Law of Lease

The lease is distinct from the sale in that it is limited in time. Also its subject matter may include usufruct.

The lessor retains ownership whilst the lessee has possession.

Each of the following four elements are required: 1) parties, 2) offer & acceptance, 3) property (subject matter) and 4) price.

1) parties

  • usual rules of contract law apply

2) offer & acceptance

  • usual rules of contract law apply
  • must include description of subject matter
  • must include statement of price (rent) and duration

3) subject matter of lease

  • services or usufruct
  • things that are consumed by use (fungibles) cannot be leased
  • the lessor must own the property
  • the property must be of value and unencumbered
  • must exist at time of sale
  • must be lawful
  • immovable properties from which no usufruct is derivable (such as an uninhabitable house or broken bicycle) may not be the subject matter

4) price (i.e. rent)

  • rent (or salary/wage in case of lease of labour — as below)
  • fixed and known by the parties

Conditions

Duration must be agreed by the parties. Binding and irrevocable contract absent mutual agreement or conditions as set out below. Assignment of lease permitted only with lessor authorization.

Lessor

  • bears risk of accidental loss or damage or destruction of the subject matter
  •  bears cost  of depreciation
  • liable for  taxes and insurance
  • may charge a security deposit for enforcement of rent payment

Lessee

  • must not use the subject matter for unlawful purposes
  • is liable for current expenditures necessary for maintain the subject matter during the lease period
  • is liable to repair or replace in case of negligent damage to subject matter

Termination

Lessor may terminate the agreement for default on rent.

Lessee may terminate the agreement if the asset is incapable of delivering the described usufruct or if the subject matter is not in good working condition.

Lessor and lessee may terminate by mutual agreement, if the leased asset is destroyed (contract frustrated), or due to the death of the lessor or lessee (a minority view).

Islamic banks

Islamic banks follow two models of lease contract.

Lease of Labour

The Islamic law of lease also encompasses the hire of labour on an employment, independent contractor or fee for service basis.

Charitable Lending 

Gratis loan or license to use usufruct or property is also recognised by Islamic law, as a form of charity. This is distinct from a gift in that there is necessarily an agreed return date.

 

Mejelle, 2nd Book chapters I-VII