5 important clauses you need to look out for in a Malaysian tenancy agreement

Regardless of where you are in life, a house is always a necessity. Even if you have moved on from the college-renting days, you might be a homeowner who is looking for some passive income by renting out the space you are not using. Most of us would be familiar with common terms such as what kind of deposit is needed, how long would the duration of the tenancy be and methods on paying rental every month.

Regardless of whether you are a tenant or a homeowner, chances are, you would not have read the agreement before signing either because you spaced out after reading the first few lines or because the agent might tell you, "Aiya. Standard agreement nia. Just sign, no worries."

[READ MORE: What happens when you sign a contract without reading it]

The question then is, what exactly are the standard agreements you are agreeing to? Bear in mind that every contract differs but these are the more common situations that may occur.

1. You can end a tenancy early if you get transferred by your company

Image from 230dudes.com

If you have worked abroad, you may have stumbled across a diplomatic clause before. Just to clarify, a diplomatic clause is not used to call a ceasefire in case of an argument between you and your landlord. In essence, a diplomatic clause allows you to end a tenancy before the agreed period in the event you are relocated by your company or are no longer capable of working in a state/country.

The beauty of this clause is that it gives you the peace of mind of signing a tenancy when you are unsure of how long it would be before your next transfer. Aside from that, it also lays down clearly what you would have to do in order to inform the landlord that you will be moving out.

However, diplomatic clauses typically only becomes enforceable after a minimum period of one year of residence (but this is also negotiable). This means that if you were transferred away during the first year of your tenancy, you would probably not be able to rely on this clause. You would then have to refer to the termination clause to see what you can do about early termination. The reasoning behind this one year period is to allow the landlord time to recover what he has paid to any real estate agent.

This is what a diplomatic clause might look like in an agreement:

"In the event that the Tenant occupying the Premises is or is about to be:

1. assigned, posted, transferred or relocated from Malaysia to another country on a permanent basis;

2. required by the relevant authorities to leave Malaysia or is otherwise incapable of working or residing in Malaysia; or

3. no longer employed by his Company for any reason whatsoever (this is typically for foreigners working in Malaysia),

the Tenant may terminate the Agreement by giving the Landlord not less than two months' notice in writing or paying two month's rent in lieu of such notice. The Tenant may only exercise the right of termination under this clause after the expiry of twelve (12) months from the commencement date of the Term with document proof of transfer, cessation, and termination employment pass (for foreigners) sent by post in a registered letter addressed to the Landlord at the address specified herein.

In such event, the Tenant shall hand over vacant possession of the Premises before the expiry of the said notice with prejudice to the rights of the Landlord at law and equity to damages, compensation and consequential losses arising from the Tenant's said repudiation."

Based on the example given above, here is what it says essentially:

1. Should you be posted to another country or state, you can use this clause. You can also rely on this clause if you are no longer with your employers or the Malaysian authorities have prevented you from working or living in Malaysia.

2. You must produce evidence of this to your landlord. For example, it could be a letter from your employee or the Malaysian authorities.

3. You must give your landlord at least two months' notice that you would be moving away or pay him two months' rental instead of providing a notice.

4. The diplomatic clause only takes effect after a whole year of residence.

5. You must return the rented property to your landlord before the notice period expires and the landlord would reserve his right to claim for damages from you if he suffers any losses. For example, if you had left the house with gigantic hole in the wall because your television fell down, your landlord can still claim the cost of repairs from you.

2. End of tenancy but want to keep renting?

Options to renew are basically clauses in the tenancy agreement that allow you to extend your rental for another term upon the expiry of the first term. For example, if you initially signed a contract for a three years, you may be able to extend the tenancy for another three years if you have a clause like this in your agreement.

Some people may wonder why have a clause like this when you can always negotiate for another term at the end of the first one. There are two reasons for this:

1. You can negotiate your rental for the second term from day one

2. You don't have to run the risk of your landlord refusing to rent you the house for another term

However, an option to renew can be tricky. It has to be worded in a way that leaves out any ambiguities or it may be void for uncertainty under section 30 of the Contracts Act 1950:

"Agreements, the meaning of which is not certain, or capable of being made certain, are void."

