Question:

I have read your answers stating that Monetary Penalty is tantamount to Ribaa. I am about to sign a tenancy contract with a landlord who has placed a penalty clause upon delay in rental. It is a 12 month lease, and he is willing to change lease terms as long as his risks are mitigated. He wants to charge $10 everytime I delay in rent. How can I make my contract Shariah Compliant.

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

It brightens our day to see that you are seeking Shariah Compliancy for your tenancy contract. You are correct that monetary penalty for delay in payment upon rent will be impermissible. Here are a few ways we could tackle it.

1. Stipulate a yearly lease subject to monthly review to the rentals. This could also be placed at 3-month intervals. In these reviews, the rental for the following month can be inflated if there was a delay in past months rent. While this will resolve the issue at hand, practical proceeding may not be as easy. Moreover, the landlord may not wish to take such cumbersome method. But if it is done, it would be Shariah Compliant.

2. Similarly, the 12 month lease contract can be set up where in sixth month, or the twelfth month’s rent can be left open for mutual agreement at that time. Thereby allowing the land-lord to set the sixth month’s rental or the twelfth month’s rental to include the penalties he wants to levy and add that to the rental itself. It will depend whether he landlord feels it to be doable or not. In most cases he may not want to make such custom changes.

3. One more method is to flip the penalty onto land-lord’s dispensation. Since we know that the land-lord would levy $10 additional for late payment, we inflate every months rent by $10. This would mean that over 12 months you will pay $120 additional in rental. Now, at the end of the yearly lease, the landlord from his own accord give you are gift/discount of $10 per month upto $120 per year for every month you were on time in your rental payment.

Keep in mind that in worst case scenario the land-lord may not give you back anything at all, even though you may have paid on time. But you would have secured an interest free contract, nonetheless.

It is common practice in leasing to give 13^th month free for long term lease in order to retain the same clients. So, this option may work best for the land-lord as well as yourself.

And Allah Ta’āla Knows Best

Mufti Faisal bin Abdul Hameed al-Mahmudi
www.fatwa.ca