Commercial leasing: businesses setting up in Saudi Arabia must be aware of key rules

These mechanisms may work differently than what is usual in a company’s home jurisdiction. Termination and eviction procedures may also differ so understanding what provisions are in place is crucial for ensuring continuity.

Under its ‘Vision 2030’ plan, Saudi Arabia has implemented significant reforms and changes which have created a more favourable business environment and opened up new opportunities for both local and international companies. These reforms – which include updates to local real estate laws, investment law and labour laws – have created a dynamic business hub and new job opportunities, attracting a wide range of international investments.

Commercial leasing in Saudi Arabia

Recently, Saudi Arabia has seen impressive growth in areas including real estate, hospitality and eco-tourism. The increase in opportunities for businesses brings with it an increased demand for high-quality office premises in prime financial and business centres in the Kingdom, such as the prestigious King Abdullah Financial District.

However, different laws and regulations apply, depending on the nature of the real property interest.

Commercial leases can be long or short term and apply to real property leased for commercial purposes – for instance, office space or retail. Leases must be executed and registered through the Ejar platform by a registered broker. Ejar, a platform of the Real Estate General Authority, is a unified electronic system for registering lease contracts. Leases that are not registered on the Ejar platform will have no judicial or administrative effect.

Ejar leases generally follow a standard format and are considered enforcement instruments. If the standard format is materially changed or if additional provisions are added which conflict with the standard terms and conditions, the relevant Ejar lease will likely lose its enforcement status.

To complete registration, the parties are required to enter the rental property details such as property location, rental period, rent amount and payment schedules. Both tenant and landlord must upload their details, including copies of their IDs. The landlord is also required to upload documents proving ownership of the real property. A registration fee will also need to be paid, and this is typically paid by the landlord. Once the documents are submitted and the drafts of the relevant lease are verified by the parties, a unique contract number will be generated to confirm registration.

There are also strict requirements around the type of activity the company is permitted to engage in from the premises, which must be in accordance with the company’s commercial registration certificate.

Commercial rental sector in Saudia Arabia compared to other jurisdictions

Given the dynamic and evolving nature of the real estate sector in Saudi Arabia, navigating the regulatory regime and local nuances – such as the application of sharia law and principles as codified in the Saudi Civil Transactions Law – can be challenging without proper legal guidance and practical experience.

A key difference is the general absence of a publicly searchable real estate register and publicly accessible information on real estate. This can make it challenging to verify property information and track transactions. In addition, given that the legal framework is still evolving to facilitate the objectives of Vision 2030, this can result in uncertainties for investors and tenants, particularly in areas which may be designated as special economic zones in the future such as Neom and the Red Sea, meaning the regime in these zones will change and differ from the rest of the country.

However, recent laws, such as the Real Estate Registration Law issued by Royal Decree No. M9/1443 dated 19/3/1443H corresponding to 20/4/2022, have introduced new frameworks like the establishment of a centralised land register in Saudi Arabia. Although these frameworks will be implemented in designated phases over the span of several years, it is nevertheless a significant step forward in creating further transparency.

The requirement to register leases on the Ejar platform adds another layer of complexity which investors should be aware of, as it necessitates compliance with specific procedures, standardised documents and payment of fees, and can only be facilitated through a registered broker in Saudi Arabia. However, the availability of a unified electronic system ensures legal certainty and a comprehensive record of lease agreements, providing protection for both landlords and tenants.

Another difference is that foreign ownership and leasing rights in Saudi Arabia are generally subject to certain restrictions and requirements. For example, ownership and leasing of real estate within the cities of Mecca and Medina has traditionally been subject to very strict regulations. Foreign nationals, or companies owned by them, were generally prohibited from owning property in these areas and had limited leasehold rights.

That being said, recent changes to foreign ownership and real estate laws have enhanced investor rights to better align with the strategic goals of Vision 2030 and create a conducive environment for foreign investment. For example, foreign companies which are licensed to carry out business in the Kingdom may be permitted to own real estate as a business asset or as employee accommodation, subject to the satisfaction of certain requirements. Furthermore, a recent change has introduced some flexibility to foreign ownership in Mecca and Medina. Foreigners are now allowed to own shares in Saudi funds and companies that own real estate in these two holy cities.

Some provisions in a commercial lease can significantly impact business operations, such as costs associated with service charges, repair, and reinstatement obligations, and so it is important to obtain legal advice to negotiate lease terms to avoid being subject to onerous obligations. Legal advice also ensures that a lease complies with local laws and market practice, mitigating the risk of a future dispute or imposition of penalties.

Co-written by Saleh Bin Abadi of Pinsent Masons.