So how can you word a clause that would not be void for uncertainty? Typically option to renew clauses fail because they fail to provide a proper mechanism for determining rent for the second term or for failure to indicate how the option is to be exercised.

In the case of King's Motors (Oxford) Ltd. v Lax, the option to renew clause was void because it failed to provide a proper mechanism for determining rent but left it to be mutually agreed to by the landlord and tenant.

Therefore, an option to renew should properly spell out:

1. What terms from the current agreement should be included in the renewal term.

2. How rental for the second term is to be decided.

3. How is the option to renew exercised.

An example of an option to renew that encapsulates the above points is as follows:

"The Landlord [shall/may] upon the written request of the Tenant made two (2) months before the expiry of the tenancy grant the Tenant a further term of three (3) years on the same terms agreed herein but without this option to renew at a renewed monthly rental rate not exceeding twenty percent (20%) from the current monthly rental rate."

The reason why the words shall and may are given as options in the example above is because they both carry different legal connotations. If you use the word "shall", it means that the landlord must allow you to renew your tenancy if you wrote in two months before the expiry of your current tenancy. However, if you choose to use the word "may", it means that your landlord has the option to allow you to renew your tenancy or to refuse to do so.

3. Want to leave early before your tenancy expires?

Termination clauses may seem pretty standard. For example, they usually inform you when your rental period ends and how you are supposed to return the property back to the landlord. However, there may be more than meets the eye. Most termination clauses would provide that you would not be allowed to break the tenancy during the first year and should you choose to end the tenancy early after the first year, your security deposit would be forfeited. Some clauses may even state that you would be required to pay your landlord for the unexpired months of the tenancy.

There are two questions that arise this. The first is what if you need to terminate the tenancy within the first year? Most termination clauses just state that it is prohibited and leave it at that. The second question is do you really have to pay your landlord the rental for the remaining months of the tenancy? In short, if the agreement says so, then the landlord can make you pay for the remaining months even if you have already moved out.

An example of such a clause is as follows:

"The Tenant is not entitled to terminate this agreement during the period of this agreement. In event of a breach, the Landlord is entitled to forfeit the Security Deposit and claim for a sum equivalent to the remaining period specified as liquidated damages."

Following the Malaysian case of Berjaya Times Square Sdn Bhd v Twingems Sdn Bhd & Anor (No. 2) where the tenant had decided to unilaterally terminate (meaning the tenant wanted to terminate the agreement but the landlord refused) the agreement, the courts found that the tenant's failure to perform his end of the contract (to complete a three year tenancy) resulted in the landlord suffering from actual losses.

This means that while you can terminate your contract despite the existence of a minimum period, you may have to pay your landlord damages in accordance to what has been agreed upon.

If you are wondering why can't the landlord mitigate his losses by looking for another tenant instead of forcing you to pay for the unexpired term, the same Berjaya Times Square case tells us that the landlord is not under a duty to mitigate his loss. This point of argument comes from the UK case of White & Carter (Councils) Ltd. v McGregor where the judge was of the view that when only one party chooses to terminate the contract, the other party can either accept it and sue for damages or refuse the termination and continue on with the contract as normal.

Further to the above, section 75 of the Contracts Act 1950 also tells us that if a clause in the contract specifies the amount of damages (or compensation) that you have to pay when you breach the contract, then that amount is payable even if no actual losses have been proven.

Section 75 Contracts Act 1950:

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

4. If your landlord wants to sell the place, he might need to give you first dibs

Have you ever been in that situation where you really love the house you are renting but then your landlord tells you to pack up and leave in two months' time because he has decided to sell the property? You are gutted because that house has seen you through plenty of good times plus it is super near your work place! You plead with the landlord and even make an offer to purchase the house from him but he turns you down.

