Tenancy Agreement for Commercial Properties in Malaysia

Tenancy Agreement for Commercial Properties in Malaysia

Commercial property is often used for business activities and there are landlords purchase it for investment purposes, simply because the return of a commercial property, in most of the circumstances, is higher than a residential property.

A new business venture, due to its limited start-up capital, is unlikely to afford to purchase a commercial property for own business use or even obtain a bank loan as the down payment on a commercial property could be unbearable for them. Therefore, renting a commercial property seems like one of the ways to deal with.

In general sense, a tenant of a commercial property will have duties and obligations as the same as a tenant of residential property while there are also several distinctions between them.

In this article, we will outline a few essential terms that every potential tenant should be aware of before entering into a commercial tenancy agreement.

1. Details of the property, landlord and tenants

• These are the fundamental elements must be included in every tenancy agreement;
• The property details must cover what kind of business premise is being leased, whether it is a shop lot, shop unit or office lot as well as the type of the business which will be carried out at the property;
• must take extra care to make sure the area of the demised premise is properly delineated and shaded in the floor plan, and the floor plan must be included as one of the relevant schedules in the tenancy agreement to avoid unwanted disputes in the future;
• If the landlord is a company, its full name, company number and registered address should be clearly provided in the agreement, or, if the landlord is an individual, his or her full name and NRIC number/ passport number should be included;
• If the tenant is a company, its full name, company number and registered address should be clearly provided in the agreement, or, if the tenant is an individual, operating business as a sole trader then his or her full name and NRIC number/ passport number should be included;

2. Refundable Deposit and Utilities Deposit.

• The security deposit is a sum of money usually equivalent to a number of months of rent, depending on tenancy period stipulated in the tenancy agreement and this amount of money will be paid by the tenant to the landlord upon execution of the tenancy agreement to protect the landlord against any breach of agreement on tenant’s part. If the tenant complies with his or her contractual obligations throughout the tenancy and of utmost importance, not moving out before the tenancy ends, the full amount will be refunded at the end of tenancy.
• If, at the end of tenancy, during the move-out inspection, the landlord by any chance finds damage to the property, the tenant will then unable to get the entire security deposit back as it will be used to repair any damage caused to the property.
• Another circumstance that the security deposit is non-refundable is where the tenant moves out of the property before the tenancy ends and refuses to pay the rental as promised, or the tenant is unable to pay due to cash flow problems or financial hardship, the security deposit will then be used up to for payment defaults.
• The utility deposit will be used by the landlord to pay the accrued utility bills that have not been paid at the end of the tenancy.
• If, during the tenancy period, the tenant fails to settle the utility bills as promised in the tenancy agreement, the utility deposit will be used up to settle the unpaid bills, thus the deposit will not be refundable at the end of tenancy.

3. Monthly Rental

• The monthly rental payable by the tenant for the demised premises should be stipulated as clear as possible, for example pinpoint the rental per square feet per month and chargeable rentable area, in order to protect the rights of both parties.
• The date on which rent is to be paid and payment method should be stated in the tenancy agreement as well to avoid any possible dispute.
• If possible, the landlord’s bank account should be specified in the tenancy agreement for reference.

4. Failure to pay monthly rental.

• Most of the commercial tenancy agreements do give the tenant a “grace period” for a reasonable number of days after the payment’s due date. Once the grace period has expired, the landlord will be entitled to charge late payment interest on the outstanding amount.
• This should be written as a clause and included in the tenancy agreement in order to ensure its enforceability in law.
• Prior to bringing a legal action against the tenant relying on the ground of persistent non-payment of rental, the landlords are always required to issue a letter of demand which is a formal warning letter to remind his or her obligations to pay on time, if not the landlord may commence legal proceedings to recover the rent arrears.
• The landlord should keep a copy of any correspondence and adduce it in court as an evidence, if there is a hearing, to show that the landlord has taken reasonable steps to recover the rent arrears.

5. Covenants by the landlord

• These are basically the obligations of the landlord under the commercial tenancy agreement.
• For example, at all times throughout the tenancy period, keeping the demised premise insured against loss or damage by fire and ensuring the tenant shall peaceably hold and enjoy the demised premise without any interruption of the landlord or any person claiming on behalf of the landlord as it may result in loss of profit of the business.
• If there is any other covenant/warrant made by the landlord, then all the covenants/warrants should be clearly stated in the tenancy agreement.

6. Covenants by tenants

• There are affirmative covenants and negative covenants that outline the obligations to be complied with by the tenant.
• Paying rent and all charges for utilities on time without delay and keeping the interior of the demised premise in good and reasonable conditions are usually into the former one whilst the latter one consists of prohibitions of installation of extra electrical socket plugs power point and of structural alternations to the demised premise in order to ensure the property is safe in every aspect.
• Landlord is not obliged to apply business premise license which is also known as trade license for the tenant to run the business that he or she is planning to operate therefore the tenant is required to apply for requisite business licenses as required by the Companies Act 1965 from relevant authorities or ministries to ensure the smooth operation of the new business venture.

7. Force Majeure Clause

• This is an essential clause in tenancy contract that free both parties from liabilities or obligations when an unforeseeable event which is beyond the control of both parties occurs.
• Every tenant should be exceedingly mindful of whether the tenancy agreement consists of such force majeure clause especially during this pandemic as one could only rely on it if it has been explicitly stated in the tenancy agreement. If a business is not allowed to operate due to national lockdown but still be bound by the agreement to pay for rent every single month, this will definitely escalate debt of the business.
• The circumstances must be explicitly provided for under the clause as to which event would be regarded as force majeure event allowing the tenant or landlord to terminate the tenancy agreement, it would be great if the terms such as “pandemic”, “government order”, “lockdown”, “movement restrictions” are stipulated in the clause.

8. Term of the tenancy – whether it comes with an option to renew?

• A renewal option is not an uncommon contractual clause that appears in commercial tenancy agreement as a business after operating for a few years will usually choose not to move to a new place since a customer base has already been built and no reasonable businessman will give a well-established customer base up and decide to choose a brand-new start.
• The term of option to renew is usually included in which it is beneficial for the tenant to extend the agreement for a longer term upon the expiry of first term.
• If the tenant really wishes to extend the tenancy period after the end of the first term, he or she should be mindful of the wordings of the option to renew term in the tenancy agreement. If the word “may” is used, this simply means the landlord has the right to decide whether to renew the tenancy with a new agreement or refuse to do so but it is a different story if the word “shall” is used, the landlord will then be bound to renew the tenancy for the tenancy.

9. Fit out period

• referring to the period starting from access date up to the day immediately prior to the commercial tenancy agreement commencement date which means when the fit-out period ends, at the same time, the rent begins.
• This is commonly given in commercial property for renovation as the tenant is required to do renovation works to make the commercial property fit for his or her business, therefore the landlord will give such period before commencement of the tenancy and no rent is payable for this period because it sounds harsh to collect rent from someone when he or she is not making income during preparation phase.
• The fit-out period will be depending on the area of the commercial property, as a tenant, please don’t feel shy to negotiate for a longer time period with the landlord and such agreement on the extended fit out period should be inserted into the agreement.

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