In 2018, the UAE issued Federal Law No. 8 of 2018 on Financial Leasing (the Old Law) with the aim of regulating finance leasing in the UAE. The related regulations were never issued, however, resulting in uncertainty as to what, if any, steps needed to be taken to comply with the Old Law. Non-existent regulations aside, the Old Law was also deficient in multiple respects (for instance, its applicability to certain assets, such as aircraft and ships where finance leasing structures are commonplace, was unclear). As a result, market participants ended up simply ignoring the Old Law. This was clearly an unsatisfactory position and generated unnecessary uncertainty. With a view to rectifying this, in September 2023 the UAE issued Federal Law No. 32 of 2023 on Finance Leasing (the New Law) which came into force on 29 March 2024. In this briefing, we provide a summary of the New Law and outline some key observations on its main features. This briefing will be of particular interest to those involved in any financing or leasing activity in the UAE (including those interested in leasing unborn animals).

Key definitions under the New Law

Firstly, to set the scene, key definitions under the New Law are as follows:

• "Finance Lease" means:

"A Lease whereby the Lessor leases out the Asset to the Lessee against a rent for a specific term, while the Lessee may be granted an option to own the Asset, pursuant to the provisions of Article (3) hereof."

• "Lease Agreement" means:

"An agreement whereby the Lessor leases out the Asset to the Lessee pursuant to the provisions of this Decree-Law."

• "Asset" means:

1. "Every non-consumable object owned or legally possessed by the Lessor, pursuant to the provisions of this Decree-Law and the resolutions issued in pursuance hereof, and used in the Lessee's craft, trade, business or personal uses, including:
   • Off-plan real estate units that may be the subject of legal transactions, pursuant to the legislation in force in each Emirate; and
   • Capital and future Assets, Assets manufactured in a certain way, equipment, plants, living and unborn animals. Movable property shall be deemed an Asset even if it becomes immovable by destination or is incorporated in real property.
2. A leased Asset excludes the following:
   • Aircraft, airframes, helicopters and aircraft engines of any type that are subject to registration in special registers, pursuant to the legislation in force in the State and international treaties and conventions to which the State accedes;
   • Marine vessels of any type that are subject to registration in special registers, pursuant to the legislation in force in the State;
   • Cash;
   • Investment bonds; and
   • Parcels of land granted by the State."

Scope of the New Law

Turning to some key operative provisions of the New Law, pursuant to Article 2 (Applicability) of the New Law, the New Law applies to any Finance Lease of a leased Asset in the following cases:

• If the leased Asset is in the UAE or in any free zone in the UAE except:
  • any free zone which has special provisions regulating finance leasing; or
  • any UAE financial free zone (i.e. the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Markets (ADGM)),

  (the Excluded Free Zones).

• If a Lessee's principal place of business is in the UAE or in a UAE free zone other than an Excluded Free Zone.
• If a Lease Agreement expressly provides that it is be governed by UAE law.

Possibly as a precursor to different regulations applying to different types of "Finance Lease", Article 3 (Types of Finance Lease) of the New Law, in turn, divides "Finance Leases" into different categories with different salient features: broadly, bilateral leases; tripartite leases; leases involving sale and leaseback; and subleases.

Key observations

Some key observations on the New Law, pending issuance of the New Regulations:

