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Transacting halaal

2013-01-17
January 17, 2013

Q:

I own a business which I conduct from premises I rent. The landowner charges me, as monthly rental, a certain monetary amount in South African currency + 5% of the total turnover of my business.
I have not entered into any partnership with him. That is charged by him purely as a form of rental.
Is that permissible in the fiqh?

A:

Bismillāh ar-Rahmān ar-Rahīm

Allah, the Lawgiver, has sent down a comprehensive sharī`ah of mercy which regulates all the affairs of His human slaves, regarding the Dīn and the dunyā, worship of the Creator and just interaction with creatures.
Every aspect of this Law is important, and it is incumbent on the Muslims to learn it and practice it without distinguishing between Church and State.
Our success lies only in adherence to Islam as a whole.
Indeed, to practice transactions with fellow human beings is harder on the self, especially in these times of egotism, greed, fear, monopolistic practices, capitalism and meanness. That is why the Companions were more fastidious about carrying out the judgments of the Law dealing with money, trade, business, industry and related matters, than the details of acts of devotional worship.

Know, may Allah guide us all, that the four schools of Ahl as-Sunnah wa’l-Jamā`ah, i.e. the mainstream Muslims who are on a path of correctness, are in unanimous agreement as to the fact that the essential rules on leasing human services or corporeal assets (ijārah) mirror the rules governing the contract of purchase and sale (bay`).
The scenario you mentioned in your question deals with the contract of ijārah. Sometimes, when as in your example human services are not leased, this contract is more specifically termed kirā’ or lease of corporeal assets, such as a plot of land or a motor vehicle or an apartment or a shop. It is one and the same thing, just the name changes.
We will simply call it lease.

A contract of sale transfers ownership over the very thing I am selling and the other party is buying. We say in legal terminology that the very “corpus” of the thing, say a Maths textbook or an AMC pot or a green umbrella shaped in a particular way or a two-storey mansion, is sold and bought respectively.
In a lease, I do not sell or buy the very corpus of, say, the rented premises you are undertaking your business from, whether it is a factory or a trading stall or a professional office. Ownership of those premises still belongs to your landlord. What I “sell” is the usufruct of that corporeal object (manfa`ah).
You buy from the landlord the use and enjoyment of the premises you carry out your business from. In return for the lessor’s alienation to you of the usufruct of your business premises, similarly to a purchaser who pays a price to the vendor, you disburse a consideration which corresponds to the extent of your use and enjoyment of those premises. That is called a charge, i.e. a fee or a rental (ujrah). The rental is, effectively, the “price paid for the usufruct” of what is leased.
Sale: Transfer of ownership of (a) in exchange for transfer of ownership of (b).
Lease: Alienation of the usufruct of (a) in return for disbursement of charge (b).
 
All four schools of jurisprudence agree that, exactly as the sale article and the purchase price in a sale, both the usufruct that is leased and the fee / rental that is paid in exchange for it must be known. They must be certain in the sense that the parties must not lack material knowledge of their extent (among other key defining features). They should be specifically fixed and identified, so that any uncertainty and vagueness leading to probable or inevitable discord between the contracting parties, as to what they are, how are they calculated, what their extent or quantum is, etc, are avoided at source.
The landlord gives you a value = the usufruct of the premises; you give him in turn a corresponding value = the charge called rental. Those are the two countervalues exchanged by the parties in a lease of corporeal objects as your business premises.
If there is material lack of the extent of either or both of those two countervalues, the lease is vitiated by gharar, and also by an element of gambling.
The great Hanbalī jurist Ibn Qudāmah said the following in Al-Mughnī, the book of his where he gathered the views of all four madhāhib: “We are unaware of any disagreement on that among the scholars of Ahl as-Sunnah generally”.
If there is material lack of knowledge about the extent of either or both of the countervalues, the lease is irregular, i.e. it is not legally valid, and the normal consequences of a lease cannot flow from its stipulation. It is corrupt or unsound (fāsid), as we call it in the fiqh. A fāsid contract is one where the normal legal effects attaching to the relevant contractual form do not ensue from its conclusion. In your example, the contractual form involved is lease. A fāsid lease of some property is accordingly one where the normal legal effects of you gaining lawful occupation of that rented property and the landlord acquiring the right to receive from you a lawful charge called rental do not arise.

