What you need to know before signing a lease or tenancy agreement

Introduction

The greatest yet often disregarded wisdom is encapsulated in this simple phrase – ‘Don’t sign anything that you don’t understand’. 

Is a lease just a lease?

A lease agreement is a contract which will be binding on both the landlord and tenant. Therefore, it is important to understand what a ‘lease’ is and what are the various implications of signing a lease before executing any contract. There are 2 pertinent considerations that you need to take into account; first, the National Land Code (NLC) 1965 is the ultimate handbook for Malaysian land law; second, registration is king under the NLC and dealings over land which are not registered as per its terms will not be protected by the law.

The term ‘lease’ is used on a day-to-day basis rather loosely. Under the NLC 1965, a ‘lease’ can be a regular lease which we all know good and well, or a ‘tenancy exempt from registration’ (or ‘tenancies’), which is essentially just a shorter-term lease. 

What are the differences between a lease and a tenancy?

Leases and tenancies are different on two levels. At surface level, a lease is simply a rental agreement for a longer duration. Specifically, a lease must be at least above three years, whilst ‘leases’ for a term of three years and below are termed ‘tenancies’. 

Diving deeper, there are different procedures upon executing a lease or tenancy agreement. As mentioned, registration is king. Therefore, the NLC 1965 requires you to register your lease agreement by submitting a form to the Land Office. Being literally termed ‘tenancies exempt from registration’, tenancies cannot be registered under the NLC 1965. However, one may still endorse a tenancy by making a written application to the Registrar. The effect of registration and endorsement is to afford your lease or tenancy agreement statutory protection under the NLC 1965. 

The ‘imposter’ in disguise

Notwithstanding the above, leases and tenancies must also be distinguished from licences. This distinction is important as tenants (under a lease or tenancy) and licensees have different rights in law. Firstly, a tenant’s rights attached to the property is good against anyone. Therefore, their occupancy over the leased property is generally protected against anyone claiming otherwise. In contrast, a licensee only receives rights which are good against the person granting the licence. Therefore, a licensee’s occupation is not secured should the property be later transferred into the hands of someone outside of the licence agreement. This places licensees at a huge disadvantage as a subsequent purchaser of a licensed premise can easily evict the licensee with a notice to quit stating a reasonable period to evict. In this scenario, continued occupation of the premises is unlikely and, at best, the licensee may claim damages from the landlord through litigation. 

When is an agreement for a lease and not for a licence?

It is in your best interest to ensure that your agreement is in substance a lease agreement rather than just being labelled as one. In this regard, common law requires an agreement to embody three elements before they are legally recognised as a lease. In a nutshell, a lease must be made with an intention to grant exclusive possession over the premise, in exchange for rent paid, over a certain period of time.

Firstly, the agreement must grant exclusive possession over the premise (i.e. the tenant must be able to exclude anyone including the landlord from the leased premise) per Innab Salil & Ors v Verve Suites Mont Kiara Management Corporation [2020] 12 MLJ 16. However, an agreement does not immediately fail as a lease for not granting exclusive possession. An agreement that does not grant exclusive possession may still be deemed as a lease, provided that the parties intended for the agreement to take effect as a lease. In ascertaining whether such an intention exists in any given case, the court must value the substance of the agreement more than its form. Therefore, a mere labelling of a lease agreement will not make it a lease agreement. It is the nature of the tenant’s occupancy according to the content of the agreement that matters. 

Secondly, the lease must be for an ascertained and specified duration. However, the courts are ready and willing to validate a lease with an uncertain duration by converting the uncertain period into a definite one, following the maximum duration for leases under the NLC 1965 (Siew Soon Wah & Ors v Yong Tong Hong [1973] 1 MLJ 133). Accordingly, a lease over an entire plot of land will be converted into a lease for 99 years whilst one over part of a land will be converted into a lease for 30 years. Thirdly, rental must be paid in exchange for occupation. The consequences of non-payment of rent are severe, wherein a landlord may treat themselves as discharged from the lease agreement following a default in rent payment. 

Q: Does the law require me to do anything as a tenant under a lease?

If even one of the three elements outlined above is lacking in your agreement, it is a license and not a lease. However, all is not lost provided the agreement is not signed. You can still negotiate the terms of your agreement to ensure it looks like a lease and functions like one. Now, after securing your lease agreement, it is important for you to take note of s230-232 NLC 1965 as they impose various mandatory or conditional obligations on a lease which may or may not be contracted out of. 

S230 NLC 1965 provides two mandatory obligations. First, landlords under a lease will always have to pay all rent that is due to the State Authority in respect of the land. Second, tenants under a lease will always have to pay rent due to the landlord in the time and manner specified under the lease agreement. As these two obligations are mandatory, they cannot be removed by clever drafting or contracts as they apply even if not expressly stated in your lease agreement. 

In contrast, s231-232 NLC 1965 implies various obligations on the tenant and landlord respectively, in absence of any indication to the contrary under the lease agreement. 

Why should you care about these obligations that are more or less implied by default anyway? Because failure to comply with these implied obligations when they are applicable renders a lease terminable by forfeiture under s234 NLC 1965. Furthermore, the implied obligations under s231-232 can be expressly contracted out of, by stating otherwise in the agreement. Therefore, it is important to carefully read your lease agreement before signing to ensure your landlord is not unreasonably contracting themself out of these statutory obligations that are for your own benefit.

Q: How can I terminate my lease?

A registered lease can be terminated on various grounds. These include but are not limited to by way of effluxion of time, forfeiture, express surrender of the lease, and a valid notice. 

Termination upon effluxion of time is just a fancy way of saying termination upon expiry of the lease agreement. Therefore, a lease is logically terminated after the stipulated duration of occupation has lapsed. 

Termination by express surrender of the lease under s239 NLC describes an agreement between the landlord and tenant for one party to give up the remaining term of the lease and for the other party to accept it. Express surrender is somewhat similar to termination by effluxion of time in that both modes of termination operate by mutual consent of the landlord and tenant, without any penalty or consideration to be paid in return. 

Termination by notice is, in contrast, a unilateral act which must be made according to the terms of the lease agreement itself. Therefore, lease agreements will often contain termination clauses which will specify the procedures to terminate a lease agreement before the lease duration lapses. It is therefore important for you to review the notice period under your agreement as it will largely determine how long you are given to vacate the premises upon receiving the notice. 

Forfeiture under s234 NLC 1965 can take place against a tenant upon their breach of any express or implied provisions such as the obligations provided under s 230-231. It could also take place if the tenant becomes an adjudicated bankrupt, or upon winding up if the tenant is a company. However, s235 NLC 1965 does provide tenants an opportunity to remedy their breach. It first requires the party initiating forfeiture to issue a notice specifying the particulars of the breach and to demand for rectification of the breach or for compensation to be paid before forfeiture can take place. Forfeiture may only take place if the tenant fails to rectify their breach or make compensation, as the case may be.  

Conclusion

Here are a few key takeaways:

1. Always read your contract before signing it.

2. If you are looking to rent a home, a lease is always better than a licence.

3. A lease must always give you three things: –

    a. Right to occupy the house to the exclusion of the landlord;

    b. A specified and ascertained lease duration;

    c. A fixed rent to be paid.

4. Know your rights and obligations as a tenant under a lease.

5. Make sure your landlord is not unfairly contracting himself out of his statutory obligations under s 231 and s 232 NLC 1965.

6. Make sure there is a termination clause that provides a reasonable notice period to terminate your lease agreement.