Leases under Financial Restructure and Bankruptcy Federal Decree Law No. 51 of 2023

Leases under Financial Restructure and Bankruptcy Federal Decree Law No. 51 of 2023

The United Arab Emirates enacted Federal Decree Law No. 51 of 2023 on Financial Restructuring and Bankruptcy (the “New Bankruptcy Law”).

It is worth noting that the New Bankruptcy Law established special courts to adjudicate on bankruptcy applications, and will be referred to as the bankruptcy courts (“Bankruptcy Courts”)

The New Bankruptcy Law addresses many important issues which a debtor might encounter if it is to initiate bankruptcy proceedings or if bankruptcy proceedings have been initiated against it. One of such important issues is the lease.

According to the New Bankruptcy Law, if a debtor is a lessee of the property in which it conducts business, the lease agreement shall continue to be effective, and any condition to the contrary shall be void.

The New Bankruptcy Law pointed out that, the trustee, who is a natural or a legal person appointed by the Bankruptcy Courts to carry out bankruptcy proceedings in accordance with the powers conferred upon him under the New Bankruptcy Law (“Trustee”), may, within 60 days following the date of issuance of the decision to initiate bankruptcy proceedings, decide to terminate the lease agreement in respect of the property in which the debtor practices its business, after obtaining permission from the Bankruptcy Court. In this case, the Trustee shall notify the lessor of this decision within the aforementioned period.

The New Bankruptcy Law added that, if a lease agreement has been terminated in accordance with the provisions of the New Bankruptcy Law, the lessor that leases out a property to the debtor shall have a lien for the two years preceding the issuance of the decision to initiate Bankruptcy Proceedings as well for the current year, in respect of all matters in relation to the performance of the lease agreement and any compensation that may be awarded.

If the movables in the leased property are transferred or relocated without terminating the lease agreement, the lessor may exercise its said lien, and in addition, he shall have a lien for another year starting from the end of the then current year during which the decision to initiate bankruptcy proceedings is issued.

Further, if the Trustee decides to continue the lease, he has to pay the overdue rent, without prejudice to the lessor’s right to request termination of the lease agreement due to abstention or delay in respect of paying the rent. The lessor may request the Bankruptcy Court to terminate the lease, unless the Trustee provides sufficient security to pay the rent on the due dates.

Furthermore, the Trustee may, after obtaining permission from the Bankruptcy Court, sublease the property or assign the lease, unless the debtor is prohibited from doing so by virtue of the lease agreement or under the legislation regulating the lease relationship applicable to the leased property.

In conclusion, the New Bankruptcy Law replaced Federal Decree Law No. 9 of 2016 on Bankruptcy and has come into force from May 1, 2024.