Rental property has the potential to be a good source of income. However, this is only true if they are managed properly. For both landlords and tenants, you must have a well-written tenancy agreement. Here’s what you need to know to write one in Malaysia.
Properties are well-known to be appreciating assets. Therefore, owning some will provide long-term benefits especially if you can generate some income by renting them out. However, many expenses come along with property rental. This includes listing costs, property agent fees, and upkeeping of the property.
You can also run into conflicts with your tenant. Furthermore, a prolonged dispute can potentially cause more harm than any income profits you’ve received from the rental. Therefore, it’s important to have a tenancy agreement that protects you. It needs to be clearly worded and cover all possible scenarios. Here’s what you need to know to write a tenancy agreement in Malaysia.
Note: The information and content contained in this publication are for reference only and do not constitute any professional advice or service. Readers should seek independent advice before taking action.
1. What is a tenancy agreement?
A tenancy agreement is a legal covenant between a landlord and a tenant. It outlines the duties and obligations of each party during the tenancy period. It also provides a detailed description of the property being rented out. This includes its furniture, fixture, and other amenities.
To ensure the document doesn’t leave out any important details, landlords are advised to hire a lawyer to draft the tenancy agreement. Potential tenants can consult their lawyer to review the agreement and make any changes before signing. However, hiring a lawyer can be expensive. Therefore, landlords can opt to draft their agreement and ask the would-be tenant to review and agree to it.
2. What are the common terms that should be included in a tenancy agreement?
There are currently no government regulations about what can and cannot be added in a tenancy agreement. Therefore, both the landlord and the potential tenant can add many terms and conditions. This can make the contract more advantageous to either party.
A basic tenancy agreement should include the following:
- Details of property and purpose
- Tenancy duration
- Rental amount
- Deposit amounts
- What is provided by the landlord (furniture, utilities, etc)
- Obligations of landlord
- Obligations of tenant
- House rules, prohibitions, and limitations
- How to resolve disputes
- Special conditions/ clauses
Many things need to be specified in a tenancy agreement. Therefore, the details have to be stated clearly to prevent misunderstanding and disagreement.
3. When do tenants signed the tenancy agreement?
Once the potential tenant has viewed the property and agreeing to the tenancy terms, this person will then give the landlord a ‘letter of offer’ together with an earnest deposit. Then, both the landlord and tenant will need to sign the tenancy agreement within seven days after the security and utility deposits are paid. The signed tenancy agreement is then stamped and becomes an official legal document.
4. How many deposits are there in a rental agreement?
Landlords usually require tenants to pay three types of deposits, which are:
This is a booking deposit to ensure the landlord doesn’t lease the property to anyone else within the next seven days. It can be kept in escrow by a real estate agent and is typically equivalent to one month’s rent. The earnest deposit is also accompanied by a signed “letter of offer” from the tenant. The earnest deposit can be utilised as rental payment for the first month of occupancy when the tenancy begins.
This is used to protect the landlord in case the tenants violate the terms of the tenancy. The amount is usually equivalent to two month’s rents. It can be used to pay for repairs, key replacement and cleaning work. It can also be forfeited if the tenant leaves before the contract ends. However, if the tenant fulfils the contract and there are no issues throughout the tenancy, the entire amount is refunded when the tenancy ends.
This is used to pay any outstanding utility bills ( such as gas, electricity, and water) that have not been paid at the end of the tenancy period. It is typically half a month’s rent.
5. How much is the stamp duty for a tenancy agreement?
A proper tenancy agreement should be stamped by Lembaga Hasil Dalam Negeri Malaysia (LHDN) or the Inland Revenue Board of Malaysia (IRB) for it to become a valid legal document. The PDS 1 and PDS 49(A) application forms will need to be submitted to the nearest LHDN office.
The stamp duty for a tenancy agreement in Malaysia is calculated as the following:
1-year tenancy agreement
- RM1 for every RM250 of the annual rental above RM2,400. The stamp duty is free if the annual rental is below RM2,400.
- Tenancy agreement between 1 to 3 years
- RM2 for every RM250 of the annual rent above RM2,400. The stamp duty is free if the annual rental is below RM2,400.
- Over 3-years tenancy agreement
RM4 for every RM250 of the annual rental above RM2,400. The stamp duty is free if the annual rental is below RM2,400.
To make things easier, you can follow this formula:
Here’s how you calculate it :
- If you want to rent out your unit at RM1,700 per month, your annual rental would be RM20,400 (RM1,700 per month x 12 months).
- As the first RM2,400 is exempted from stamp duty, the taxable rental amount would be RM18,000 (RM18,000– RM2,400).
- The stamp duty would be charged according to the duration of the tenancy (refer to the amounts at the start of this segment).
Here’s the formula :
- (Yearly rental amount – 2400)/ 250 x H = Duty stamp cost
As the case for this example (rent of RM1,700 per month), the final stamp duty fee is as the following:
1 year or less:
[(1700 x 12) – 2400]/ 250 x RM1 = RM72
Two copies need to be stamped, one for the landlord and one for the tenant. The additional copy of the stamped tenancy agreement is RM10.
> 1 to 3 years:
[(1700 x 12) – 2400]/ 250 x RM2 = RM144
> 3 years:
[(1700 x 12) – 2400]/ 250 x RM4 = RM288
6. Structure of tenancy agreement
*This tenancy agreement structure is for reference only and do not constitute any professional advice or service. Readers should seek independent advice before taking action.
Section 1: Cover page
The cover page includes the arrangement date and names and IC numbers of the landlord and tenant.
Section 2: Defining the agreement
This part establishes the definition of “landlord”, “tenant” and “demised premises”. It also refers to separate sections known as the “Schedule” and the “Inventory”. Usually, the first part of the agreement does not include the property details, contact details, rental amount, etc. That information will be in “Schedule”.
Section 3: Duration of tenancy, rental amount and deposits
It specifies the start and end date of the tenancy, rental amount and deposits.
Section 4: Tenant’s responsibilities and obligations
This section covers the tenant’s responsibilities and obligations. For example, pay bills and rent on time, keeping the house safe and undamaged, no subletting,g etc.
Section 5: Landlord’s responsibilities and obligations
This section covers the landlord’s responsibilities and obligations. Eg: Insuring the property, pay tax etc.
Section 6: Special conditions/ clauses
These are additional conditions of a standard agreement agreed between the Parties. This part defines what happens in the case of exceptions.
Section 7: Final definitions
This part clarifies some definitions like the terms “landlord” and “tenant, numbers etc.
Section 8: Signatures
Signatures of the landlord, tenant, and witnesses.
Section 9: Schedule
This part provides actual information such as the property address, contact details of the landlord and tenant, tenancy terms.
Section 10: Inventory
The list of items that are provided by the landlord and handed over to the tenant. The items listed are expected to be returned in good working order at the end of the tenancy.
7. Get ready to earn some income!
A well-written tenancy agreement will help protect you as a landlord and avoid future disputes with your tenants. You should have the document ready before you put it on the rental market. If you want to increase your chances of getting quality tenant applications, you can list your rental property here at iProperty.com.my!
Edited by Rebecca Hani Romeli