Standing Together, when Rent is Due
20 April 2020
It is without doubt that the movement control order (‘MCO’) implemented throughout Malaysia since 18 March 2020 triggers a serious financial impact on many businesses due to fall in revenue, and individuals suffering from loss of income and even loss of jobs. This is expected to last past the MCO. Consequently, business owners and individual tenants may not be able to meet their rental obligation. But does this mean that the MCO triggers an automatic right to suspend or reduce rent payment? Let’s examine the following questions.
- Is the tenant able to use the rented premise?
Certainly those who are renting houses will not be able to delay rental payment as they are still able to stay there. Although the MCO does not affect their tenancy which is for residential stay, their ability to pay rent may have been.
Commercial tenants of non-essential businesses which are required to close business or operations will not be able to use the rented premise although some may be able to operate remotely, as compared to those providing essential services which can still remain open, albeit on a reduced scale of operations but may experience significant drop in business.
Can tenants who are unable to use their rented premise or those who can continue to use but are badly affected, defer or reduce rent payment? In the former, the tenancy is directly affected whereas in the latter, the tenant’s ability to pay is directly affected.
- What does the tenancy agreement say?
First of all, the MCO is not an automatic ground to defer paying or reduce rent, unless you are renting the class of premises announced in the Government’s Prihartin initiatives (set out below).
GOVERNMENT PRIHARTIN INITIATIVES
For all others, it is necessary to look to the tenancy agreement for provisions where rent may be suspended, delayed, deferred or reduced, or tenant’s obligation may be suspended, delayed or deferred, if the rented premise cannot be used or accessed due to epidemic/pandemic, disease outbreak, government order or other similar causes. This is commonly known as the force majeure clause, which sets out events and circumstances that are unforeseeable or beyond the control of the parties and renders a party’s obligations under the agreement impossible to perform or is prevented. Examples of such events includes natural disasters, fires, acts of God, war or strikes.
It must be made clear that the tenant’s ability to use the premise is not a tenant’s obligation, rather, it is the tenant’s right. To elaborate, it is the tenant’s right to use the premise which is directly affected by the MCO thereby resulting in the inability of the tenant to meet its obligation to pay rent under the agreement. Can the use of the premise then be said to be a landlord’s obligation? In a tenancy agreement, landlord’s obligation relating to use of premise is to permit the tenant to enjoy and use the premise. The shutting down of premises or closing of businesses is directed by force of law under the MCO and not due to any act or omission by the landlord. Further, the landlord was not directed to lock up the entire building and prohibiting access to the premises therein. Therefore, it cannot be said that the tenant’s inability to use the premise is due to the landlord.
More importantly, the force majeure clause is NOT implied by law or an automatic right. It must be expressly included in the agreement by the parties, and the wording of the clause has to be examined to determine if it is wide enough to include the MCO or the Covid-19 outbreak and which denies the tenant’s right to use or access the premise, thereby leading to suspension of the tenant’s obligation to pay rent.
There is another form of force majeure clause which may be found in tenancy agreements, that is damage or destruction of the premise due to force majeure events or causes, thereby rendering the premise unable or unfit to be used or for occupation. In such event, rent will be suspended for the relevant period. The key here relates to the physical condition and state of the premises which is damaged or destructed to the extent that the tenant is unable to use or occupy. The tenant is not required to show any financial impact for rent to be deferred. Tenancies affected by the MCO will not qualify under such damage or destruction clause.
Then, is there any clause in tenancy agreements where the tenant is unable to use or occupy the premises due to causes similar to the MCO and rent will be suspended?
The answer is most likely, no. The only provision in tenancy agreements where rent is suspended because tenant is unable to use or occupy is usually confined to damage or destruction of the premises caused by events not attributable to the tenant.