• Complete repeal of the Old Law: On and from its effective date of 29 March 2024, the New Law completely repealed and replaced the Old Law, technically save for related decisions of the Old Law (the Old Regulations) which pursuant to Article 29(2) of the New Law are to remain in force until replaced by new regulations (New Regulations) issued pursuant to the New Law. As no Old Regulations were ever issued, this saving provision is redundant and in practice the Old Law may be regarded as completely repealed notwithstanding Article 29(2) of the New Law. Out with the Old Law went a number of problematic or burdensome provisions, including the requirement to register every single Finance Lease on a special register which was to be established under the Old Law for the Finance Lease to be valid, which requirement, thankfully, was not retained under the New Law (although there is still a requirement under Article 6 (Enforcement Between/Among Parties and Vis-à-vis Third Parties) of the New Law for a Finance Lease to be registered on the UAE Movables Security Register in order to be enforceable vis-à-vis third parties).
• Is it a Finance Lease or not? Article 2(1)(b) of the New Law does not use either "and" or "or" after its penultimate limb, but rather a full stop after each limb, thereby making it unclear if a Finance Lease needs to satisfy all three criteria set out in Article 2 (Applicability) of the New Law or only one to fall within the remit of the New Law. This will ideally be clarified in the New Regulations. Clearly, the New Law will have a much wider remit if only one of the criteria set out in Article 2 (Applicability) needs to be satisfied as opposed to all three in order for New Law to apply to a Finance Lease. It is submitted, however, that it is unlikely that an interpretation that all three criteria need to apply is in line with what was intended when the New Law was drafted. One corollary of such an interpretation would be that the New Law could be completely circumvented by simply electing non-UAE law as the governing law of the relevant Lease Agreement in the choice of law clause in the Lease Agreement. That would be an unusual outcome, especially because if a dispute on such matters ended up in the onshore UAE courts, typically the UAE courts are likely to apply UAE law to the relevant Lease Agreement in any case, which would likely undermine any attempt at avoiding the New Law by electing an alternative law as the governing law of the relevant Lease Agreement (even if that was the intention of the third limb of Article 2 (Applicability) of the New Law, meaning such a clause in practice would not be effective (even if contemplated by the New Law)). On the other hand, needing to satisfy only one of the criteria, which it is submitted appears to be the intention under the New Law, may raise a number of complex conflict of laws issues depending on the particulars involved in any leasing situation – for instance, there is ambiguity over what the proper outcome should be from a conflict of laws analysis if confronted with an express English governing law clause combined with a lessee with a habitual place of business in England but a lease asset located in the UAE outside an Excluded Free Zone. It is conceivable that the courts of England, the DIFC or the ADGM might not reach the same decision as the UAE courts on such matters.
• Sub-leasing: Article 3(5) of the New Law refers to sub-leasing arrangements whereby a Lessee leases out a leased Asset to third parties. Whilst this sits in Article 3 (Types of Finance Lease), from a plain reading of the words there, it is submitted that the intention is probably just to emphasise that a Finance Lease of one of the three types outlined earlier in that Article (as summarised above) would still constitute a type of Finance Lease notwithstanding if entered into by a lessee and a sub-lessee, although this remains to be clarified.
• Leasing of an unborn animal and of assets "manufactured in a certain way": A plain language interpretation of the definitions under the New Law can lead to some interesting outcomes, some of which do not immediately seem relevant to finance leasing or leasing in general. For instance, the definition of "Assets" under the New Law includes, among other things, "unborn animals" and "assets manufactured in a certain way" as distinct species of assets.

This warrants a quick and interesting detour into Islamic jurisprudence, noting that under Article 7 of the UAE Constitution "Islamic Shari'a is a main source of legislation in the UAE". Unborn animals have an interesting position in Islamic jurisprudence. This possibly dates back to a seminal paper outlining the opinions on gharar (which translates as uncertainty, excessive amounts of which in respect of the subject matter of a contract are generally prohibited by Islamic jurists) written by Professor Siddiq Al-Dhareer¹ in which he listed four conditions needed for gharar to invalidate a contract. One such condition is that the gharar must affect the principal components of the relevant contract, understood to mean the price or the object of sale of a contract. The sale of an unborn calf was said to be invalid on that basis, in contrast to the sale of a pregnant cow which was valid – the dividing line being that the pregnant cow is known but an unborn calf may still be unborn.

Perhaps the reference in the New Law to unborn animals is merely part of a grouping together of assets that the New Law is delineating as distinct assets, including unborn animals, notwithstanding the apparent excessive gharar that this might entail postulated by some Islamic jurists. While that is understood by the author, it remains unclear how an unborn animal could be leased or the subject of a Finance Lease. It is also unclear what precise method of manufacturer the words "assets manufactured in a certain way" is intending to capture. The ambiguity around such issues raised by the definition of "Asset" will need to be clarified.

