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Parliament meticulously voted on December 15, 2023 on the law regarding commercial leases. Despite the National Assembly’s careful consideration, tenants and landlords voiced their dissatisfaction—a much-expected reaction, to say the least.
Amid great socio-economic fragility, the law enacted on December 15, 2023 is progressively ending, over four years, the freeze on old commercial leases. This has followed in the footsteps of the law governing the gradual freeing of residential leases over nine years. The law was passed in 2014 and slightly amended in 2017.
Both legislations fall within the framework of supply and demand without imposing binding provisions. The conclusion of a residential or commercial lease is left to the full contractual discretion of the landlord and tenant, respecting the right to individual property as stated in Article 15 of the Lebanese Constitution.
The termination of the “exceptional legislation” on residential rents and commercial spaces, in force since the Second World War, was bound to happen sooner or later.
A Commodity
Much like non-perishable consumer goods, housing is perceived as a commodity within financial circles. Consequently, it is expected that the price of this product, be it a commercial or a residential property, will experience fluctuations in response to inflation rates and the fundamental market law of supply and demand. In essence, the rent for a commercial space should align with its rental value. Therefore, the reassessment of commercial leases is necessary.
For the record, rental value pertains to the assessment of the rent that a property can generate under normal market conditions, considering various factors such as location, size, facilities, amenities and the condition of the property. This estimation is especially significant as property owners can leverage it to establish a competitive rent, considering the specific features of their property and the local market.
A Realistic Option
The commercial lease law mentioned in the December 15, 2023 legislation pertains to the rental contract for a space where commercial, industrial, artisanal or a regulated liberal profession is conducted. Hence, the premises must be used for the operation of a commercial business.
In fairness to both retailers and property owners, the law has stipulated the freeing of commercial leases, providing tenants with a four-year transition period to the new rental system. Throughout this period, lease prices will be progressively adjusted to reach 8% of the rental value by the end of this timeframe.
On the other hand, the legislation allows the property owner to reduce the transition period to two years if they opt out of the rent increases.
It has also provided the possibility of reclaiming the leased property before the expiration of the deadline in some cases, requiring the owner to pay the tenant compensation of up to 15% of the property’s sale price.
No Increase in Rental Prices
By freeing commercial leases, the value of real estate appraisals and rental prices will naturally decrease due to an excess of supply. Consequently, the market will balance out on its own. An increase in rental prices is therefore unlikely. Surely, frustrated property owners will not rent at a loss. Instead, they aim to rent out their real estate assets to generate income.
