prices will increase & thus we can demand more. However there is a market force in play which is a formula of demand & supply. As long as there is very strong demand for properties such as those in IC given its location, initial rental prices 2 years ago & current forces that dictate demand.

The main issue to look at is the rate of return on your investment, for most people it is aound 10%, with capital appreciation thrown in.

If ontries to look at the print on the standard tenancy contract which we all sign & are getting our tenants ti sign, there will always be confusion as one will contradict the other. As regards the increase in rents, one should always follow the Decree issued for that particular year.

The current rents are much higher right now simply becuase landlords know that they will not be able to increase for 2 year or more.

If you take a new tenant now, you have to price it with the understanding that there will be no rent increase for 2 years.

So, althought the spirit of the law is to protect the tenant from rent rises...
the net effect is ZERO.

But, of course, it is upsetting if the law came in after you took a tenant.
In which case, like me, you are providing social housing (those of you from UK will understand!).

 

[anil]

I totally agree about supply/demand and to follow the law (which we all do).

But, if today, you had an empty property, you would look at the average rent over 3 years that you will get. So that will also help to push up the rent demanded by landlords... these are the market forces in place.

 

[zombie]

I agree that the landlord will always try to maximise the returns, However there has to be somebody to pay the price, in this case there is very strond demand, which has pushed rental prices to this level.

On the other hand in the more Premium developments, one hears of a large number of properties lying vacant, because the rent demanded is too high, with not enough people ready to take them.

The Rent Cap was a social measure implemented to protect tenants against huge increases

 

[Demoniise]

If as kenny advices after 1 yr you remove the tenants and say you want to live there yourself and instead rent it what is the position. Have many tenents in IC taken landlords to the rent committe and what has been the outcome? Please advice

 

[zombie]

The law is very clear on that matter, pls check the RERA site & d/load Law no. 26 of 2007, which is currently applicable for any clarifications on Landlord Tenant Relationships.

Interpretation at the Judiciary level is an unknown factor, people who have gone through the process could guide better.

Vikram

 

[rizjunior]

You can not demand rent according to market rate because of current rent cap. When you rented your apartment, it was according to then market rate. Even after three years (my understanding) you can claim rent increase according to prevailing law unless there is any clause in tenancy contract allowing to increase rent according to market.

How many people live in that apartment?, try seeing if 10 or 15 people are not housed there, most companies do this. In such case you can go to court to vacate your apartment.

If you somehow get the possession by misdeclaration like stating that you want to live there and later on rent it out, there could be serious problems for you if the tenant finds it out and take legal action against you. I would not recommend this.

By the way its just one year and you want to increase rent? is it fair with tenant? Think if you were tenant somewhere.

 

[Demoniise]

If you somehow get the possession by misdeclaration like stating that you want to live there and later on rent it out, there could be serious problems for you if the tenant finds it out and take legal action against you. I would not recommend this.

By the way its just one year and you want to increase rent? is it fair with tenant? Think if you were tenant somewhere.

Is it fair on the landlord then if the rents start falling the tenants can just leave without any threat of legal conseqences yet when rents are rising the landlord is threatened with legal action if he wants to increase rent in line with market forces.

Does anyone know what the serious problems that can occur in Dubia if legal action is taken by a tenant?

 

[rizjunior]

Is it fair on the landlord then if the rents start falling the tenants can just leave without any threat of legal conseqences yet when rents are rising the landlord is threatened with legal action if he wants to increase rent in line with market forces.

I agree but in most countries of the world, law is on tenant's side, which are thought to be vulnerable than landlords.

Does anyone know what the serious problems that can occur in Dubia if legal action is taken by a tenant?

A possible fine of AED 50,000 plus damages if tenant presses it in court. Please remember law is very straight here, no jiggling around.

Wait till March, because everyday lot of familes are going back to their home countries because of recession. There are hardly any sales in property market. Developers are not paying money to contractors and lot of businesses are getting harder and harder to cope with money problems. Rent might go down in coming months.