How a flag is decided

Does this clause make the customer pay an extra amount, on top of the sum owed, when a payment is late or missed?

The clause adds a charge when a payment is late.

Is the late-payment amount worked out as a percentage of the overdue sum, or does it grow for each day the payment stays unpaid?

The late-payment amount grows with the arrears and the time they stay unpaid, which is how interest works. AAOIFI SS3 does not allow the financier to earn compensation for delay.

Does the financier keep the late-payment amount, or any part of it, for its own benefit?

The financier keeps the money it charges for late payment. AAOIFI SS3 allows the financier to recover its actual collection costs, but not to profit from the delay.

Does the clause say that late-payment amounts are given to charity instead of being kept by the financier?

Late-payment amounts are given to charity, which is the arrangement AAOIFI SS3 allows.

Does the financier keep part of the late-payment amount to cover its own losses caused by the delay, and give only the rest to charity?

Keeping an amount for "losses caused by the delay" is compensation for late payment, which AAOIFI SS3 rules out. Only the actual costs of recovering the debt are allowed.

Does the clause make the customer pay only the actual costs and legal expenses of recovering overdue money?

Charging the actual cost of chasing arrears is allowed under AAOIFI SS3.

Is a fixed fee charged each time a payment is missed or late, such as an arrears or administration fee?

A set fee for each missed payment is only acceptable if it matches the real cost of handling the arrears. If it works as a penalty the financier keeps, it conflicts with AAOIFI SS3.

Is a further late charge worked out on amounts that already include earlier late charges, so the charges build on each other?

Charging on top of earlier late charges compounds the penalty, the same way interest compounds. AAOIFI SS3 does not allow any charge for delay to accrue to the financier.

Does the rent, profit rate or margin go up because the customer has paid late or defaulted?

Raising the rent or rate because of late payment increases what you owe as a price for the delay, which AAOIFI SS3 and SS9 forbid.

If the customer misses a payment or breaks the agreement, can the financier demand everything outstanding at once?

On default the financier can call in the whole balance. AAOIFI SS3 allows this.

Can the full amount be demanded straight away, without first giving the customer notice and a reasonable time to pay?

AAOIFI SS3 allows the whole balance to fall due on default, but prefers that this happens only after notice and at least two weeks to pay.

If there is a default or the agreement ends early, must the customer buy the financier's remaining share for the outstanding finance amount or its original price, whatever the property is then worth?

Making you buy the financier's share back at its original cost on default locks in the financier's capital. AAOIFI SS12 does not allow a partner to promise to buy the other's share at face value; it should be market value or a price agreed at the time.

If the property is sold for less than the financier is owed, or less than the value of its share, must the customer pay the shortfall?

In a real partnership a fall in value is shared in proportion to ownership. Putting the whole shortfall on you breaks the loss-sharing rule in AAOIFI SS12.

After the property is sold, is any money left over once the financier is paid returned to the customer?

Any surplus from a sale comes back to you, so the financier takes only what it is owed.

Can the financier sell the property or take possession of it if the customer defaults?

The financier can sell the property to recover what it is owed. AAOIFI SS3 allows this.

Is the rent, or the rental rate after any fixed period, set by reference to an interest rate such as the Bank of England base rate, SONIA or LIBOR?

Your rent follows an interest-rate benchmark. AAOIFI SS9 lets rent for later periods follow an agreed benchmark, but tying it to an interest rate makes the plan move like a variable-rate mortgage, and many scholars see this as a weak point.

Is the rent for later periods worked out using a formula or benchmark that is written into the agreement?

The rent for later periods follows a formula written into the agreement, so it is known in advance as AAOIFI SS9 requires.

Can the financier change the rent, rental rate or margin at its own discretion?

Rent should be known and agreed. A rate or margin the financier can change at will adds uncertainty (gharar) that AAOIFI SS9 and SS31 try to keep out.

Is there a maximum limit (cap) or minimum limit (floor) on how far the rent, rate or margin can move?

Any change in the rent is limited by a cap or floor, which reduces uncertainty.

Does rent start before the customer has possession of the property, or before the financier has bought it?

Rent is paid for using an asset the lessor owns. Charging it before the financier owns the home or hands it over is not allowed under AAOIFI SS9.

Must the customer keep paying rent whatever happens to the property, even if it is damaged, destroyed or cannot be lived in?

Under AAOIFI SS9 rent stops if the property is destroyed or cannot be used through no fault of yours. An "absolute and unconditional" duty to pay rent moves that risk onto you.

Is the rent calculated by applying a rate to the outstanding finance balance or acquisition cost?

Rent is a rate applied to the outstanding finance balance.

Must the customer carry out or pay for structural repairs or major maintenance of the property?

Under AAOIFI SS9 the owner bears major and structural maintenance. Where the financier owns all or part of the home, putting all of it on you is a departure.

Is the customer made responsible for everyday running costs such as utilities, council tax, decoration or minor repairs?

Day-to-day running costs can be placed on the occupier under AAOIFI SS9.

Is the customer appointed as the financier's agent to arrange repairs or insurance, with the cost then recharged to the customer, for example as supplemental rent or by set-off?

Appointing you as the financier's agent makes ownership costs look like the financier's, but if the money comes straight back to you as extra rent or set-off, you bear the cost in substance (AAOIFI SS9).

