Covid-19 Impact on Tenants: Effect of MCO Regulations on Tenancy & Lease

Covid-19 Impact on Tenants: Effect of MCO Regulations on Tenancy & Lease

13 May 2020

In this article, we have attempted to answer all your burning questions relating to the impact of MCO regulations on tenancy and leases. We have answered each question in different headers so that you can navigate immediately to the question you want answered too.  

 

Frequently Asked Questions    

A. Is there a difference between a Tenancy & Lease

A duration of a lease is more than 3 years and must be registered under National Land Code. A lease registered will be visible in the document title in contrast to a tenancy.  

Any form of rental period less than 3 years will be construed as a tenancy in Malaysia. 

There is currently no specific legislation in Malaysia governing tenancies. The rights of the landlord, tenant, lessor and lessee is governed by the following laws : - 

a) Contracts Act 1950

b) National Land Code

c) Specific Relief Act 1950

d) Distress Act 1951 

e) Civil Law Act 1956

f) Rules of Court 2012  

 

B. What are the possible Impact of the Movement Control Order and Covid 19 Pandemic on tenancies/lease (Commercial properties) and Tenancy Agreements? 

 

Common Problems faced by Landlord:

1. Difficulty and inability to collect rental payments from the tenant/lessee.  

2. In spite of the imminent difficulty faced by the landlord/lessor to collect rental payment, he or she is still obliged to service loans (that are not exempted under the moratorium), quit rent, assessment, utilities, management fees, sinking fund and etc. 

 

Common Problems faced by Tenant/lessee:

1. Inability to operate business & generate income for non-essential service

2. Inability to pay rental on time due to financial difficulty (pay cut/no income and/or non-usage of the rented/leased properties) 

3. Continued legal obligation to pay land/mall owners of all outstanding. 

 

C. Has the Government implemented any short-term relief packages? 

Here are some of the short-term relief packages available:

1. The government has announced 2% discount on electricity bills for commercial, industrial and agricultural industries, as well as for domestic users, from April 1 to Sept 30; 

2. 6-month bank loan deferring plan (moratorium); (Note: still subject to conditions set by respective banks) and; 

3. Tax Break: Landlords who waive or reduce rent for small and medium enterprises (SMEs) by at least 30 per cent will receive the equivalent in tax deductions under the PRIHATIN PLUS package. 

 

D. What are the Options available for parties under the current circumstances? 

 

Options for Landlord:

 

What happens if the tenant fails to pay rent?

Generally, on a strict legal standpoint, the Landlord can insist on strict compliance of the tenancy/lease agreement. (ie. Termination of the agreement and/or forfeit the deposit for the tenant’s failure to pay rent depending on the terms of the agreement). 

 

What happens if the landlord terminates the Tenancy/Lease Agreement?

If the tenant refuses to move out or fix the violation (if any) after receiving a termination notice (the period of the termination notice is subject to the terms of the agreement, normally 30-60 days), the Landlord is entitled to exercise his rights to terminate the tenancy/lease and obtain and eviction order under the Section 7 of the Specific Relief Act 1950 should the tenant refuse to vacate the rented premise and/or commence Distress action under the Distress Act 1951 to recover rental arrears. A claim for double rent under Section 28 (4) of the Civil Law Act 1956 from the expiry of the notice of eviction until the delivery of possession can be made by the landlord against the tenant who refuses to yield up the demised premises. 

However, on a commercial standpoint, it is not advisable to lose tenants/lessees by insisting on the strict compliance of the agreements during this period as it’s also difficult/impossible to find new tenant for replacement. 

Landlords of commercial premises in particular run the risk of having empty outlets in a few months’ time if landlords are unwilling to assist their tenants and tenants of non-essential services outlets are forced out of business. Hence, the best option is to discuss a solution with the tenants and come up with a win-win solution amidst this challenging time. 

 

Options available (subject to the landlord’s discretion): -  

a) Deferment/suspension of rental during MCO; 

b) Reduction of rental during MCO; 

c) Waiver of certain portion of rental; and

d) Waiver of late payment interest and assurance of not exercising termination rights/clause due to late rental payment.   

 

Options for Tenants:

There are 3 viable options which you can opt for:

 

1. Reliance on Force Majeure clause in the agreement (if any)

Force majeure means the occurrence of event(s) or circumstance(s) which could not have been foreseen at the time the contract was entered into, which prevents or impedes a party from performing one or more of its contractual obligations under the contract.

 

What is a force majure clause?

A force majeure clause allows a contract to be set aside or the obligations of the contractual parties to be temporarily suspended if it no longer can be performed due to an unforeseen circumstance that is beyond the control of the parties to the contract. 

(Covid-19 pandemic and the MCO are examples of unforeseen circumstances)

Force majeure can be used only by the party who cannot perform its obligation and that it would be the tenant in the case of MCO while the landlord is not the one affected and would not be able to rely on the clause.

