Tenancy Agreement Malaysia

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See also: To Rent or To Own?

With the soaring prices of properties, especially in major cities, it’s an undeniable fact that a large majority of locals in Malaysia could not afford to buy houses. This is due to the fact of the rising living costs and these people are in dire need to sustain the daily necessities of the family members — ranging from education, health and food.

So, where would these people live? Well, the clear option would be to rent a place. These rental units consist of both landed properties and apartments, so there are a variety of choices.

As for the landlords, properties are known to be appreciating assets, providing long term benefits. The benefits could definitely be extracted if they choose to rent out their properties. These landowners could generate income with this. This, alongside with their 9 to 5 jobs would provide a steady income for the landowner’s family.

Nevertheless, with the joy of renting out properties, come many expenses along with the property rental. This includes listing costs, property agent fees and maintenance of the property. There’s also a high possibility of getting into long-term disputes with the tenants. This might cause more harm than good and it might cost a landowner a huge amount of money loss from these disputes. Well, what’s the solution? 

The only thing that could prevent disputes between tenants and landowners would be a tenancy agreement. Now, this agreement should be clearly worded and cover all potential dilemmas that might arise. Confused? Well, fret not as here’s a guide to the tenancy agreement in Malaysia. 

What is a Tenancy Agreement?

To break down each phrase of this agreement; the word tenancy, refers to the possession of land or property as a tenant. A tenant means someone who rents or leases a property from a landlord. An agreement is a negotiated and typically legally binding arrangement between parties as to a course of action.

Therefore, a tenancy agreement is a legal covenant between a landlord and a tenant. It gives more attention to the duties and obligations of each party (tenant and landlord) during the tenancy period.

It would also cover the detailed description of the property being rented out along with its furniture, fixture and other amenities, to prevent further disputes. Landlords are always advised to hire a lawyer to draft the tenancy agreement. This is to ensure the document does not leave out any important details that might result in disagreements among both parties. Include all property details starting from the property address to additional clause in the proper tenancy agreement.

Landlords could also opt to draft their agreement and ask the would-be tenant to review and agree to it. However, this would be quite risky especially, if the landlord is not experienced in drafting the tenancy agreement. 

Contents of a Tenancy Agreement

Currently, there are no government regulations on the contents of the tenancy agreement. Unlike agreements, like the Sales Purchase Agreement, both the landlord and tenants can add many terms and conditions to the agreement based on various factors — property type, number of dependents for the tenant and the rental price. By adding these terms and conditions, the contract would be more advantageous to both parties.  A basic tenancy agreement would include:

1. The details of the property and the purpose
2. The tenancy duration
3. The rental amount
4. The deposit amount
5. What is provided by the landlord?
6. Obligations of the landlord
7. Obligations of the tenant
8. House rules, prohibitions and limitations
9. Ways to solve disputes
10. Special conditions

The list might seem relatively long. However, it is important that these things need to be specified in a tenancy agreement. The details have to be stated clearly to prevent any form of misunderstanding. 

Types of Deposits for Tenancy Agreement

There would be 3 types of deposits that landlords would ask the tenants to pay:

Earnest deposit

Functioning as a booking deposit, the earnest deposit would ensure that the landlord would not lease the property to anyone else within the next 7 days. This would be equivalent to a 1 month’s rent and would be kept in escrow by a real estate agent. Additionally, the earnest deposit would be accompanied by a “letter of offer” from the tenant — utilised as the rental payment for the first month of occupancy when the tenancy begins. 

Security Deposit

This deposit has a purpose to protect the landlord if the tenants violate the terms of the tenancy. This would equal  2 months worth of rent. Besides protecting the landlord, this deposit could be used to pay for repairs, key replacements and cleaning work. If the tenant leaves before the contract ends, it could be forfeited. However, if the tenant fulfils the contract and the tenancy agreement, without causing any damage, the entire amount is refunded when the tenancy ends. 

Utility Deposit

This deposit, on the other hand, would be used to pay any outstanding bills (gas, electricity and water), and it would amount to half a month’s rent. This would come into use if the utility bills were not paid at the end of the tenancy period. 

The Connection between Stamp Duty and the Tenancy Agreement

The tenancy agreement must be stamped by the Lembaga Hasil Dalam Negeri Malaysia (LHDN) or in other circumstances, the Inland Revenue Board of Malaysia (IRB) just to ensure it becomes a valid document. In addition to that, 2 application forms, the PDS 1 and PDS 49 (A) should be submitted to the nearest LHDN office. The confusion would definitely arise with the method to calculate the stamp duty. But, fret not as here’s the guideline on how to calculate the stamp duty:

(Yearly Rental Amount – RM 2400)/ 250 X Price for every RM 250 of rent = Duty Stamp Cost 

The Price for every RM 250 per rent in a 1 year tenancy agreement: 

RM 1 for every RM 250 of the annual rental above RMM 2,400.

The stamp duty is free if the annual rental is below RM 2,400. 

The Price for every RM 250 per rent in a 1 to 3 years tenancy agreement: 

RM 2 for every RM250 of the annual rent above RM2,400. 

The stamp duty is free if the annual rental is below RM2,400.

The Price for every RM 250 per rent in a more than 3 years tenancy agreement: 

RM 4 for every RM250 of the annual rental above RM2,400. 

The stamp duty is free if the annual rental is below RM2,400.

What’s a Stamp Duty?

A stamp duty is a fee on legal documents and would be used mostly, for property-related documents such as the loan agreement and the tenancy agreement. It is divided into 2 categories — fixed duties and ad valorem duties (costs based on value of a transaction that legal documents represent)

What’s an Administration Fee? 

Besides the stamp duty, a landowner has to take into account the administration fee, which is subsequently another fee that involves an average amount of cash. However, this is normal as in the case of legal documents and paperwork, this situation is very common. 

