What happens if commercial & residential tenants are unable to pay rent due to COVID-19?

We dispel all uncertainties tenants and landlords might have over the validity and irrevocability of their tenancy agreements during this MCO and beyond.

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With the Covid-19 pandemic affecting the livelihood of individuals and businesses, one of the questions at the top of many people’s minds is how exactly do they honour their tenancy agreements. Even if the Movement Control Order (MCO) ends on 12 April, the effects of the outbreak will linger. Citizens who have suffered a loss of income and/or business will be in financial hardship for six months to one year and as a result, will be unable to pay rent for a prolonged time.

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To preface, this guide only deals with legal tenancy agreements i.e. written tenancy agreements that have been signed by both parties and duly stamped by the LHDN. The reason for this is because legal tenancy agreements have the rights and obligations of all parties clearly written down and in most cases, whether it is a residential tenancy or a commercial/ business tenancy, the agreements have been prepared by real estate agents or lawyers of either party.

If this is applicable to you, read on to find out what you could do about your tenancy during this time of uncertainty.

What are the rights of commercial or retail tenants during this MCO?

Throughout the duration of the MCO, the government has implemented certain measures to help ease the financial burden of its citizens, from giving out cash aids and discounts on electricity bills to a six-month moratorium on bank loans. If you qualify for these aids, it would certainly help in the payment of your monthly rental. But what if you don’t qualify? What could you do as a tenant?

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Well, it depends on how your tenancy agreement is drafted. Most commercial or business tenancy agreements have a specific clause that accommodates a force majeure event, allowing for the agreement to be put aside.

What is a force majeure clause?

A force majeure clause is a provision which allows for the non-performance of one or more contractual obligations by a party due to unforeseeable circumstances or events such as wars, riots, strikes, civil commotions, natural disasters, epidemics, and government intervention.

Let’s say for example you run a physical florist shop and being considered a non-essential business under the MCO, you had to close your shop. You not being able to pay rent while your shop is closed is justified. You can rely on the force majeure clause in your tenancy agreement as it is impossible for you to run your business during the MCO.

When can you invoke the force majeure clause?

Note however that triggering the force majeure clause could result in either the termination of the agreement, the temporary suspension of the terms of the agreement or the waiver of the terms of the agreement. It depends on how the force majeure clause is worded.

READ: Individuals & SMEs automatically qualify for 6-month loan deferment. Full details here. 

What if my tenancy agreement does not have the force majeure clause?

Remember that you can only rely on the force majeure clause if your tenancy agreement contains the clause. If your agreement has no such clause, you may try the Doctrine of Frustration.

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What is the Doctrine of Frustration?

The Doctrine of Frustration (DOF) is essentially a situation where one party finds that, through no fault of their own, they are unable to carry out their contractual obligation because it has become impossible to do so.

In Malaysia, DOF is found in Section 57(2) of the Contracts Act 1950 which states that 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 

How can tenants prove that they face financial distress to qualify for DOF?

In order to prove that a frustrating event has occurred, the tenant must show the following three elements:

(a) the event, i.e. the MCO, which the tenant relies on as having frustrated the tenancy agreement must be one where no provision has been made in the tenancy agreement;
(b) the event relied on by the tenant must be one which they are not responsible for; and
(c) the event which is said to cancel the promise (i.e. the tenant’s agreement to pay full rental to the landlord) must be such that it renders the promise radically different from what was agreed under the tenancy agreement.

Based on the above elements, a tenant would find it hard to prove frustration of the tenancy agreement, as difficulty in paying monthly rentals does not constitute an inability to carry out the terms of the agreement. Furthermore, the effect of frustration is that the agreement becomes void, i.e. the agreement cannot be enforceable by law.

The case of Public Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor (2009) also stated that a contract is not frustrated if it becomes difficult to perform or difficult to interpret.

As such, tenants whose agreements do not contain a force majeure clause and also cannot be said to be frustrated would have to bear the burden of paying the full monthly rental or they might face legal action from their landlords.

One good news is that some tenants might enjoy a rental rebate – earlier this month, the Prime Minister announced that landlords of commercial premises who reduce their rental rates by at least 30% from April to June 2020 will qualify for additional tax deductions.

What about residential tenants, do they get to apply force majeure?

Unfortunately, residential tenancy agreements do not have force majeure clauses. This is because these agreements are to enable tenants to live in premises whereas commercial or business tenancy agreements are to enable tenants to carry out businesses in premises. The MCO does not affect residential tenants the same way it does commercial and business tenants. Residential tenants are compelled to stay at home. Commercial tenants may not be able to operate their businesses.