Force majeure clauses are intended to include risks beyond the reasonable contract of a party (RHB Capital Bhd v Carta Bintang [2012] 10 MLJ 469). In essence, it frees both parties from liability or obligation when a supervening event takes place.

To rely on a force majeure clause, it must be proven that the unforeseen circumstance affects the nature of the contract, and that the contract become impossible to perform. 

(For tenants who are providing non-essential businesses, it is reasonable to rely on this clause as they cannot operate their business during MCO which affect the nature and purpose of the contract and the contract become impossible to perform during this period. In other words, the contract has now been put on hold. The contract would then be ‘restarted’ once the MCO is over and businesses can operate as usual.)

A well drafted force majeure clause may contain provision as to the procedures to be complied with by the party relying on such force majeure clause upon the occurrence of a force majeure event. 

Essentially, it will depend on the provision of force majeure clause as to the recourses and remedies if any, open to the parties in such an event of unforeseen circumstances. 

All forces majeures clauses vary and there is not a standard one for all. Some may allow the parties to terminate the Agreement; some may allow the tenant to waive the obligation to pay rental during the MCO period. 

Not all tenancy contracts have a force majeure clause. So, in such cases, tenants would still need pay their rent during this difficult period.

It is also noteworthy that Malaysian Courts will not allow a force majeure clause to be implied into a contract as The Contracts Act 1950 does not provide for implied terms - BIG Industrial Gas Sdn Bhd v Pan Wijaya Property Sdn Bhd and Another Appeal [2018] 3 MLJ 326 – Court of Appeal.  

 

2. The tenant may make a claim under the doctrine of frustration

Alternatively, if the agreement does not contain a force majeure clause, the tenant providing non-essential service may claim frustration.

Quoting Section 57 of the Contracts Act 1950;

“Section 57 of Contracts Act 1950 : 

(1) An agreement to do an act impossible in itself is void.

(2) A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Frustration is a general principle under contract law which can totally cancel a contract if it becomes impossible to perform. 

Court of Appeal in Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 201 has laid down 3 elements to be proven for a successful claim of frustration.

(a) the event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract;

(b) the event relied upon by the promisor must be one for which he or she is not responsible (ie. not self-induced frustration); and

(c) the event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise.

However, grave financial difficulty that make it impossible for a tenant to pay rent may not necessarily fulfill limb (c). In Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293, it was held that: -

“A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration.”

Therefore, it is challenging to argue that a tenant facing financial constraints in meeting the monthly rental would amount to an impossible act to frustrate the tenancy agreement. Even if successful, the effect of frustration is that the contract will become void which means the contract shall be treated as never been created. Hence, the tenant is unable to resume business on the same rented/leased premise even after the MCO is lifted or the pandemic is over.

Whilst the tenant may be relieved from a claim for damages by the landlord, the effect of frustration i.e void tenancy agreement can create further difficulties for the tenant as the tenant still need to pay for services/benefits that cannot be restored or parts of the contract that was already fulfilled by the landlord as the tenant may have already benefitted from them - Section 15(2) Civil Law Act 1956

Possible benefits enjoyed by tenants [despite the implementation of the MCO and total restriction in doing business] such as storage benefits, security and safekeeping, fire insurance benefits and benefits arising from prompt mandatory payments by the landlord for quit rent, assessment, utilities, management fees and sinking fund of commercial strata-titled properties. 

Furthermore, both landlord and tenant who has spent some money in carrying out their contractual obligations can claim these expenses from the other side, if the court thinks it’s fair under Section 15(3) Civil Law Act 1956

 

3. Request for a reduction in rental – Negotiation

 

Can a tenant ask for lower rent due to the Covid-19 Impact on their tenancy?

In the absence of a force majeure clause, the tenant may negotiate with the landlord and request for a rental reduction. However, strictly speaking, the landlord has no obligation to consider and agree to such request. 

Nonetheless, if the parties did reach an agreement, it is advisable to execute a document in written form (eg: settlement deed/collateral contract) to evidence any form of successful negotiations between parties rather than relying merely on oral agreements to prevent parties from reneging post MCO. 

 

Conclusion

Tenants of commercial premises who are unable to meet the obligation to pay rent on time may resort to the following recourse: 

  1. reliance on force majeure clause ; 
  2. doctrine of frustration, which is likely to be infeasible ;  or 
  3. negotiation with landlord for reduction in rental, which is the better recourse in absence of force majeure clause.

 

In the event that all recourses and negotiations are to no avail and the tenants/lessee are unable to pay the rent on time, it is still the landlord’s and lessor’s right and prerogative to terminate the tenancy and forfeit the deposits. 

 

Contributors

TAN SZE LEE

KATHLEEN DANG

LEONARD RAJ 

 

Note:  This FAQ does not constitute legal opinion or legal advice on any of the issues addressed above. It merely sets out views on the recent implementation of the MCO on commercial tenancies and lease. Please however feel free to contact us should you have any queries or require any clarification.


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