Ethica Institute of Islamic Finance™

What events result in termination of the lease?

The lease terminates when one or more of the following events occur:
1) the property or service becomes worthless;
2) both parties mutually decide to terminate the agreement;
3) one party unilaterally terminates the lease if the other party contravenes the agreement.

When the lease terminates:
1) the lessor reclaims physical possession of the leased asset and continues sole ownership;
2) the lessor may demand compensation from the lessee to the extent of any damage to the leased property;
3) the lessor may not demand that the lessee pay any of the remaining rent;
4) the contract may not stipulate in the agreement that the property transfers to the lessee upon termination, as a gift or otherwise, because the Shariah forbids that one contract condition another; in this case, a lease contract conditioned by a transfer of property contract.

Some scholars allow that, in a separate contract, the lessor may unilaterally promise to sell at a specified price or gift the leased property to the lessee. Upon termination, the lessee may opt to take ownership of the property, but the lessor may not force the transfer. The lessee, on the other hand, may enforce the lessor's promise.

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