This is where a right of first refusal comes in handy. A right of first refusal clause is essentially when the landlord, if he wants to sell the property, has to make an offer to you first. You can then choose to accept or reject the offer. If you choose to reject it, a right of first refusal would typically guarantee that the property would be sold to the third party subject to your tenancy. This means that you would not be left in an awkward position of having to scramble to look for alternative employment.

Sometimes, the right of refusal can also provide that if you reject the landlord's offer, he cannot sell it to a third party on more favourable terms. This means that if he offered to sell you the house for RM100,000 and you rejected it, he cannot sell the house for RM50,000 to someone else.

An example of how a right of first refusal clause would look like is as follows:

"That the Tenant be granted a right of first refusal during the Term where the Property is listed for sale, pursuant to which the Landlord shall:

1. prior to accepting any offer to purchase the Property, extend to the Tenant a written offer to purchase the Property on the similar or no less favourable price and terms, to be accepted or rejected by the Tenant within 21 days of the date of the offer; and

2. where the Tenant rejects the Landlord’s offer to purchase the Property, the Landlord may sell the Property to any third party purchaser during the Term provided that the Landlord shall procure as a condition of the sale that the purchaser of the Property assumes rights, liabilities and obligations of the Landlord howsoever arising under this Agreement, as if the purchaser had at all times been a party to this Agreement. To effect the foregoing, the Landlord shall, as a condition of the sale, require the purchaser of the Property to enter into either a novation or assignment of this tenancy, and ensure that the Tenant shall continue to enjoy the Property for the remainder of the Term as set out in this Agreement."

5. You can actually not pay rent if your landlord fails to carry out his duties

The big question on everyone's mind when your landlord fails to carry out his duties is, "Can I stop paying rent until my landlord cleans up his act?" If your landlord is responsible for maintaining the toilets in your house and fails to do so, can you stop paying rent until he completes repairs? Or can you actually carry out the repairs on your own and deduct the amount from the rent?

This is known as the entitlement to withhold/set-off rent.

An example of such a clause is as follows:

"If the Landlord fails to execute such repairs as informed by the Tenant within fourteen (14) days of receipt of such notice, the Tenant may execute such repairs and the costs thereof shall be a debt due from the Landlord which may be recoverable by deducting such debt sums from the rental payable or the Tenant may withhold such rental payable until the Landlord executes such repairs."

In the Malaysian case of JR Lincks Educational Consultants Sdn Bhd v Goh & Sons Enterprise Sdn Bhd, the tenant had notified the landlord that they would stop paying rent until the landlord manages to carry out their side of the agreement. The landlord then, among other issues, sued the tenant for non-payment of rent. The courts relied on the UK case of British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd to rule that the tenant had the right to withhold the rent if the he/she has an actual claim for damages against the landlord.

This means that you can't simply decide to withhold rent. You must have suffered genuine losses in order to take this action or you face the risk of getting sued by your landlord for non-payment of rent.

There are also some clauses that will allow grant you the right to withhold or set-off rent in cases such as the above, saving you the trouble of uncertainty and going to court.

Again, don't assume that all contracts are the same

Image from michaelgaigg.com

While examples of clauses are provided above to help you understand how such clauses may be phrased, contracts are always negotiable. This means that while there may be standard issues to cover, there is no such thing as a standard clause. A contract, in its bare sense, is a mutual agreement between parties which can be legally enforceable. This means that it is up to you and your landlord to negotiate the terms.

With that being said, if you are in the midst of drafting your tenancy agreement, it might be wise to seek legal help instead of copying template agreements online. Contrary to popular belief, convoluted language is not used by lawyers to earn your money, they are used to cover as many possible situations as possible. So, as your teachers would tell you, "Don't copy blindly!"

This article is for informational purposes only and should not be taken as legal advice. Every situation is unique and dependent on the facts (ie, the circumstances surrounding your individual case) so we recommend that you consult a lawyer before considering any further action. All articles have been scrutinized by a practicing lawyer to ensure accuracy.