How Dubai's direct debit rent payments will ease cashflow issues for tenants

Kuldip Lakhani, an information specialist in Abu Dhabi, recalls an incident last year when his landlord lost one of his postdated rental cheques.

“I had to write replacement cheques instead and obtain the landlord’s undertaking on his company letterhead that he wouldn’t cash my original postdated rent cheques,” says Mr Lakhani, who has been renting property in the UAE capital for more than 14 years.

The 36-year-old Indian native, who also owns a property in Dubai’s Jumeirah Village Circle, says it is also a hassle for tenants to retrieve postdated cheques if they decide to terminate a rental contract before expiry after coming to a mutual agreement with their landlord.

It is these issues that the Dubai Land Department aims to eliminate by enabling tenants in the emirate to pay their rent through their bank accounts and credit cards rather than using the traditional postdated cheque system.

The DLD and Emirates NBD signed an agreement last week that seeks to digitise rental cheque payments through the UAE Central Bank’s Direct Debit System. This will eliminate the need to manually manage postdated cheques submitted to landlords and property management companies.

Tenants in the UAE typically write out postdated cheques a year in advance. While this method gives landlords the security that the payment will be made, it can cause financial problems for tenants who sometimes have to take out a personal loan to pay their rent.

“This move will give tenants flexibility of payment and help them better manage their rental budget along with other monthly expenses,” Mr Lakhani says.

“They no longer need to worry about issuing or replenishing a chequebook to pay rent. For people who have just relocated to Dubai, it will be easier to rent a property as they don’t have to wait for a chequebook to be issued.”

From a landlord’s perspective, it is time-consuming to collect, store and cash postdated rent cheques, according to Mr Lakhani, who has appointed a property management company to take care of end-to-end processes, including handling cheques, for his apartment in Jumeirah Village Circle.

However, this facility comes at a cost, usually between 3 per cent and 5 per cent of the annual rental income, he says.

“I have rented my apartment for four cheques. While my property manager maintains the postdated cheques, I still have to follow up for them to be deposited to my account,” Mr Lakhani says.

“The new move will make cash flow smoother for landlords.”

However, Mr Lakhani is not sure how the department's decision will protect property owners if a tenant does not have sufficient money in their bank account or on their credit card to pay the rent.

This is not the first time that tenants in Dubai have been able to pay their rent through direct debit or online banking.

In 2018, Dubai property services company Asteco introduced a digital payment service for tenants that allowed them to pay rent by direct debit after teaming up with the National Bank of Fujairah.

“Implementing direct debit will benefit all parties, particularly tenants, because it eliminates the difficulties associated with issuing postdated cheques, such as irregular signatures, ink blotting and overwriting, all of which can result in a returned cheque, even if there are sufficient funds available in the account,” says HP Aengaar, chief executive of Asteco.

“Furthermore, using direct debit for more frequent payments [monthly] allows tenants to more effectively manage funds, while taking into account other financial obligations, such as school fees.

"This can be more difficult if you are expected to save throughout the year in order to meet one to four rental payments via postdated cheques and ensure funds are available.”

However, direct debits could make it difficult for tenants to negotiate annual rent rates down, Mr Aengaar says.

For landlords with multiple units, direct debit could provide better insights into their monthly cash flow and income, he adds. Through postdated cheques that are paid in installments, it could pose issues for landlords to identify which units generate greater income.

Dubai Holding Asset Management launched the DubaiAM Life digital platform and app in 2019 to simplify the day-to-day interaction with customers and boost digital transformation efforts, according to Ahmed Al Suwaidi, managing director of residential communities at Dubai Holding Asset Management.

"In the past three years, we have seen that not only do alternative payment platforms significantly ease the overall payment process for residents and property managers like us, but they also allow for more transparency and security on both sides," Mr Al Suwaidi says.

"Our residents can pay with post-dated cheques, a credit or debit card, or both, in flexible instalment plans that allow residents to manage their cashflow better and reduces financial stress."

Pradeep Kumar is a 32-year-old Indian project engineer in the oil and gas industry. He owns a one-bedroom apartment in Damac Hills in Dubai and also manages a tenancy on behalf of his parents for their Jumeirah Village Triangle villa.

He believes the decision to do away with postdated rental cheques does not protect the landlords’ rights because tenants cannot be held accountable any more.

