Tenancy Agreement: A Guide to Getting It Right

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Introduction

Most of us would have probably experienced the days of driving around the streets or scrolling through social media, newspapers and mobile apps to find a place to rent. Whether you’re a student who didn’t get a hostel, relocating to a different state for a new career, or simply travelling to a new location for a new phase. One might wonder whether it is necessary to sign a tenancy agreement (rental contract agreement) or if a verbal agreement is perfectly fine.

Creating a clear-cut tenancy agreement with a specified tenancy period is one of the trusted methods to prevent (at least minimise) misunderstandings, issues, and complaints between a tenant and a landlord. Not to mention, legally recognised the issues and boundaries as well (conditions applied). 

Abandoning the need for a tenancy agreement for reasons such as inconvenience or cost, or substituting it on the basis of trust is not a good idea if things go south. 

The following guide shall enlighten the process, benefits and costs associated with a tenancy agreement.

Continue reading to know whether a tenancy agreement is an Unbreakable Vow or not.

Tenancy agreement: What is it?

First and foremost, a tenancy agreement works as a formal document (legal contract) between a landlord and a tenant specifying the duties, obligations, monthly rental (or annual rental) and expectations of both parties throughout the tenancy period. However, it should be made clear that a tenancy period should not be longer than three years, as anything beyond that will be considered a lease and not subject to the tenancy restrictions. Most of the tenancy agreements will be renewed on a yearly basis. In some cases, the monthly rent (or annual rent), may or may not increase or decrease, influencing the clauses in the rental agreement. 

The standard agreements ensure the property as well as any objects or other amenities such as furniture in the house are thoroughly described. 

The inclusion of as many terms and conditions as desired by either the landlord or the tenant is greatly recommended to minimise the likelihood of tenancy disputes since Malaysian law is rather flexible in tenancy agreements, as long as they are reasonable and beneficial for each party. It is obviously better to have consent in writing and outline several aspects involving a property renting such as who should bear the cost of repairs, term of the tenancy, effects of breach of contract, rental payment and booking deposit amongst other legal frameworks in a standard tenancy agreement. 

Sample Tenancy Agreement.

When is a tenancy agreement needed?

A tenancy process usually begins once a prospective tenant views the property and accepts the fundamental tenancy terms—most importantly, the rental fee. It is then followed by a ‘letter of offer’ accompanied by a calculated earnest deposit using a simple formula which will be shown later. 

The Tenancy Agreement will be prepared and signed (with witnesses) by both the landlord and the tenant within 7-14 days after the Earnest Deposit has been paid.  The mode of payment is negotiated between the involved parties. 

The tenancy agreement, which was signed by both parties, must bear the Malaysia Inland Revenue Authority’s, also known as Lembaga Hasil Dalam Negeri (LHDN) in Malay, stamp to be considered an official, legally binding instrument  (a binding contract). Your agreement will not be valid without the stamp. 

How much does it cost to create a tenancy agreement?

There are several types of fees and deposits for rented residential properties or other types of properties involved in the tenancy agreement. 

Administration Fees

Administration Fees are a one-time cost based on the monthly rental sum called an administration fee paid by the tenant to the landlord. 

The calculation is pretty simple and straightforward:

Administration Fees	Jumlah Sewa
RM100	RM 1,000 and below
RM150	RM1,001 to RM2,000
RM200	RM2,001 to RM3,000
RM250	RM3,001 to RM,4000
RM300	RM4,001 and above

Yuran guaman

The duration of the tenancy determines the legal fees, with the benchmark being 3 years (less or more than 3 years).

Deposit paling lumayan

Earnest deposit works as a reservation deposit to guarantee that the landlord won’t rent the property to anyone else in the ensuing seven days and the amount is normally equal to a month’s worth of rent. In addition, a signed “letter of offer” from the tenant is included with the earnest deposit which may be applied to the first month’s rent. 

Security deposit

Security deposit is equal to two months’ worth of rent and serves as ‘protection money’ for any harm, violation or damages done to the landlord’s property by the tenant. For example, repairs or painting works. 

Besides, the security deposit is provided to guarantee that the tenant does not terminate the contract prematurely, as the money will be forfeited by the landlord. Given the circumstances of no difficulties or early termination, the landlord must reimburse the tenant’s security deposit upon the expiration of the tenancy agreement.

Utility deposit

If a tenant has left the property with any unpaid utility bills such as electricity and water upon the expiration of the tenancy agreement, the landlord could utilise the utility deposit (or utility deposits) (normally 50% of the overall rent) to pay those outstanding bills. 

Key components in a tenancy agreement?

Property Details

You may start by stating the location/address of the property and type of property (e.g. bungalow, semi-D, apartment, condominiums). In the case of non-landed properties (e.g. apartment/condominium), the unit number of the property must be clearly mentioned. The landlord is also required to specify whether the full property is rented out  to you or only a piece of it. For instance, you may just want to rent a single room in a house that has three bedrooms. The other two bedrooms would be inaccessible to the tenant. 

Additionally, the property’s fixtures, furnishings, appliances, notice period, payment of rent, termination clause, renewal clauses and special conditions (if required)  should be described as detailed as possible in the tenancy agreement.

Landlord’s obligations

The landlord should outline their key responsibilities. Landlords are responsible to pay the annual property tax as well as property insurance premiums on time and ensure the existing household goods are returned in perfect working order. It’s necessary for the landlord to understand and pay the different types of taxes imposed on the landlord. For instance, a landlord’s rental income is subject to rental income tax, but don’t fret because that income is subject to a 50% tax exemption. 

