Lawyer Chris Tan explains how landlords and tenants can emerge winners despite difficulties in rental payment during the prolonged lockdown in Malaysia.
Text and Photography by Jan Yong
Amid the continuing nation wide Movement Control Order (“MCO”) in Malaysia in its various iterations, more and more tenants, both commercial and residential are finding it hard to pay their monthly rentals. Tenants of offices, shopping malls lots and shoplots are especially hard hit as many are in the non-essential sectors, thus having to endure closures or limited opening hours. Even residential tenants are finding it harder as the lockdown wears on. Either they have lost their jobs, or have had their salaries cut or contracts not renewed, it’s tough going for a majority of the population.
On the part of the landlords, they have to deal with non-payment or delay of rentals. Even if their tenants move out, they have difficulty finding new tenants due to the property oversupply situation on top of having to make do with lower rentals which can’t even fully pay their property loans.
But now is the time to make sacrifices and compromises for the good of everyone so everyone can survive this unprecedented crisis, lawyer Chris Tan expresses his sentiments. “The key to resolving this seeming deadlock is to renegotiate the tenancy contract,” he opines.
Apart from government incentives where landlords are given tax deductions if they grant at least 30% rental reduction*, the other options for commercial landlords, according to the founder of Chur Associates, include:
1. Loan moratorium from banks upon the landlord’s request but perhaps this could be granted on condition that the landlord reduces the rental to their tenants;
2. Government to intervene to allow EPF withdrawal for landlords to service their loan payments. This could come in handy should the banks decline the loan moratorium requested by the landlord.
From the residential landlord’s perspective, the best option is of course for both landlord and tenant to sit down to renegotiate the rental contract. Similar to commercial tenancies, if a conditional moratorium is allowed to be imposed by banks, then both parties would benefit.
“It’s not a foolproof method to ensure landlords pass on the benefit to tenants but the banks could always ask the landlords to make a declaration that they will give a discount to their tenants upon taking up the moratorium. This is similar to the owner occupation declaration that a loan applicant has to sign in the case of a housing bank loan. The tax returns of the landlord can also be used as proof that a discount was given. Again, an EPF withdrawal, if allowed by the government, would be beneficial for the residential landlord,” explains Tan.
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In both commercial and residential situations, the tenant could ask for several concessions from the landlord:
Rental reduction for a specific duration e.g. during full lockdown;
Rental deferment instead of reduction;
Flexible usage of the rental deposit which could be utilised for fulfilling the monthly rental obligations;
Prolonging the rental period by exercising prematurely the rental renewal option which is a standard option in most rental agreements. But the renewed rental will be a reduced amount as per mutual agreement of the parties. This ensures that the landlord continues to have a tenant for a longer term albeit at a reduced rental;
Tenant to pay maintenance fees and sinking fund (if strata titled property), on condition that the rental is reduced accordingly. This is the easiest solution as the tenant needs access to all the common properties; and
Tenant can reduce his space usage of the premises, for example, by subletting it. The landlord’s permission is needed as most tenancies do not allow sublets unless permission is granted by the landlord;
Rental to be on a profit-sharing basis between landlord and tenant. This would be very useful for tenants with non-essential businesses which are closed during lockdowns.
The government can incentivise the reduction of property rentals but can’t regulate it because the principle of freedom of contract is still practised in Malaysia. As the majority of the rental market consists of private landlords, it would be quite impossible for the government to regulate it notwithstanding the existing Emergency powers. This is because regulating it would spook investors and people would lose confidence in the market.
“Furthermore, it is not envisioned that a full lockdown will be prolonged for longer than three months,” says Tan. “This is because the economy will not be able to sustain it.”
Rental obligations during MCO
The tenancy agreement is still valid unless it has become impossible for either one or both parties to carry out their obligations due to a force majeure event which would entitle either party to suspend or terminate the tenancy agreement. A force majeure event could include unforeseeable circumstances but this clause must be present in the agreement in order for a party to rely on it.
The force majeure events could include earthquakes, droughts, tidal waves and floods, fire or other physical natural disasters; riot, war, acts of terrorism, and pandemic or lockdown.
If the tenant does not pay rent for a prolonged period, the landlord can choose to terminate the tenancy agreement and issue a Notice of Forfeiture to the tenant to give reasonable time for him/her to remedy the breach.
Following the Notice of Forfeiture, if the tenant fails to pay the arrears of rent, then the landlord can proceed to file an action in court for rental arrears, damages and vacant possession.
In a worst case scenario, if the tenant refuses to move out, then the landlord can apply for a Writ of Possession by which the court can direct a bailiff to remove the tenant and his or her belongings from the premises. Alternatively, a Writ of Distress will allow the landlord to seek the assistance of the court bailiff to enter the premises to seize and sell the tenant’s possessions/movable properties. – compiled from various sources.
Note: The above does not represent legal advice and reliance is at readers’ own risk. Please seek legal advice for any landlord / tenant issues.