Unlike commercial or retail tenants, residential tenants will not be able to use DOF in any way. DOF is predominantly used in commercial contracts or contracts where there is an exchange of services. A residential tenancy is one where you pay a certain amount to be allowed to live in the premises. Unless the building collapses and becomes impossible to live in, it’s hard to argue that the MCO is a frustrating event for a residential tenant.

What is the solution for residential tenants?

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Tenants are encouraged to talk things over with their landlords. While the landlord may decide not to waive the rent for the entire MCO period, she or he might be magnanimous enough to give a discount or allow for a deferment of payment.

Also, most tenancy agreements allow for a grace period of seven days after a payment is due. And if deferment is not possible, tenants could have a word with their landlords to try to offset their security deposits in lieu of rent.

Negotiation tip for tenants

If you reach an impasse with your landlord, you can opt to take advantage of your security deposit. Most tenants would have paid at least two months rent as a security deposit at the start of their lease period. You could offer this up as rent to your landlord and replenish the deposit once you are financially stable again, making it a win-win situation for both landlord and tenant.

Do note, that the government has announced that tenants of the Program Perumahan Rakyat (PPR) would receive a waiver on rent for six months.

CHECK OUT: 10 things you should know before you rent a house in Malaysia

How can landlords deal with a difficult tenant?

As for landlords facing stubborn tenants who refuse to negotiate or hash things out regarding rent payments, they may choose to terminate the tenancy altogether. Even if there is no termination clause in the agreement, the non-payment of rent constitutes a fundamental breach of contract that entitles the landlord to terminate the agreement. The landlord must give sufficient notice to the tenant about the termination and inform the tenant of the date they must vacate the premises. The landlord is also entitled to sue for the outstanding rent.

Can a landlord still enforce the eviction notice & eviction order during the MCO?

If the tenant has been defaulting on the rent numerous times, the landlord can issue an eviction notice in accordance with the what is stated in the tenancy agreement. Usually, the tenant is given between 2 weeks to 30 days to comply with evacuating the property.

Should the tenant refuses to vacate the rental property after the notice period is up, the landlord can file a civil case against the tenant and obtain an eviction order (properly known as the writ of possession) as provided for under the Specific Relief Act 1950. Once you have successfully obtained the writ of possession from the court, you can set a date and time with the court bailiff to meet at the property and the bailiff will take possession of the premises on your behalf.

By that time, the tenant will be forced to comply as to when the bailiff arrives, he will ask the landlord to open the door to the premises, and proceed to throw the tenant and all his belongings out.  If the tenant is not available, the court bailiff will ask the landlord to take pictures of all the tenant’s possessions, get the landlord to change the locks and stick a notice at the door stating that if the tenant wishes to collect his belongings he/she must contact the landlord.

Most of the time, the bailiff will arrive with a police officer just in case the tenant proves to be very difficult.

As court orders can take a while to be obtained, the landlord is allowed to charge the tenant a higher rental from the expiry of the notice period to the date of the court order as compensation.

What other solutions are there to further assist tenants and landlords?

Across the Causeway, the COVID-19 (Temporary Measures) Act was passed on 7 April 2020 to provide relief to parties of scheduled contracts including lease or licence of non-residential immovable property. This means tenants of shopping malls are included.

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Under the Act, the tenant who is unable to perform his contractual obligations on or after 1 February 2020 under a lease or a licence due to COVID-19, and has given a “Notification for Relief” to the landlord, will be temporarily relieved from performing those obligations for six months, although the period could be extended or shortened by the Minister for Law.

The Act also provides for a moratorium on taking action against the tenant for the following:

  1. Starting or continuing court or arbitration proceedings against the tenant and its guarantor;
  2. Levying distress against property of the tenant;
  3. The enforcement of any security over immovable property; and
  4. Exercising a right of re-entry or forfeiture under the lease.

If the landlord does not agree that the tenant is entitled to relief under the Act, the disagreement can be referred to an assessor to be appointed by the Minister for Law and whose determination is final and binding on all parties.

Malaysia could benefit from having its own version of the COVID-19 Act. As it is, Malaysia does not have a prescribed piece of legislation that deals solely with any rental relief or rebates that would help tenants that are facing financial difficulties. Taking a leaf from our Causeway cousins, such an Act would allow burdened tenants to not carry out their contractual obligations without the worry of repercussions.

Having our own COVID-19 Act would certainly pave the way towards better help and relief for contracting parties as well as to allow our weakened economy time to recover.

To read further about the impact of Covid-19 on the property market, click here.

Edited by Reena Kaur Bhatt

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