The Kingdom of Saudi Arabia (KSA) has introduced several reforms in recent years impacting the way in which leases are governed.
Amongst these changes are:
- The introduction of the Civil Transactions Law in 2023, codifying many of the Shari'ah principles already applied to leases to create a fairer and more transparent regulatory framework.
- The digitisation and standardisation of the leasing processes through the establishment of the Ejar platform;
- The creation of The Real Estate Registry (the Registry) with a view to registering all titles to land in the Kingdom within a centralised registry; and
- Relaxations in relation to foreign investment, which have been explored in our other articles: Vision to Reality - foreign ownership laws in Saudi Arabia / Saudi Arabia's Evolving Framework for Foreign Real Estate Investment
In light of the evolving regulatory landscape, it is important that those seeking to invest in KSA are aware of the key legislative provisions and practices relating to leases, whilst also keeping an eye on any anticipated changes that are on the horizon.
Registration and enforcement
All leases, (residential and commercial) irrespective of the length of term, must be registered through the Ejar platform, else they will be unenforceable.
Established in 2018, Ejar is an electronic network for tenancy services which aims to simplify and streamline the rental process, whilst also ensuring fairness and transparency for the parties. To date, over 5 million leases in KSA have been registered through the Ejar platform.
KSA's Real Estate Brokerage Law, which came into force in 2022, provides that only licenced Real Estate Brokers will be qualified to access the Ejar platform and complete the registration on behalf of the parties. Should a Broker fail to register a lease through the Ejar platform, they may receive a fine of up to 2,000 Saudi Riyals per lease, and this fine may be doubled if the violation is repeated within three years.
Furthermore, leases must comply with Ejar's standard lease forms (the Unified Tenancy Contract) to be enforceable in KSA's Enforcement Courts, which are specialised courts dealing with the enforcement of leases. Additional clauses or changes to Ejar contracts that go beyond the standard registration on the Ejar platform must be addressed in the general courts. This is because the Enforcement Courts primarily handle disputes related to registered contracts, while the general courts have the jurisdiction to deal with more complex legal issues or additional terms that are not covered by the Ejar framework.
The standard lease form for commercial leases requires certain information in relation to the parties, the premises being let, term and renewal options and financial metrics, such as brokerage fees, fees in relation to utilities and other services and rental payment frequency. It also contains standard clauses in relation to termination and breach as well as setting out basic obligations on both the landlord and the tenant which cannot be changed (for example, in relation to maintenance obligations).
There are also a number of ancillary provisions, in prescribed terms, which will only apply if the parties elect to activate them, for example, tenant obligations relating to assignment and subletting and alterations. This includes some provisions which are relevant to shopping centres. Finally the parties are able to include bespoke, additional terms, but these should not conflict with the basic terms, else there is a risk that the lease contract will lose its status as an enforceable document in relation to the Enforcement Courts, meaning that disputes would have to go through general court proceedings, which could be timely, costly and uncertain as to outcome.
Leases with a term of ten years or more must also be annotated on the relevant freehold title. Failure to do so will result in the lease being unenforceable and without legal or administrative effect.
The aim of the Registry is to create a digital database encompassing all land ownership in KSA, with incremental first registration being rolled out across the Kingdom.
Furthermore, the Civil Transactions Law and the Ejar standard forms make clear that a tenant's rights under a lease will be unaffected if the property is sold by the landlord.
What are the key lease provisions?
Deposits
Under the Real Estate Brokerage Law, rental security deposits in KSA are determined by agreement between the parties, however they are limited to a maximum of 5% of the total value of the lease. Any amount exceeding this value will be considered an advance payment of rent.
Upon signing the lease, the tenant is required to pay any agreed deposit through the Ejar platform to guarantee that the property will be returned to the landlord undamaged and to cover any unpaid bills. The deposit is retained by Ejar and, when the tenancy comes to an end, the parties will agree on the value of any damages to the property and the funds will be distributed to the parties as appropriate. Any disputes as to the assessment of damages will initially be resolved by specialised experts assigned by the Real Estate General Authority (REGA), and the parties may appeal this decision to the competent court should they wish to do so. Ejar states that the burden of proof when seeking to make withdrawals from the deposit amount is with the landlord.
Rent and Rent Review
The law gives the parties flexibility to agree the dates and intervals at which rent should be paid. In the absence of such agreement, rent should be paid at the beginning of each term.
Since 15 January 2024, tenants of residential properties are now required pay rent digitally through digital payment channels approved by Ejar, namely Mada or SADAD. At the time of writing, this requirement is not applicable to commercial leases.
The law does not currently set a cap on the frequency of rent reviews or any rent increases. Rent is typically reviewed upon the renewal of a lease term.
The exception to this is leases under which the tenant is a government entity. Under the Implementing Regulations of Law of State's Leasing and Evacuation of Properties, which came into force in 2016, the rent payable by a government entity may only be increased once per lease term, and by no more than 10% upon each review.