Does the financier itself pay for its share of major repairs, insurance or other ownership costs, without recharging them to the customer?

The financier pays its own share of ownership costs, as AAOIFI SS9 expects of an owner.

If the property is destroyed or becomes a total loss, must the customer still buy the financier's share or pay off the financier's balance?

If the home is destroyed through no fault of yours, each owner should bear the loss on its own share. Making you pay the financier in full anyway shifts all the ownership risk to you (AAOIFI SS9 and SS12).

Does the rent stop or reduce if the property is destroyed or cannot be used?

Rent stops or reduces if the property cannot be used, as AAOIFI SS9 requires.

Must the customer arrange and pay for buildings insurance on the property?

AAOIFI SS9 places insurance of a leased asset on the owner. Where the financier owns part of the home, you paying for all of the buildings cover means you carry a cost that belongs partly to them.

Does the clause require or prefer takaful (Islamic insurance) cover?

The clause asks for takaful cover, in line with AAOIFI SS26.

Does the clause allow or require ordinary insurance from a commercial insurer, rather than takaful?

AAOIFI SS26 prefers takaful. Conventional cover is tolerated only where takaful is not reasonably available, which is often the case for UK buildings insurance.

Does the financier arrange the buildings insurance itself, at its own cost or out of the rent it charges?

The financier insures the property itself, which matches AAOIFI SS9.

Are insurance payouts used to pay the financier its full share or balance first, before the customer receives anything?

If insurance money first clears the financier's whole share, the financier's capital is protected while the loss falls on you, which does not fit loss-sharing under AAOIFI SS12.

Can the customer buy the financier's remaining share or settle the plan early?

You can buy out the financier's share early.

Is there an early settlement charge worked out as a percentage of the amount paid early or the balance outstanding?

A percentage charge for settling early compensates the financier for rent it will no longer earn. Under AAOIFI SS9 rent is only due for the period you actually use the home, so charges should reflect real costs.

If the customer settles early, must they still pay rent for the period after the settlement date?

Rent pays for use of the home. Charging rent for months after you have bought the financier out is not allowed under AAOIFI SS9.

Is the only cost of settling early a fixed administration fee?

Settling early costs only a fixed administration fee.

Does early settlement or an extra payment need the financier's consent, or depend on its discretion?

Your right to buy out the financier early should be clear. Leaving it to the financier's discretion adds uncertainty (AAOIFI SS31).

Is the price the customer pays for the financier's share fixed in advance at the financier's original contribution or the outstanding finance balance, rather than the property's value at the time?

Selling its share back at the original cost means the financier cannot lose money on the property. AAOIFI SS12 says a partner may not undertake to buy the other's share at face value; it should be market value or a price agreed at the time.

Is the financier's share bought at its market value at the time of each purchase, or at a price agreed at that time?

The financier's share is bought at market value or a price agreed at the time, as AAOIFI SS12 expects in a diminishing partnership; you share in rises and falls.

Does the price for the financier's share include a profit or mark-up on top of what the financier paid for it?

Adding a profit to the price of the financier's share guarantees it a return on capital, which a partner cannot be promised under AAOIFI SS12.

Are both the customer and the financier legally bound in advance to complete the future purchases of shares, as if the sales were already agreed?

AAOIFI SS49 accepts a binding one-way promise, but promises that bind both sides to future sales work like a sale agreed in advance, which the standard does not allow.

Is the customer's promise to buy, or the financier's promise to sell, written as a one-sided undertaking by one party?

The promise to buy or sell is one-sided, which AAOIFI SS49 allows.

Does the buy-out price add the financier's other costs or charges on top of the price of its share?

Adding the financier's other costs to the buy-out price makes the final amount open-ended and pushes more of the financier's costs onto you.

Does the financier hold the legal title to the property, alone or on trust?

The financier holds legal title to the property.

Does the clause say that the customer and the financier each own a share of the property?

The clause sets out that you and the financier each own a share of the property.

Does the clause say the financier takes no risk or liability as an owner of the property?

Owning an asset means carrying its risks. AAOIFI SS9 and SS12 do not let an owner contract out of ownership risk altogether.

Must the customer indemnify the financier against all losses, costs and liabilities connected with owning the property?

A blanket indemnity can move the financier's ownership risks back onto you, which sits uneasily with AAOIFI SS9.

Is any fee calculated as a percentage of the finance amount or the outstanding balance?

A fee that grows with the amount financed behaves like a charge on money rather than a payment for work done. AAOIFI expects service fees to reflect actual costs.

Can the financier change its fees or add new fees after the agreement is signed?

Fees that can change after signing make the total cost uncertain (AAOIFI SS31).

Are fees limited to the actual or reasonable cost of the work or service provided?

Fees are tied to the actual or reasonable cost of the work done.

Is a third party, such as a guarantor, asked to guarantee the customer's payments?

A third party guarantees your payments. AAOIFI SS5 allows this.

Is the guarantor paid a fee or commission for giving the guarantee?

AAOIFI SS5 does not allow a fee to be paid for giving a guarantee.

Does the customer, as co-owner, guarantee the financier's share or capital against any fall in the property's value?

A partner cannot guarantee the other partner's capital in a musharaka (AAOIFI SS12).