Commercial Real Estate and Project Financing 77
Another important issue which is often overlooked is that the Islamic
financier can only agree to sell a constructed building to the customer (al-
mustasna), if it has some legal right to the land on which the building is to
be constructed. This can raise rather complex issues as to the type of land
grant it requires, what legal liabilities are attached to that grant, whether
any registration of that right is required (and the consequences that attach
to that registration) and payment of any fees (both in relation to the initial
registration and on anyde-registration).
Forward lease (ijara)
A forward lease is a lease that relates to the leasing of an asset that does not
exist when the forward lease is entered into. On the face of it this would
seem to violate the rule againstgharar(uncertainty) in that the general
proposition (subject to certain limited exceptions) is that an asset must exist
when a contract relating to that asset is entered into.
The way that a forward lease is framed, however, is that the leasing of the
building does not commence until it has been constructed. There will also
usually be a drop-dead date after which, if the building has not been
constructed so that it is substantially completed and ready for use, the lessee
will not be under an obligation to lease the building.It is thereforeincumbent
on the Islamic financier, as the lessor, to ensure that the building is
constructed in accordance with specifications and on time, otherwise its
customer, as lessee, willnot be obliged to lease.
It is possible during the construction phase for the Islamic financier to
require the lessee to pay advance rent (which is often calculated based on a
benchmark that refers to a conventional interest rate). However, if the
building is not constructed in accordance with the specifications or available
on time for leasing, and the lessee lawfully refuses to lease the building, the
advance rent must be returned to the lessee. If the leasing of the constructed
building does commence, then the advance rent must be taken into account
and offset against the rent payable as from the commencement date of the
leasing. From an Islamic financier’s perspective, thisis usuallynotattractive
because it means that during the construction phase, it would not receive
any financial return.
To deal with this issue, the rent that becomes payable after the lessee
takes possession and starts to use the completed building, is normally
increased (usually in the first or second lease period) by an amount that
equals the advance rent. This increased rental amount is, therefore, set off
against the obligation of the lessor to credit the lessee with the advance
rent. The end result is that the Islamic financier effectively does obtain a
return that relates tothe construction period.
If the leasing does not take place (due to the building not being in
compliance with the specifications or due to delay) then the Islamic financier
will be in a difficult position. It will have a building that it owns and also