In your example, your part of the bargain is known. There is no problem there. You have leased the premises = you have bought their use and enjoyment, so that you can run your business from them, in return for a monthly rental, for as long as your lease is agreed to last.
However, what your landlord is getting from you, in return for alienating to you the usufruct of the business premises, is not known. There is a material lack of knowledge of its extent. It is therefore hit by gharar.   
The fixed monetary charge creates no problem. It is valid. You pay the landlord such-and-such a sum of South African rands per month so that you can occupy those premises and run your business from them.
The difficulty concerns the 5% on the business turnover.
How much is the turnover? No one knows. How much is then the percentage of it which your landlord includes in the rental as a part thereof? Nobody knows.
All the four schools emphatically say that gharar or material lack of knowledge about the rental cannot be tolerated if it leads to disputes and litigations between the parties.
That is clearly the case here. The two parties will dispute the turnover amount and the 5% thereof. The landlord will not take your word. Your accountant will differ with the landlord’s assessment and quantification of your business turnover.
The four schools also say that if the gharar or material lack of knowledge of rental or usufruct is not so marginal that one can overlook it, and is such as to defeat the purposes sought by lessor and lessee (to exchange a clear usufruct for a clear rental), then the lease is invalid in the said juristic sense our Islamic scholars have assigned to that word.
That is the case in the scenario of your question.



Making the rental a fixed percentage of the revenue generated by the rented asset



This mas’alah is directly linked to your question.
In your example, the rented asset consists in the premises you carry out your business from, say, a factory or manufacturing plant.
The scholars of the ummah have stated that if a person (the landlord here) gives another party (yourself) occupation of premises from which the latter conducts his manufacturing business, in exchange for a fixed percentage of the revenue or similar yield generated by the manufacturing business, e.g. one-third or one-fourth or one-tenth or 5% of such revenue, the contract is invalid / fāsid.  
This arrangement is not permitted precisely because of what we have highlighted so far: The extent of the rental exchanged for your usufruct of the rented premises is unknown. It is unknown since the extent of the turnover generated by your manufacturing (or commercial or professional) business is uncertain. If the whole turnover is unknown, any part of it is unknown. The 5% of the unknown total turnover is thus unknown. There is gharar, and there is gambling, since the landlord gambles on the 5% of business turnover yielding him a substantial monthly sum over and above the straightforward rental he charges. Because of the gharar or material lack of knowledge of the composite rental you are asked to pay, claims and counter-claims will proliferate between you and your landlord. The community of Muslims is thus affected by friction and discord between its members, its healthy unity is torn apart, and unnecessary litigation weighs down on its judicial and similar structures.


***

No partnership has been established between you and the landlord. In particular, there is no dormant partnership or mudārabah between the two of you. A mudārabah is only valid when the investment capital consists in money (gold and silver in the true fiqh), not in merchandise such as a plant or a block of flats.
Your scenario is therefore unlike a new phenomenon we witness these days: A number of, say, doctors specializing in various fields, unable to practice on their own, come together in one building. The owner of the building furnishes it for them, keeps it clean, performs the necessary accounting and bookkeeping functions, and each of the doctors pays to him in return a percentage of his earnings. The owner of the building uses the property either as a basis for calculating the monetary value of the rent he charges, or as an investment tool by which he can lay claim to a share of the doctors’ earnings.
Such an arrangement is invalid if meant to be a lease, since the rental is unknown; and it is likewise invalid if meant to be a dormant partnership or mudārabah, because of the investment capital of the rented immovable property (= the furnished doctors’ rooms) being illegitimate.
The classical fiqh did not know of such arrangement, but it was familiar with something which could be analogically compared to it.
For instance:

  • A bleacher brings the bleaching tool while the other party provides the asset of a house he owns, and they establish a partnership whereby one works through his tool and the other through his house, and the profit of the venture is shared by them. That is in order. This example and your example are chalk and cheese. There is no partnership between you and your landlord involving the business use of the rented property. The landlord does nothing. He simply collects money as rental.
  • A fishing net is made available by a person to a fisherman for him to work with it, and any gain he makes by the fishing venture is shared by the two of them in equal halves or some other agreed upon ratio; Fabrics are handed by an individual to a tailor who makes shirts out of them in exchange for one-third or one-fourth of the proceeds of their sale: The Imams Abū Hanīfah, Mālik and ash-Shāfi`ī correctly view the said arrangement as impermissible. Imām Ahmad b. Hanbal deems it fine, since the asset provided by its owner (the fishing net) is, for him, one capable of generating expansion in wealth by utilizing it, so it is lawful to exchange it for a share of the growth generated by its utilization. That is, however, a far cry from your scenario, since in your case no premises are leased to you as a contributing factor to the production of monetary growth between two prospective partners.


