LEASE BASED CONTRACT (IJARAH)

➔ DEFINITION
➔ A contract to transfer the usufruct (manfa’ah) of a property to another person for a
specified period at an agreed consideration.
➔ Usufruct = The legal right to use someone else's property temporarily and to keep any
profit made from it
➔ Hanafis scholar = a contract pertaining to usufruct with compensation.
➔ Shafi’i scholar = a contract over desirable, known, permissible, and accessible usufruct
in exchange for a known consideration.

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➔ Malikis & Hanbalis scholars = a transfer of ownership of permitted usufruct for a

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known period in exchange for compensation.
➔ Bank Negara Malaysia = a lease or commission contract that involves an exchange of
usufruct or benefits of an asset or a service for rent or commission for an agreed period.

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➔ LEGALITY OF IJARAH - permissible in Islam
1. Al-Quran
a. Al-Qasas: 26-27 ▶ And one of them (the 2 women) said: “O my father! Hire him!

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Verily, the best of men for you to hire is the strong, the trustworthy.” He said: “I
intend to wed one of these two daughters of mine to you, on condition that you
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serve me for 8 years, but if you complete 10 years, it will be a favor from you”.
b. At-Talaq ▶ “And if they suckle from your offspring, give them their recompense.”

2. Al-Hadith
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a. The Prophet Muhammad (PBUH) is reported to have said: “pay the hired worker
his wages before his sweat dries off”
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b. The Prophet Muhammad (PBUH) is reported to have said: “he who hires a
person should inform him of his fee”
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➔ PILLARS OF IJARAH
1. Parties
a. There must be at least two parties, a person giving a lease (lessor) and a person
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accepting the lease (lessee).

i. If more than one lessor or lessee ▶ consent of all lessors must be
obtained.
b. Both contracting parties should be fully qualified and possess the legal capacity
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to execute the contract.

i. he/she must be a person of legal age (baligh), sane (‘aqil), and free from
any legal impediments.
c. May be entered by a legal entity
i. Ie: company
ii. Not limited to natural persons only.
2. Wage/rent/salary
a. As consideration ▶ amount must be determined and agreed upon at the point of
execution of the ijarah contract.
b. The mode of payment is dependent on the agreement ▶ (installment or lump
sum/ in the form of monetary terms or in any kind/ etc)

3. Usufruct and service

a. The leased asset must not be a debt in nature.
b. Maybe in the form of a physical/tangible asset ▶ may be movable or immovable ▶
eg: lands/building/etc

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c. Must be recognised by Shariah as valuable, in existence, identifiable, accessible

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and deliverable at the time of inception of an ijarah contract.
i. Eg: in the case of renting a house, the house must physically exist,
because the benefit of renting the house will not be obtained if there is no

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house in existence.
d. All goods can be leased but the goods must remain intact (useable)
e. Excluded from leasing (CANNOT BE RENTED):
i. Lakes containing fish and forests containing animals, if the intended

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usufruct is fishing or hunting. Due to uncertainty as may be at one point in
time, there are no animals that could be found.
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ii. Subject matter that could be consumed or eaten (eg: Food, Money, etc)
iii. Non-physical/intangible assets (eg: trademark, patent, etc)
f. Usufruct comes from usable properties.
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4. Expression (Sighah)
a. The Ijab (offer) and Qabul (acceptance) between the contracting parties.
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b. Refer to a situation where one party offers to give an object on lease and the
other party accepts such an offer.
c. May be expressed in any form ▶ either orally or in writing ▶ as long as the method
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does not contravene Shariah principles.

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➔ CONDITIONS OF IJARAH
1. The consent of both parties to the contract and it is a contract whereby the owner of
something transfers its usufruct to another person for an agreed period, at an agreed
consideration
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2. The subject of ijarah must have a valuable use.

3. The corpus of the leased property remains in the ownership of the lessor and only
usufruct is transferred to the lessee.
4. All the liabilities emerging from the ownership shall be borne by the lessor, but the
liabilities referable to the use of the property shall be borne by the lessee.
5. The period of the lease must be determined in clear terms.
6. The lessee cannot use the leased property for any purpose other than the purpose
specified in the agreement.
7. The lessee is liable to compensate the lessor for any harm caused to the leased asset
by any misuse or negligence on the part of the lessee
8. The leased asset shall remain at the risk of the lessor throughout the lease period in that
any harm or loss caused by factors beyond the control of the lessee shall be borne by
the lessor
9. A property jointly owned by two or more persons can be leased out, and the rental shall
be distributed between all the joint owners according to the proportion of their respective
shares in the property.
10. A joint owner of a property can lease his proportionate share to his co-sharer only, and
not to another person

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11. The leased asset is fully identified by the parties

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12. The rental must be determined at the time of the contract for the whole period of the
lease.
a. It is permissible that different amounts of rent are fixed for different phases during

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the leased period, provided that the amount of rent for each phase is specifically
agreed upon at the time of affecting a lease.
b. If the rent for a subsequent phase of the leased period has not been determined
or has been left at the option of the lessor, the lease is not valid.

