Federal Court: Management body can stop short-term rentals

The Federal Court in the recent case of Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation [2020] 1 LNS 1131 decided two questions of law in relation to the use of commercial service suites for short-term rental, namely:
Question 1:
Whether a management corporation established under the relevant statutes to maintain and manage commercial service suites built on a piece of land held under category of “Building” and an express condition of “Commercial Building”, may enact and pass House Rules to prohibit the owners of the commercial service suites from commercial usage, in particular, for short-term rental, which is consistent with the express land use endorsed in the document of title?
Question 2:
Whether a management corporation established under the relevant statutes to maintain and manage commercial service suites, built on a piece of land held under category of “Building” and an express condition of “Commercial Building”, and who has enacted and passed House Rules to prohibit the owners of the commercial service suites from using their property for short-term rental, is in violation of Section 70(5) of the Strata Management Act 2013 (“SMA”) when enforcing the said prohibition in the House Rules against the said owners?
(“the Questions”).
The Background Facts
The respondent/plaintiff was the management corporation (“MC”) of “Verve Suites” located in Mont Kiara which was built on a piece of land where the category of land use is “Building” with the express condition that the land is to be used for commercial building with the purpose of service apartments and commercial only.
The appeal before the Federal Court involved four appellants/defendants, three of whom were parcel owners who leased out their units directly or through the 2nd defendant which operated a business of leasing units in Verve Suites on short-term and long-term rental. The remaining defendants were not parties to the Federal Court appeal as they had either settled their disputes or chose not to appeal,
On 18 November 2015, the Commissioner of Building Kuala Lumpur issued Circular 2015/2016, instructing all joint management bodies or management corporations to curb the prevailing issue of the use of buildings in and around Kuala Lumpur for short-term rental.
Following the issue of the aforesaid circular, the MC held an extraordinary general meeting and passed, inter alia, a house rule prohibiting the use of the units for business or short-term rentals (“Rule”).
The MC duly notified residents of the implementation of the Rule and the defendants, in defiance of the Rule, continued to engage in short-term rental activities and were fined by the MC. Some of the defendants initiated proceedings against the MC before the Strata Management Tribunal to challenge its implementation of the Rule but the action failed. The MC in turn, commenced proceedings in the High Court to injunct the defendants from breaching the Rule and to enforce the same.
The High Court Proceedings
The preliminary issue before the High Court was whether the enforcement of the Rule violated Section 70(5) of the SMA. The defendants’ argument was that Section 70(5) of the SMA prohibits any additional by-law from restricting dealings with any parcel, and that the renting of their premises on short-term was a “dealing” as it constitutes a “tenancy exempt from registration”. Thus, the Rule violates Section 70(5) because it impinged on the defendants’ right to deal with their land.
In response, the MC argued that the short-term rentals do not amount to either a lease or tenancy exempt from registration, and were instead mere licences. As such, the short-term rentals are not to be regarded as dealings and thus, do not come within the ambit of the prohibition under Section 70(5).
The High Court agreed with the MC’s arguments and found that:
  1. the relationship between the houseguests and the defendants is like that of hotel guests, that is, one of licensee and licensor;
  1. the SMA is a social legislation wherein the MC is given the power to make by-laws for safety and security measures; and
  1. the interest of the community in the strata body prevailed over the individual commercial interests of the defendants. Further, all parcel owners had signed a deed of mutual covenants comprising certain positive and negative commitments which tallied with the Rule.
The Court of Appeal Proceedings
The Court of Appeal upheld the decision of the High Court and stated that a tenancy exempt from registration under the National Land Code 1965 (“NLC”) is not intended to cover short-term stays as it would be absurd to construe every booking for a short-term stay as a tenancy exempt from registration which must be endorsed on the document of title for the tenancy to be recognised.
The Federal Court Proceedings
The appellants/defendants obtained leave to appeal to the Federal Court on the Questions. The findings of the Federal Court on each Question is discussed below.
Question 1
This Question pertains to whether the Rule may override and supersede the express land use on the title imposed by the State Authority under Section 120 of the NLC.
From the outset, the Court held that the SMA is without doubt, a social legislation. Accordingly, where two different interpretations of its provisions are possible, it is the one which favours the interest of the community over the interest of the individual that is to be preferred. This is in line with the landmark Federal Court decision in Ang Ming Lee & Ors v Menteri Kesejahteraan Bandar, Perumahaan dan Kerajaan Tempatan & Anor [2020] 1 MLJ 281.
Section 120 of the NLC provides for the general power of the State Authority to determine and impose the conditions and restrictions of use of any particular land or any part thereof, whereas the SMA is a more specific statute governing strata living and other matters related thereto. The apex court acknowledged that on the face of it, there appeared to be a conflict between the Rule and the express condition of the land use and by extension, a conflict between Section 70 of the SMA and Section 120 of the NLC.
In order to resolve the apparent conflict between Section 120 of the NLC and Section 70 of the SMA, the Court adopted a harmonious construction of the two provisions, and found that the fact that the State Authority had issued conditions and restrictions of use in the title of the land did not preclude the MC from promulgating further rules or by-laws for purposes set out in Section 70(2) of the SMA.
