BizBahrain Magazine Nov-Dec 2017

ASAR | Corporate Law Analysis
Renewal Rights - a statutory right in an
existing tenant to remain in a rented
space.
In Bahrain, pricing control is
implemented by prohibiting a landlord
from raising the rental rate other than
in a single instance of rental increase,
which may raise the rent by up to a
maximum of 10% of the original rent.
Other than in this case, increase in rent
is generally permitted in the limited
case of renovation of the property,
which would allow the landlord and
tenant to agree a fair rental rate (in
the absence of reaching an agreement
on the rent for the renovated space,
the tenant may litigate and the court
may consider the reasonableness of
the lease offered). In sum, a Bahraini
tenant would benefit under rent control
by a limitation on increases in her rent
payments during the course of her
tenancy.
Renewal rights were introduced into
the Bahrain rental control legislation
in 1970. This guaranteed an occupant
of a property the right to remain in
the leased space indefinitely (with
some exceptions), subject to payment
of rent and material compliance with
the lease agreement. Eviction despite
lease compliance was available
in only a limited number of cases,
such as repossessing the property
for the owner to use it as a personal
residence (extended to the owner’s
first degree relatives). It is notable
that eviction is permissible for the
purpose of renovating the property;
however, the tenant has a right to be
offered a renewed occupancy once the
renovation is complete. Another notable
aspect of the renewal right is that it
accrues to the ultimate occupant even if
an intermediary tenant has sub-let the
property (who would not be protected
by the rent control legislation). Special
rules apply concerning the amount
of rent due from the occupant to
the landlord upon termination of an
intermediate lease agreement, which
are set out in the law.
The Bahrain Cassation Court had
expanded the protections under the
rent control legislation by implying its
application beyond the municipalities
of Manama and Muharraq (being
the areas identified in the law) and
by consistently finding in favour of
tenants where the lease agreement
excluded protections otherwise
provided under the rent control
legislation. The rent control law in
Bahrain has regularly been derided as
detrimental to business and arguably
costs the Bahrain government
substantial sums in municipality
fees due to the artificially low rents
applying.
Revocation of Rent Control
It should be noted that the New
Rents Act does not eliminate the types
of provisions contained in the previous
rent control legislation. It includes
provisions concerning maximum
rental increases and rights of renewal;
however, the most important element
of the New Rents Act is that those
provisions apply “unless otherwise
agreed.” Now, a sophisticated landlord
can include in the lease agreement
provisions to protect her from a tenant
being able to avoid eviction or regular
rental increases. This substantial
change means the lease contract truly
establishes the conditions between the
landlord and tenant, rather than the
lease agreement being diluted by rent
control legislation.
Most importantly, the New
Rents Act established that any
lease agreement benefiting from the
previous rent control legislation would
face a substantial change effective
from February 2018 (three years after
the New Rents Act became effective).
The changes include a right to increase
rent by up to 5% (on up to 5 occasions)
during the term of a residential lease
agreement period and up to 7% (also on
up to 5 occasions) during the term of a
commercial, industrial, occupational,
handicraft or other lease. Also, a higher
or more regular rent increase may be
agreed by contract (e.g. a 10% annual
rental increase).
Upon the expiry of a lease
agreement after February 2018,
the lease would terminate by the
landlord’s objection to renewal, even
if the agreement had been subject to
automatic renewals under the prior
rent control legislation. Suddenly a
landlord will be able to evict a tenant
by way of expiry of the lease term (or
its renewal) for the first time since
1970. This combination will open
the door to building owners retaking
control of their properties from
indefinite tenants who often pay de
minimis rent.
Market Impact
It is hard to fully appreciate the
market impact of this “death” of rent
control in Bahrain. Tenants with
minimal rental rates are likely to face
off against landlords demanding a
substantial increase in rent against the
threat of an eviction notice. Traders
who have remained in a single location
for decades may be forced to balance
a changed economic reality to remain
versus relocation with its incumbent
risks of high relocation costs,
increased rents at the new location
and losing customers. Other new
entrants in the Bahrain market will
see the competitive advantage of their
competitors reduced, giving rise to
an opportunity to compete on quality
and innovation without the effective
subsidy that old market participants
had held with low rents and stable
locations. Finally, landlords will be
able to realize a more reasonable
return on the capital investments
in their property which may spur
redevelopment in areas such as the
Manama and Muharraq Souqs and
renovation of buildings without the
risks of litigation or limited increases
in rents. The net increase in rent will
also yield to the Bahrain government
an increase in municipal fee revenues.
As with any major regulatory
change, there will be economic
winners and losers; however, the
introduction of a more competitive and
free market in the property industry
has a value of its own as Bahrain
endeavours to increase its business
friendliness.
Ghufran Fadhul
Associate - ASAR -
Al Ruwayeh & Partners
November-December 2017
65