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Covid-19

Impact of the coronavirus (covid-19) outbreak on tenancy

To contain the spread of the coronavirus (Covid-19), the Government of Malaysia has implemented movement control order nationwide (“MCO”) from 18 March to 14 April 2020 (“MCO Period”).

Following the implementation of the MCO by the Government of Malaysia, businesses which are not of essential services are restricted from being carried out during the MCO Period.

As such, we set out below some relevant issues that business operators may face in respect of their tenancies during the MCO Period.

1. Can a tenant seek for reduction of rental?

This depends on whether the tenancy agreement consists of a force majeure clause, allowing a tenant for a reduction in rental if the tenant cannot reasonably access or use the premises.

If the tenancy agreement provides that rental shall be reduced due to unforeseen events beyond the control of both parties, such as pandemic, outbreak, act or actions of Government, then the tenant is entitled for a reduction of rental under this force majeure clause.

2. What is a force majeure clause and consequences thereof?

A force majeure clause is a contractual provision which excuses either party from performing its obligations under the contract due to unforeseen events beyond the control of the parties to the contract.

The consequences of force majeure events depend on the terms of the tenancy agreement. Some common force majeure clauses are as follows:-

(i) suspends the performance of tenant’s obligations under the contract (this allows the tenant to suspend payment of rental and continue to pay rental after the cessation of the force majeure events); or

(ii)  waives the performance of tenant’s obligations under the contract (this allows rental to be waived during the period of occurrence of force majeure events); or

(iii)  terminates the contract (this allows termination of the tenancy agreement and tenant to return vacant possession of the premises to the landlord).

3. Does force majeure clause cover Covid-19 pandemic?

It depends on the drafting of the force majeure clause in the tenancy agreement.

For example, If Covid-19 pandemic is not listed as a force majeure event under the tenancy agreement, but the force majeure clause in the tenancy agreement covers events which are beyond the control of the parties, Covid-19 pandemic will qualify as a force majeure event.

4. Is a residential tenant able to rely on Covid-19 pandemic as a force majeure event to suspend performance in the tenancy agreement?

No, as residential premises are for the purpose of accommodation and not for business operation. Therefore, MCO has no impact on the tenancy of the residential premises.

5. Can a tenant seek suspension of performance in the tenancy agreement if the tenancy agreement does not consist of a force majeure clause?

In order for a tenant to rely on the force majeure clause to suspend performance under the tenancy agreement, the tenancy agreement must consist of a force majeure clause. If the tenancy agreement does not consist of a force majeure clause, the tenant is required to continue with the performance and observation of his/her obligations under the tenancy agreement, unless the landlord agrees to suspend the performance of the tenant.

6. Can a tenant claims that the MCO frustrates the tenancy agreement entered into between them and the landlord on the following grounds:

(i) tenant facing financial difficulty in paying the rental; or

(ii) suspension of business operation during the MCO Period?

A contract will only be subject to frustration if the performance of the party under the contract to do an act becomes impossible or unlawful.

Therefore, the tenant may not be able to claim that the implementation of the MCO results in the performance of the party under agreement being impossible to be carried out.

7. Conclusion - Can the landlord insist on the tenant to pay the agreed rental?

If there is no force majeure clause in the tenancy agreement or other contractual terms that provides otherwise, the landlord is entitled to disagree with the tenant’s request for a rental reduction or delay in their rental payment.

However, during the MCO Period, the landlord and tenant can come to a mutual agreement to reduce the rental or allow a grace period for the tenant to meet its obligations under the tenancy agreement to pay the rental to the landlord.