• Excluded assets: Finance leasing structures are commonplace in aviation and shipping, as well as many other industry sectors. It is a welcomed development that the New Law (in contrast to the Old Law, which was ambiguous on this point) now expressly excludes aviation and shipping assets that are subject to special registers under existing law and/or international treaties. Participants in those industries will breathe a sigh of relief that this is one less thing to worry about. However, those involved in other industries such as trains, and those involving yellow goods and other big ticket capital equipment such as medical equipment in which finance leasing structures are also common, should keep an especially close eye on future developments under the New Law as it appears to have direct applicability to those sorts of assets.
• Movable assets: Article 6(3) of the New Law provides that the enforcement of rights under a Finance Lease relating to movable assets shall be subject to the UAE Movable Assets Security Law. This is welcomed and avoids convoluting what is already quite a complex body of law.
• Regulation and licensing of financial leasing: Article 4 (Regulating and Licensing Financial Leasing Activity) of the New Law provides that the UAE Central Bank shall be responsible for regulating, licensing and supervising finance leasing activities by banks and other companies and institutions subject to UAE Central Bank Regulation (UAE Regulated Entities). That Article goes on to provide that regulation of finance leasing activities by non-UAE Regulated Entities shall be carried out by such body as determined by the UAE Council of Ministers, leaving the door open for a separate body other than the UAE Central Bank to regulate finance leasing activities undertaken by such non-UAE Regulated Entities and, as a corollary of that, for such non-UAE Regulated Entities to undertake finance leasing activities in the UAE. We are not yet aware of any substantive steps that have been taken by the UAE Central Bank or UAE Council of Ministers in either regard.
• Islamic finance: Islamic finance structures such as Ijaras and Istisna's are very common in the UAE. In essence, such structures involve the sale of an asset which, in turn, is leased to a lessee in return for rentals with an option for the lessee to buy back the asset at the end of the lease term. On a plain language reading of the New Law, clearly there is an argument to be made that such Islamic financing structures fall within the remit of the New Law. If so, all the regulations of the New Law would apply to such Islamic financing structures, save for those expressly contracted out of in accordance with the New Law (on which, see immediately below). That said, if the UAE courts were to take a substance-over-form interpretation of such Islamic finance arrangements similar to the approach an English court would likely take (in essence, that such arrangements are financings even if structured with many of the features of a Finance Lease as defined under the New Law in order to be in a Shari'a-compliant form), it is submitted that such Islamic finance arrangements should, and are likely to, fall outside the New Law. There are also certain provisions under the New Law that, if not contracted out of, would potentially butt up against common Shari'a requirements – for instance, in respect of the contractual allocation of responsibility for the risk of loss of a leased asset and its maintenance, which supports the interpretation that such Islamic finance structures were not intended to be caught by the New Law.

Unfortunately, while we think it is unlikely, at this stage it is not possible to be definitive on whether such Islamic finance structures will be captured by the New Law and the position will remain ambiguous unless clarified. As a belt-and-braces approach in the meantime (leveraging the right under the New Law to contract out of a number of its provisions, on which see immediately below) for the avoidance of doubt, particularly risk-averse parties that want to attempt to import a greater degree of certainty on such matters might consider including a clause in their Islamic finance agreements whereby the parties agree that the arrangement does not constitute a Finance Lease under the New Law and, to the maximum extent possible, exclude the application of the New Law to those arrangements. We are yet to see this included as a common feature of Islamic financings and it may be that parties just continue to ignore the New Law pending the New Regulations being issued, which in our experience is the most common approach at the time of publication of this briefing.

• Ability to contract out of certain provisions: Lastly, as alluded to above, it is positive that under the New Law the overriding general principle of freedom of contract as enshrined in the UAE Constitution is generally respected, with the ability for parties to contract out of a large portion of the New Law should they agree to do so. This introduces a welcome degree of flexibility to the New Law.

Next steps

There have been very few practical developments in respect of the New Law as we reach the anniversary of its publication. Undoubtedly, this will have some wondering whether, like its earlier incarnation (the Old Law), the New Law will in time simply fall into the ether as another example of a legislative project started but which did not quite get off the ground in any substantive manner. There remains much work to do and time will tell whether some of the uncertainties set out above become clarified once the New Regulations are published to add some flesh on the bones of the New Law. In the meantime, market participants can take some solace in the certainty that the Old Law has been completely repealed by the New Law, notwithstanding the purported continued applicability of any Old Regulations (as noted above, there were none). Now that the New Law is in force, UAE market participants should start thinking about whether their common leasing arrangements are likely to be caught by the New Law once it is in full swing and, if so, how going forwards the New Law may impact their business in the UAE – for instance, whether they are likely to need a licence to undertake finance leasing activities and what, if any, steps they will need to start taking to register such arrangements. Clearly, we are not quite there yet with the New Law, but potentially we are not far off.

We will publish further analysis on the interpretation of the New Law and its practical application to leasing activity in the UAE once the New Regulations have been issued. In the meantime, if you have any queries on the New Law or how it may be relevant to your business, please do get in touch.

This article is also available in Arabic, click here to download.

1. [Siddiq Al-Dhareer (1997) Al-Gharar in contracts and its effect on contemporary transactions]↩