The Dubai Land Department (DLD) has stated that a new draft law is set to keep rents in Dubai unchanged for a three-year period. This follows a prediction by the DLD’s Director General in early January this year, after the DLD’s recommended clauses for the new law were accepted. No date has been set for when this law will come into force, but an official announcement will be made following the law’s publication in the official gazette.
The rental sector represents a significant proportion of the real estate market in Dubai. Landlords and tenants in Dubai generally dreaded the annual tenancy renewal. The haggling on the renewal rent, whether the market was going up or down, whether adequate notice was given by the landlord to the tenant, resulted in tenants looking to move to different properties, possibly having to downsize, and landlords potentially ending up with vacant properties.
Tenants not willing to or unable to find suitable alternatives would end up swallowing the bitter pill that was the rent increase. In more dire situations, especially given the impact of the COVID-19 related restrictions on the economy in the past year, some Dubai residents would have had no choice but to leave Dubai.
This new law providing for a rent freeze is intended to create stability in Dubai’s real estate market, both for tenants, by alleviating any worries about increasing rents, and for landlords, whose disappointment at not being able to increase rents should be balanced by the fact that their property is less likely to end up vacant. The DLD anticipates that this law will stimulate and encourage investments in Dubai and increase the occupancy rate of real estate properties in the Emirate.
Judge Abdelqader Mousa, Chairman of Dubai Rental Disputes Center, stated that landlords may not increase the rent for residential properties for three years from the date of the beginning of the tenancy. However, the rent may be increased after the expiry of that period based on the rental index. Importantly for existing tenants, Judge Mousa also stated that for tenancies concluded prior to the law coming into force, rent increases will be calculated only three years after the law comes into force.
The exact wording of the new draft law is not available for review yet, leaving some questions unanswered. Based on the currently limited information available, we provide our predictions on how this law will impact commercial property and free zones.
Although it is not certain, we believe based on the statement of Judge Mousa, that the rent freeze will apply only to residential properties, not commercial ones. By extension, we believe malls will likely not be subject to the three-year freeze either.
Whether free zones are covered in the draft law remains to be seen. Based on the above, we estimate that there will be a hybrid impact in free zones. Residential properties located within free zones will have rents frozen for three years, whereas offices, retail and other non-residential property rents will not be subject to the freeze.
Locked in for three years?
This was not specifically addressed in the DLD announcement. One of the key purposes of this new law is to help stabilise tenants in Dubai, give them an alternative to moving out every year in search of cheaper properties, as is currently the case. Given that intent, we believe tenants are unlikely to be forced into a three-year lock-in period, and the law would likely provide for some notice period for terminating the tenancy.
The final text of the law is yet to be made public, and it may provide for extensions and carve-outs to the three-year freeze in rent. Even if this law is not applicable to non-residential property, it is likely to attract expats to move to Dubai and encourage resident expats to lock in fair rates, creating a stabilising effect on Dubai’s residential real estate sector.
Authored by Taronish Mistry