To support its findings, the Federal Court referred to Weng Lee Granite Quarry Sdn Bhd v Majlis Perbandaran Seberang Perai [2020] 1 MLJ 211 which clarified that even if a particular statute confers a certain right or interest in land, such right is not unfettered and as such, is capable of regulation for specific purposes. The Court stated that by extrapolating the logic in that case, the rights and interests imposed by Section 120 of the NLC were not absolute, and by-laws passed pursuant to Section 70 of the SMA were justifiable as they were for the good of the strata community. Even if the State Authority permits the use of the land for commercial purposes, such use was still subject to other laws in force, in particular to section 70 of the SMA. Hence, the passing of the Rule was not unlawful. The Federal Court further held that the restrictions imposed by the Rule were additional conditions for purposes of regulation under Section 70 of the SMA and not for the purpose of revoking or altering any pre-existing express condition in the title of the land.
The Court then considered a letter produced by the defendants from Dewan Bandaraya Kuala Lumpur (“DBKL”) dated 16 March 2018 which stated that so long as the condition of use of the land was not purely for residential purposes, there was no impediment to the defendants using their parcels for the purpose of short-term rentals. The Court took the view that the DBKL’s letter merely represented DBKL’s opinion or advice which was not binding and did not have any force of law, as opposed to the Rule which was passed in accordance with Section 70 of the SMA which has the force of law. As such, the Rule which was enacted in accordance with the procedure established by law would prevail over DBKL’s advice or mere opinion.
For the reasons stated above, the Federal Court answered Question 1 in the affirmative.
Question 2
In essence, Question 2 deals with the issue as to whether a short-term rental was merely a licence and hence, not a dealing within the ambit of Section 70(5)(a) of the SMA, or as the defendants claimed, tantamount to a tenancy exempt from registration and hence, constituted a dealing which cannot be prohibited by the Rule.
The Court referred to various cases that considered the distinction between a tenancy and a licence. One of these cases was Street v Mountford [1985] AC 809 where it was held that the fact that the occupant enjoyed exclusive possession of the premises was sufficient to prove the existence of a tenancy unless the landlord can prove otherwise.
It also referred to Woo Yew Chee v Yong Yong Hoo [1979] 1 MLJ 131, where Raja Azlan Shah Ag. CJ (Malaya) found in favour of a tenancy on the basis that the nature and quality of the occupancy manifested an intention to create a tenancy. This was irrespective of whether the occupier had or did not have exclusive possession of the premises.
It is thus evident from the above cases that there is no singular test to determine whether an occupancy is a tenancy or a licence. Instead, the Court will have to consider the whole circumstances of each case to determine the question as to whether the agreement to occupy is in law and in fact a tenancy or a licence.
As the defendants had contended that exclusive possession creates a tenancy, the Federal Court had to consider whether the defendants had successfully established that the third-party short-term renters were tenants as opposed to mere licensees, on the basis that the renters were in exclusive possession of the premises.
The Court highlighted certain provisions in the Airbnb Terms of Service and drew the following conclusions:
  1. a clause which stated that the host had the right to re-enter and remove the occupants if the latter failed to leave the premises on time was inconsistent with rights under a tenancy where a landlord cannot remove a tenant even if he holds over except by obtaining an order of possession; and
  1. a clause which regulated the number and type of guests the short-term renters can allow into the premises indicated that the renters did not have the right to manage their own use of the premises to the exclusion of the defendants and clearly negated any inference that the defendants had granted their third-party guests exclusive possession of their premises.
The Federal Court also observed that at all material times relevant to the appeal, the defendants had let out their premises to third-party vacationers or lodgers for commercial purposes. According to the Court, the purpose of the letting, as can be gauged from the terms of the Airbnb Terms of Service and as dictated by common sense, suggested that the defendants intended their premises to be used like a hotel or a lodging facility. The terms such as ‘Host’ used to describe the defendants and ‘Guests’ to describe the short-term renters mean exactly what they say.
Therefore, the Court found that booking platforms on which short-term rentals were advertised were only intended to be vehicles for the singular activity of short-term rentals for profit. There was no proof by the defendants of exclusive possession on the part of short-term renters nor did the evidence suggest that the nature and quality of the occupancy of the said renters was ever intended to be a tenancy.
The Court reiterated the High Court’s finding that there can never be a landlord and tenant relationship in a short term rental meant for a brief/short stay between parties contracting online. The terms and conditions of such services offered by the various platforms via the internet as indicated was sufficient to determine the temporal nature of the arrangement, without the need to go for full trial, as contended by the defendants.
Based on the above reasons, the Court held that the said arrangements were nothing more than mere licences and did not amount in law to “dealings” within the ambit of Section 70(5) of the SMA. Accordingly, the Rule was not ultra vires Section 70(5), and the said short-term rentals amount to licences and not tenancies. Thus, Question 2 was answered in the negative to the extent that the short term rentals in the instant case amounted to licences and not tenancies.
In view of its answers to the Questions, the Federal Court dismissed the appeal.
This Federal Court decision cements the power of management bodies to curb the use of parcels for short-term rentals by way of passing additional by-laws, even though the category of land use of the development is commercial.
Case summary prepared by Jesy Ooi (Partner), Oon Hooi Lin (Partner) and Seen Qin Ying (Associate) of the Real Estate Practice Group of Skrine