The legal effect of an irregular lease


Unlike secular jurisprudence, Allah’s Law requires that an action which is unhealthy (fāsid) because it is vitiated by sinful impermissibility and by a breach of the sharī`ah of mercy must be undone. That unmaking of a corrupt and irregular transaction takes place by operation of the law, regardless of the parties’ intention. The seculars use the Latin phrase ex lege (= by virtue of law). The Law of Allah does not allow human beings, by their consent, to override the right of the sharī`ah. Islam is submission to the will and choice of the Lawgiver, Exalted is He.
We have seen that the 5% charge on your monthly business turnover is invalid. It means that its effects in existence have to be undone, regardless of whether you agree to do so and regardless of whether you challenge in court the stipulation of that 5% of business turnover. The vitiating element which calls for its cancellation is intrinsic to the impermissible charging of that percentage, hence no external pronouncement by a tribunal is required.
Termination of an irregular agreement, faskh in Arabic, occurs obligatorily because of the mandatory need to pay regard to a right of the Law. The irregularity (fasād) of a transaction in the eyes of the sharī`ah is one of the recognized causes of terminating a contract and undoing its effects. One of the reasons why a transaction is irregular is the existence of a significant degree of vagueness and uncertainty about, e.g., the rental and usufruct in a lease or the purchase price and sale article in a sale.
We have observed that such irregularity is applicable to your example.

If the whole rental charged by your landlord was expressed as a percentage of your business turnover, the entire contract of lease would be treated by the Law as irregular (fāsid). As a result, the contract would be terminated by operation of law. You would thus pay him the usual rental charged by landlords for such business premises in return for your actual use and enjoyment (occupancy) thereof until the date of its termination. The landlord would take back possession of the premises.  
In your case, however, the contract included both something lawful (halāl), i.e. the straightforward monetary charge expressed in a numerical amount (so many rands), and something forbidden (harām), i.e. the percentage of the monthly business turnover.
Undifferentiated unit
If your landlord insists that he only agreed to lease the business premises if you paid normal rental + a percentage of your turnover, and that the two things went hand in hand as components of a single indivisible rent package, then the whole lease is vitiated (fāsid). The consequences are as explained just above.
Differentiated segments
If the percentage of turnover is additional to the ordinary lawful rental, which is the bulk of the lease, and you and the landlord were unaware of the invalidity of the 5% stipulation (which is the smaller part of the contract), since you laboured under the misapprehension that the entire rent as charged was valid in law, the contract subsists as far as its sound portion (the bulk) is concerned, whereas the unsound portion thereof is struck off and any forbidden percentage charged on the business turnover cannot be claimed from you by the landlord.        
In other words:

  • In the former instance, the whole contractual arrangement lacks legal validity and must be undone in toto;
  • In the latter instance, the lease is valid with the exception of the forbidden portion. The clause on the 5% of the business turnover is severed from the rest of the contract, which is still operative, and only the straightforward rental is paid by you to the landlord.


What has been contracted between the two of you remained in existence until its termination. From the date of its termination, it is cancelled and treated as if it never was (= it is not void ab initio to use the expression of secular lawyers).
Does the termination of the irregular portion of your lease have purely prospective effect (= you stop paying the 5% of business turnover from that date) or retrospective effect as well (= the unlawful charge of that percentage of business turnover in the past must be refunded to you)?.
The learned jurists of the four schools, such as as-Suyūtī among the Shāfi`iyyah, have investigated this subject at length in all its varied facets and ramifications. Different schools deploy different principles. The question posed to us does not request a ruling on that ancillary issue, and so we leave it to the questioner to approach us afresh in that regard. Suffice it to say that a mere prospective effect with no legal retrospectivity is what their investigation supports, and Allah knows best. 


Conclusion


The arrangement you have mentioned in your question is undoubtedly invalid in the fiqh, according to all the schools of Ahl as-Sunnah.
In the most favourable scenario, the irregular charging of 5% of your business turnover as part of the rental of the premises has to be expunged from the rest of the contract of lease.
That irregular charge is an instance of devouring people’s property by falsehood.
Allah has sternly warned against such heinous crime in His Book, in many āyāt, as in the following statement of His, may He be Exalted, in Sūrah an-Nisā': 29, which is specifically addressed to us believers:
«You who have īmān! do not consume one another’s property by false means».
That is a peremptory command to us, from the Lord of the worlds, which every one is obliged to follow in exactly the same way as we have been commanded to fast Ramadān.
We ask Allah to make us of those who listen to His speech and follow the best of it.
 



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