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13. The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.
14. The rent or any part thereof may be payable in advance before the delivery of the asset
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to the lessee, but the amount so collected by the lessor shall remain with him as ‘on
account payment shall be adjusted towards the rent after its being due.
15. The lease period shall commence from the date on which the leased asset has been
delivered to the lessee, no matter whether the lessee has started using it or not.
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16. If the leased asset has totally lost the function for which it was leased, and no repair is
possible, the lease shall terminate on the day on which such loss has been caused.
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a. However, if the loss is caused by the misuse or by the negligence of the lessee,
he will be liable to compensate the landlord for the depreciated value of the asset
as it was immediately before the loss.
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➔ IJARAH MODELS
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1. Operating Lease
a. Where the owner or the lessor of the leased assets leases it to the lessee for
rental within a specified period of time.
b. The ownership of the leased assets will remain with the owner at the end of the
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lease period without transfer of ownership.

c. Modus Operandi
i. The customer will identify the relevant assets from the supplier
ii. The bank will then enter into a SPA to purchase the relevant assets from
the supplier
iii. The supplier will then deliver the assets to the bank
 iv. Upon receiving the assets from the supplier, the bank and the customer
will enter into an Ijarah agreement for the asset to be leased to the
customer.
v. The leased asset will then be delivered the leased assets at the end of
the leasing period to the bank.

2. Financial Lease
a. A lease that is tied to a purchasing/gifting agreement ▶ whereby upon the expiry
of a lease period, the ownership of the leased assets will be transferred to the

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lessee by way of a sale or a gift.

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b. 2 manners; Al-Ijarah Thumma al-Bay' (AITAB) & Al-Ijarah Muntahiyyah bi
al-Tamlik
c. Al-Ijarah Thumma al-Bay' (AITAB)

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i. A leasing that ends with a sale.
ii. The leased asset is leased to the lessee by the lessor with rental payment
for the benefit enjoyed from the leased asset.
iii. The lessor will sell the assets or equipment to the lessee upon the expiry

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of the leasing period.
The sale may take place with payment at a nominal value due to the
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reason that the selling price has been substantially paid in the form of a
rental.

d. Al-Ijarah Muntahiyyah bi al-Tamlik (AIMAT)

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i. A leasing that ends with ownership.

ii. The asset is leased to a lessee by a lessor, and in consideration, the
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lessee pays the agreed rental payment to the lessor.

iii. It is agreed by both that at the end of the lease period, the lessor will
transfer ownership of the leased asset gratuitously to the lessee.
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iv. Upon the payment of the last monthly rental, the lessor is obliged to
transfer the leased asset to the lessee.

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e. Modus Operandi in ‘House Financing’

i. Upon identifying the intended asset, the customer enters into a SPA with
the housing developer and pays a deposit.
ii. The customer sells the asset to the bank at the Bank’s Purchase Price
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and undertakes to purchase the same at the end of the lease period.
iii. The bank disburses payment to the developer.
iv. The bank leases the asset to the customer at an agreed monthly rental.
v. The developer delivers the assets to the customer.
vi. At the end of the lease, the bank transfers ownership to the customer
through a sale.

f. Modus Operandi in ‘Car Financing’ 🚗

 i. The bank will enter into an AITAB agreement with the customer to lease
the vehicle to the customer at an agreed rental payment for a specified
period of time.
ii. It is under this agreement that the bank will, firstly, appoint the customer
as an agent to purchase the vehicle identified by the customer,
subsequent to which the vehicle will be leased to the customer.
iii. The bank will disburse the purchase price of the vehicle.
iv. At the end of the lease period, the bank and the customer will enter into a
SPA contract to transfer the ownership of the vehicle to the customer.

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3. Forward Lease (Al-Ijarah Mawsufah fi al-Zimmah)

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a. A lease that is associated with liability.
b. The asset involved does not exist at the time of the signing of the contract.
c. Thus, it is the lessor’s liability to ensure that the specified asset will be available

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on the agreed future date so that the rent can be realised.
d. Modus Operandi
i. Customer executes SPA and pays 10% deposit to Developer ▶ Customer
obtains 10% shares in the property.
ii.

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Bank jointly purchases the house under the Musharakah contract by
paying the remaining balance to the developer and acquires 90% shares
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in the property.
iii. The customer undertakes to purchase the bank’s share during the
co-ownership period.
iv. Bank leases its portion to customer under forward lease since the house
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is still under construction.

v. Customer pays advanced rental payment and acquisition payment to the
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bank.
vi. Property is fully owned by the customer upon the customer’s full
acquisition of the bank’s shares.
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➔ TERMINATION OF IJARAH
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➔ The lessor has the right to terminate the lease contract unilaterally if;
◆ The asset is not capable of giving usufruct (does not give any benefit
anymore)
● Eg: the engine of the car is not working anymore.
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◆ The lessee/tenant fails to pay rental or obey other conditions

● The lessee did not obey the conditions so the landlord has the right to
terminate the contract
● Fail to pay → The landlord does not want to give him time anymore, so he
has the right to terminate the contract + and the lessee did not have the
right to say if he failed to pay the payment.
 ● If there is no contravention on the part of the lessee, the lease cannot be
terminated without mutual consent.

◆ The leased asset is destroyed

● Eg: The house collapsed/ Car was destroyed due to the accident.
● If the leased object (e.g. a house or riding animal) were to perish, or if the
materials used by a hired worker (e.g. cloth for making a dress) were to
perish, the lease is terminated.
● In all such cases, it is impossible for the contract to be executed.

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◆ If the tenant of the landlord / in case of if one of the parties dies

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● MAJORITY OF FIQH – Consider usufruct as property and argue that the
ijarah should be continued until its stipulated time.
● According to them, the right to stay can be inherited.

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◆ By mutual consent of the parties -
● Landlord asks the tenant to leave the house to use for something else
(eg: sale)

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○ If the tenant agreed → can terminate the contract.
○ If he refused - then the contract shall be continued
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● Lease of the asset
○ the owner can sell it but he cannot terminate the contract of lease.
○ He should continue with the same tenant
○ If the tenant refuses ▶ all the rights shall be transferred with the
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new owner.
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◆ Lapse agreed on time.

● Eg: if the contract is for one year, it is terminated at the end of that period.
● They can renew it
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CASE: Md Nurul Islam v. Hong Leong Islamic Bank Bhd

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