Here’s a roundup on the amount payable according to the rental per month:

Tenancy Agreement Malaysa - Administration Fee

In comparison to the stamp duty fee, the administration fee is more straightforward and involves less usage of mathematical abilities. This is a one-time charge based on the monthly rental amount.

What’s a Legal Fee?

Here’s the legal fee for a tenancy agreement in Malaysia. It is definitely standardized so landowners, should not worry about any sudden changes in the fees. 

Here’s the legal fee for an agreement of below 3 years:

Tenancy Agreement Malaysia - Legal Fee Below 3 Years

Here’s the legal fee for a tenancy agreement of above 3 years:

Tenancy Agreement Malaysia - Legal Fees Above 3 Years

What’s the Rental Process in Malaysia?

1. Prospective tenants would have visits to check the property and then, they would confirm the rent and deposits that would have to be paid.
2. The Landlord would then give a “Letter of Offer” to the Tenant if the prospective tenant is satisfied with the property and the rates. The tenant would then have to provide an Earnest Deposit. 
3. Both Landowner and Tenant would sign the Tenancy Contract within 7 days of paying the Earnest Deposit. Alongside that, both of them would need witnesses to affix their signature. The occupant would need to pay the Security Deposit and Utility Deposit. 
4. The signed Tenancy Agreement would be signed by the LHDN. 

Contents in Tenancy Agreement

The Details of the Property

A clear indication on the type of house being leased and the location of it is necessary. If the property consists of non-landed properties such as condominiums and apartments, a clear specification of the uni number is necessary too. In most circumstances, it is best to indicate whether the landowner is renting the entire flat or a portion of it to give room for more tenants. These would mostly occur in student accommodations.

The state of the property on whether it’s lacking fixtures, furnitures, lighting among many others is also necessary to prevent any form of unfairness towards the tenants. Any add-ons included such as an extra air conditioner,  refrigerator and television should be clearly described in the agreement to hold the tenant accountable for any damage or loss in the inventory.

The tenant needs to confirm and reconfirm the existence and condition of the items stipulated in the agreement. If this goes, wrong the tenants’ contract could be terminated. 

The Rental Amount and Deposits Made

The monthly rent should be clearly stated alongside the payment’s due date and the method of transaction. The method of transaction is also important as some landowners would prefer the tenant to pay after the monthly spot checks to ensure that the tenants include the costs of any damages into the rental. Rental deposit needs to match the duration of tenancy.

The amount of the Earnest Deposit, Security Deposit and Utility Deposit should also be taken into count.

Tenancy Period and Extend Period Option

Although the tenancy period is usually for a fixed period of time, a clear specification is also important to ensure the dealing goes smoothly between the landowner and the tenant. The term and as well as the duration needs to be specified as well. So, include a renewal clause in the legal contract.

The tenancy usually covers a year by year basis. Therefore, it won’t be calculated by the number of months. Any rental for a period of more than 3 years would be considered a lease and not a tenancy.

However, if a landowner chooses to rent on a monthly basis, consider putting down that information into the tenancy agreement. Besides that, the date that the deal is signed should be stipulated alongside the starting date of the rental period and it’s end. The rights of the tenant to renew or extend the tenancy for a certain period should be stated too. However, it should be subjected to certain conditions. 

The Landlord’s Responsibilities

Renting out the property is not the heaviest workload that would occur to a landlord. In fact, a landlord’s responsibilities would range from the payment of annual property tax to the relevant authorities, insuring the property and paying insurance premiums and making sure the furniture and other appliances are in good working condition.

Apart from that, knowing the works of the rental income tax is also important. The rental income tax function is the tax charged towards the landlord from the money he or she makes from renting out properties. 

Similarly to the Real Property Gains Tax (RPGT), when an owner profits from selling a property, a landowner would need to pay a rental income tax when the landowner profits from renting out a property. This might sound sad however, there’s also a positive side to this. The landowner can claim a 50% income tax exemption on the rental income. Albeit that, there are a few criterias:

1. Applicable for residential properties only
2. Must be a Malaysian resident individual
3. The rental income earned should not exceed RM 2,000 per month per property
4. The property is rented under a legal tenancy agreement between the landowner and the tenant
5. The tax exemption is only given for a maximum period of 3 years of assessment
6. This would only be effective for tenancies made in the year of assessment from 2018 to 2020. 

The Tenant’s Responsibility

Apart from the landowner’s obligations, the tenant has a heftier responsibility too. Rent and utility bills should be paid on time and furniture, appliances, and interiors should be maintained accordingly. The tenants should also be aware of problems and structural defects and follow all condominium rules and rules imposed by their landlord.

The House Rules, Prohibitions and Limitations

Having house rules is a very common scenario. In this case, the tenant is described to be very similar to a paying guest who’s taking an extended stay in the unit owned by the landowner. The prohibitions outline what the tenant can’t do. An example would be — the tenant would not be allowed to have pets in the house.

Besides that, the tenant should not be able to sublet the premises or any part of it to a third party and should not run a business there. Illegal activities should be banned too such as gambling, drugs, and prostitution rings. The tenant is also responsible in not jeopardizing the property’s insurance coverage. The tenant should also be prohibited from conducting any renovation in the property. Besides that, the landlord should also introduce more limitations deemed fit for the property such as the usage and the capacity of the property rented. 

Resolving Disputes

In the cases where there’s a dispute between the landlord and the tenant, or if the tenancy agreement does not state some issues, or if there’s any form of misinterpretations, there should be certain clauses in the tenancy agreement covering this entire aspect. 

Summary

Rental agreement is important when it comes to rental property as it protects breach of contract and prolonged dispute between two parties as a clearly-worded tenancy agreement could lower the chance of rental disputes.