Deposits & Rental Amount

The exact payable rent amount, payment method, due date and the amount for each of the deposits must be clearly explained in the tenancy agreement. 

Rules, Prohibitions and Restrictions

Though verbal communication is often thought sufficient, precisely defining the dos and donts of the tenant during the tenancy period is a non-negotiable requirement. The property rented to a tenant is strictly for domestic use, and thus can neither be used for proxy-renting nor commercial business operations. Activities that may result in legal repercussions such as illegal gambling, prostitution, human trafficking etc must be strictly forbidden. The landlord may terminate the agreement if the tenant violates the term. 

Tenancy Duration & Options of Renewal

The length of a tenancy agreement is typically between one (1) and three (3) years. The beginning and end dates of the tenancy period (months of occupancy or years of occupancy) must be explicitly specified in the tenancy agreement to prevent any misunderstandings. The tenant can be allowed to renew the tenancy agreement with the approval of the landlord. Clause for renewal and notice of termination clause are advised to be included too. 

What are the responsibilities of a tenant?

The primary obligation of a tenant is of course to make sure the rent and utilities are paid on time. Household objects ranging from furniture to the maintenance of the entire house must be well tended by the tenant while any repairs or concerns must be reported to the landlord.

Tenancy agreements must also provide clauses that prohibit tenants from engaging in actions that are damaging to the property’s insurance coverage. Where else, the number of occupants in the house or renovation limitation can be also included depending on the situation. Tenants are also prohibited to use the property for immoral purposes. 

How do I draft a tenancy agreement?

Hiring a lawyer is the wisest thing to do by a landlord when a Tenancy Agreement is required. The tenant, on the other hand, can seek the advice of an attorney of their own rather than personally reviewing the entire contract which is usually bundled up with legal and technical jargon. Even the real estate agent could be helpful if you are securing a place through them. Based on the advice from respective attorneys or experienced individuals, both parties may sign the agreement once all requested adjustments have been reviewed, revised, and mutually agreed upon. The legal experts can advise on the matters of rental contract agreement, matters of deposits, landlord responsibilities, legal costs, the law on landlord and tenants, tenantable repair, and other matters in simpler terms. 

Duty stamp cost of a tenancy agreement

As mentioned earlier, a tenancy agreement is considered valid and legally binding only if it has been stamped by the Inland Revenue Board of Malaysia (IRB) or  Lembaga Hasil Dalam Negeri Malaysia (LHDN). Both of these institutions are the same.  

Referred to as stamp duty or transactional tax and sometimes fee, it is used to acknowledge (stamp) transactional papers in the likes of ‘tenancy agreement’. 

You may submit your tenancy agreement to the nearest LHDN office together with PDS1 dan PDS 49(A) forms which you can download from their official website. 

The calculation of your stamp duty according to Stamp Act (1949):

Duration of Tenancy Agreement	Stamp Duty (for every RM250)	Annual Rental Rate
1-year	RM1	Above RM2,400
1-3 years	RM2	Above RM2,400
3 years and above	RM4	Above RM2,400

If the yearly rental is less than RM2,400, there is no stamp duty for any of the three various duration of a tenancy agreement. The act also specifies the duty stamp cost as a commitment of the tenant under Section 33. 

To make it easier, let’s do a short calculation to understand the Stamp Duty. Let’s say you are under a four-year tenancy contract with an annual rent of RM36,000 (RM3,000 per month). Using the formula below, your stamp duty will be:
RM36,000 (Annual Rent) – RM2,400 = RM33,600.
RM33,600/250XRM3= RM403.20 (Stamp Duty). 

What is the documentation required for a tenancy agreement?

The landlord should basically have the title and details of the property that is to be rented out along with an assessment receipt of the property. A copy of the tenant’s and landlord’s Identity Card is to be attached together with the tenancy agreement. 

How to (and not to) terminate a tenancy agreement?

The Desired party can initiate the process of termination by serving an official notice of intention to the opposite party. It can be the landlord to the tenant or vice-versa.   

If either party agrees to termination without notice in advance, the rental deposit will act as the redressal mechanism.  In other words, based on the conditions agreed upon and signed by both parties in the tenancy agreement (rental contract agreement), the tenant is required to forgo his/her rental deposit if an early termination without notice tends to happen. 

If it’s the other way around, the landlord is required to return the rental deposit to the tenant. This situation is possibly avoidable if both parties could communicate before vacating the rental unit, like providing notice in advance (possibly months in advance) to ensure the likelihood of tenancy disputes and subsequent legal costs can be avoided.

Do I need to renew or create a new tenancy agreement if the rental period is to be extended?

One may just choose the renewal options, subject to similar terms and conditions, with the date adjusted accordingly. It may not be necessary to create a new tenancy agreement unless the parties wish to include additional terms and conditions.  In normal situations, the original tenancy agreement (rental contract agreement) is sufficient. Due to the fact that most of the terms and conditions were already negotiated and evaluated during the initial negotiation, hence most of the terms and conditions should already have been agreed upon. 

Kesimpulannya

Creating a strong tenancy agreement for the landlord and tenant might be worth the minor inconvenience due to the mutual benefits. When creating a tenancy agreement, comprehensive details serve two purposes: preventing unnecessary disputes and ensuring that the correct individuals are hired or consulted. Instead of choosing the easy way, the responsibility of formulating a tenancy agreement lies in the hands of both parties.