For tenants who can still use their premises, it must be understood that the inability to pay rent because of the MCO is primarily due to financial difficulties, and tenant’s obligation to pay rent under tenancy agreement is usually not subject to their financial position or ability. Hence, most tenancy agreements are unlikely to contain a clause to defer rent payment especially when the tenant can still use the premises. However, it is possible that this suspension clause may be found in retail and industrial tenancies where the main or only source of revenue is business or production at the premise, as compared to office tenancies where work can still be carried out remotely. Again, the scope and wordings of force majeure events, causes and circumstances set out in such clause, is pertinent to determine if it is sufficient to include the MCO or the Covid-19 outbreak.
To sum up, tenants seeking to rely on the MCO or the Covid-19 outbreak to defer or reduce rent must first, find out whether their tenancy agreements contains a force majeure clause, and if yes, whether the clause is wide enough to cover the MCO or the COVID-19 outbreak.
Apart from that, tenants may also look for any provision in their tenancy agreements which allows them to terminate the tenancy by serving the requisite notice on their landlords without being liable for breach of contract. This may not be a common clause in tenancy agreement but may be present during the renewed term of the tenancy rather than the initial or first term. Such termination right may improve tenants’ bargaining position by intimating to the landlord that it may exercise the termination right if the landlord is not amenable to rent reduction or waiver.
In the absence of any force majeure or similar clause in tenancy agreements, tenants have no right to suspend, delay, defer or reduce rental payment, or even terminate the tenancy, due to the MCO or Covid-19. Any failure or delay by the tenant to pay rent for any reason not specified or permitted in the tenancy agreement, constitutes a default or beach therein and would entitle the landlord to take actions set out in the agreement or conferred by law against the tenant such as suspending certain services, taking distress actions to recover arrears of rent, and even terminating the tenancy.
Set out below are the rental related initiatives announced by the Government thus far as part of the initiatives taken to provide relief to affected individuals and businesses. Particularly note-worthy is the tax deduction given to private owners which offer three (3) months rental reduction or waiver to SME tenants (see item (v) below).
- six (6) months rental exemption for Projek Perumahan Rakyat (PPR) and Perumahan Awam homes.
- six (6) months rental exemption on all premises owned by the Federal Government such as school canteens, nurseries, cafeterias, convenience stores and others. This includes all premises owned by agencies and statutory bodies of the Federal Government.
- Malaysia Airports Holdings Berhad will provide rebates on rental of premises at airports.
- Waiver or discount for rentals to SMEs in the retail sector which are operating on premises owned by Government-Linked Companies (GLCs) such as MARA, PETRONAS, PNB, PLUS and UDA as well as several State Governments.
- To encourage private owners to extend assistance to their tenants, owners of buildings or business spaces that provide rental reduction or waiver to SME tenants are given a further tax deduction equivalent to the amount of rental reduction for April until June 2020, subject to the condition that the rental reduction is at least 30% of the original rental rate for that particular period.
Notwithstanding that tenancy agreements may not contain provisions for the tenants to defer paying or reducing rent, tenants are not precluded from negotiating with landlords for a reduction or waiver of rent, and landlords can decide whether to allow the tenants, especially good tenants who are facing genuine financial hardship, to remain in the premises and continue with their tenancies. Contracts are, after all, agreements between the parties and they can always agree amongst themselves on matters not provided or addressed therein. A waiver or reduction of rent not only benefits the tenants, but may help landlords to avoid the risk of the premises being left unoccupied if the tenants vacate the premises or close their businesses. With the exception of prime properties, procuring new tenants in the looming economic downturn may be a daunting task.
Landlords and tenants should work together to weather this unprecedented economic storm, and not outright insist on strict compliance and enforcement of rent payment on tenants who are genuinely affected. What is more crucial now is to ensure business continuity and ability to resume business, and in turn, retain employment and protect jobs. We must all play our part.
In the words of our Prime Minister, “this unprecedented situation of course requires unprecedented measures”.
This Alert is written by Ms Jesy Ooi (Partner) of the Real Estate Practice of Skrine.