Furthermore, if a landlord requests a rent increase, and the tenant remains in possession of the property after the expiry of the lease term without objecting to the increase, the increase will automatically apply after the expiry of the original lease term. However, if the tenant objects to the increase, the landlord may either agree to the objection or require the tenant to vacate the property.
Landlord and Tenant Obligations
The Civil Transactions Law sets out the key landlord and tenant obligations. For landlords, these are:
- To deliver the property and appurtenances in such a condition that the full benefit can be derived from them;
- To carry out any necessary repairs to keep the property usable by the tenant, unless the parties agree otherwise;
- Not to expose the tenant to anything which might disturb its enjoyment of the property; and
- Not to alter the property in any way that could prevent it from being used.
In terms of the tenant's obligations, these are:
- To pay rent on the dates agreed under the rental contract;
- To use reasonable care to preserve the property;
- To use the property for its agreed use (or, if there is no agreed use, according to its intended purpose);
- Not to make any changes to the property that are unnecessary or could damage the property without first obtaining the landlord's consent;
- To maintain the property as required by customary practice during the lease term, unless the parties agree otherwise; and
- When the lease expires, to return the property in the same condition it was delivered (except for any 'wear and tear' damage arising from normal use).
As noted, Ejar's unified tenancy contracts contain a number of clauses regarding landlord and tenant obligations, including around maintenance and yielding up, some of which are essential while others will only apply if activated.
Renewal
Under the Civil Transactions Law, where a tenant continues to occupy the property after the expiry of the lease term with the consent (explicit or implicit) of the landlord, the lease will be deemed as automatically renewed on the same terms and conditions as the original lease. The Ejar standard form contract, for commercial leases, states that upon the expiry of the term, the lease contract will end, but if both parties wish to renew a new lease will be entered into, on terms to be agreed. Otherwise either party can notify the other before the term expires of their desire to terminate the contract.
There are no legal restrictions on the maximum length of the lease, except for leases where the tenant is a government entity. In such cases, the lease term must be for a minimum of one year and up to a maximum of three years. Additionally, the lease contract should provide for automatic renewal unless either party gives 180 days' notice of their intention to terminate the lease.
Subleasing and Assignment
Tenants are prohibited by law from subleasing or assigning their interest in a property without first obtaining the landlord's consent (and the standard Ejar commercial tenancy form gives options for this). The law does not specify whether this permission should be in writing, giving the parties a degree of flexibility as to how consent may be obtained. In the event that a lease is assigned, the Civil Transactions Law provides that the assignee will substitute the original tenant in all its rights and obligations under the lease. Furthermore, as noted above, a valid lease will not be affected should the landlord decide to sell its interest in the property.
Termination
How a lease may be ended will be dependent on the terms of the lease itself. However, the Civil Transactions Law sets out a number of circumstances in which a tenant may terminate a lease (or demand a reduction in rent):
1. If the property is partially lost or destroyed, or becomes unfit for its intended use (for which the tenant is not responsible).;
2. If the landlord disturbs the tenant's enjoyment of the lease or makes any alterations to the property that prevent it from being used; or
3. If, as a result of a defect of the property, the tenant is prevented from enjoying it.
Furthermore, a lease will automatically be rescinded in the event that the property is completely destroyed.
Under the standard form Ejar for leases of commercial premises, there are provisions by which the contract will terminate in the event of tenant insolvency, following certain instances of tenant breach (and note the tenant also has the right to terminate in the event of unremedied landlord breach) and in certain no fault situations, such as for reasons of force majeure, in which latter case any rent paid attributable to the remaining term is to be returned.
Also pursuant to the Ejar, there is a specific hand-back process which involves both parties signing a delivery form.
How are lease disputes dealt with?
As outlined above, for a lease to be enforceable in the Enforcement Courts, it must:
- Be registered through the Ejar platform; and
- Comply with the format of the Unified Tenancy Contract.
The Enforcement Courts are specialised courts with the power to issue enforcement orders and provide the parties with a more efficient method of enforcing their rights under a Unified Tenancy Contract than bringing a dispute in the Kingdom's other general courts. Leases complying with the above conditions will be accepted automatically by the Enforcement Courts as enforcement documents. Claimants are able to apply digitally to enforce their rights in the Enforcement Courts without the need to file a lawsuit or attend hearings. Disputes relating to leases that are not considered enforcement documents must be brought in KSA's general courts and may be subject to lengthy litigation.
In 2018, the Real Estate Arbitration Centre was established as an alternative means of settling property-related disputes, including those relating to leases. Awards issued by an arbitration tribunal are final (but may be annulled in limited circumstances).
Conclusion
The unification and modernisation of leasing processes in KSA is undoubtedly a positive step towards greater fairness, certainty and transparency for both landlords and tenants alike, coinciding well with the broader aims of the Kingdom's Vision 2030 strategy. However it is crucial to understand the legislative framework, the requirements of Ejar and the ways in which they inter-operate.
For further insights or legal advice on leasing in the Kingdom, please contact our International Real Estate Team at Trowers & Hamlins.