“If a tenant does not have sufficient funds to pay via the direct debit system, how am I able to enforce my rights to have the tenant evicted from my property? The process to evict a tenant from a property is tedious,” he says.

“If a cheque bounces, most property management companies or landlords could claim up to Dh500 for the bounced cheque and even file a bounced cheque case at the police station, which only incurs a maximum fine of Dh5,000, depending on the cheque amount. How does the direct debit system penalise violators?”

Citing the example of a tenant who struggled to pay rent for his parents’ villa, Mr Kumar recalls receiving odd amounts of cash month to month rather than payment by postdated cheques.

“We are yet to receive the remainder of the rent monies as he owes us Dh24,000 for two years now,” he says.

There is still a perceived level of security by landlords who consider cheques to have a stronger guarantee for payments being honoured, according to Asteco's Mr Aengaar.

Now that the Central Bank and the DLD are openly promoting the direct debit payment methodology, it may place an increased level of security in the minds of institutional landlords given the fact that the direct debit mandate is as legally binding as a cheque, he adds.

The DLD’s decision is likely to result in Dubai-based landlords becoming more selective in choosing tenants they wish to have a relationship with, Mr Kumar says.

They may prefer tenants who work in stable jobs and known multinational companies rather than smaller local businesses. There will be a change in the landlords’ mindset and they will put in additional requirements before finalising the tenancy contract going forward, he says.

Before the announcement, tenants and landlords were already transacting through bank transfers for ease. This was especially true for tenants who receive an advance accommodation allowance from their company, Mr Kumar says.

“I once rented my apartment to a tenant who paid Dh60,000 in a bank transfer [as he didn’t have a chequebook] in response to my original offer of one cheque payment,” Mr Kumar says.

“That was after weeding out multiple prospective tenants who offered four to six cheques, and some even up to 12 cheques.”

Digitising the cheque system will allow for rental prices to stabilise even more, he says. Most landlords charge an additional Dh1,000, Dh2,000 or even up to Dh4,000 in rent if there are many cheques, according to Mr Kumar.

Landlords also need to manage their cash flow and pay the mortgage taken out on the property, Mr Kumar says.

“Failure to pay a mortgage is far worse than failure to pay a credit card or a personal loan,” he points out.

If the system is moving to direct debit, then either rental agreements or the law will need to adapt to this change, he says.

“Most landlords will treat the rental of a property on a month-to-month basis than as a yearly contract. It will be far easier and simpler to have a recurring monthly tenancy contract than a yearly contract,” he adds.

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Adam Wilkin, a sales and property management director at Aqua Properties, welcomes the change, saying he meets many tenants who find paying in cheques a “strange concept”.

Many millennial tenants do not even know how to write a cheque as they have never done this in their home country, he adds.

“As Dubai continues to attract young, tech-savvy residents to work remotely, we must modernise the way we pay our rent,” Mr Wilkin says.

The decision will help real-estate agents and property managers because the majority of their landlord clients live outside the UAE and rely on them to bank cheques and transfer the money overseas.

If the tenant is paying in several cheques, there is a lot of paperwork involved for agents and more risk, he adds.

“I hope landlords will embrace the change and be more flexible with payments,” Mr Wilkin says.

“With more and more tenants looking towards the short-term market, Dubai could see a monthly rent transfer model like Europe and the US.”

Neither the direct debit instruction to the bank nor postdated cheques are 100 per cent secured from a payment risk perspective, according to Nicoleta Remmlinger, head of business development for the Middle East at credit risk consultancy 4pi.

A direct debit instruction can be cancelled at any time and a postdated cheque can bounce once presented, she adds.

“Both direct debit instructions and bounced postdated cheques are reported daily to the Central Bank of the UAE and Al Etihad Credit Bureau and displayed in the tenant’s credit report for five years, affecting their credit score and credit history and the possibility of getting a new credit [loan, mortgage or credit card] in the future,” Ms Remmlinger says.

“Banks, financial organisations and real estate agencies should adopt a tenant score based on internal and external data from sources such as the DLD that rates timely payments, dispute records, court data and AECB data to help choose tenants and maintain landlords’ profitability.”

The key is to develop models that can predict the probability of a tenant not paying the rent in time for a chosen property and assess how much a potential tenant can afford in terms of rental amount and optimal number of cheques, she says.

Making offers that are tailored to the tenant’s needs enable real-estate companies to maximise the owners’ goals and is the best solution to avoid rent payment delays, she adds.