by 
31st July 2024
6 Essential Things to Know About Tenancy Agreements in Malaysia
Discover the key elements of tenancy agreements in Malaysia. Learn about the importance of a written contract, what to include in your rental agreement, and how to protect your rights as a landlord or tenant.
There are instances where verbal agreements are so much easier than creating a contract; and there are homeowners and property investors who rent out their premises based only on verbal agreements. They seal the deal with a handshake, foregoing a written contract due to the complexity and added cost of consulting a legal expert.
While this practice is convenient and easy, it is strongly inadvisable because in case of any dispute, resolving legal disputes will get complicated. This is particularly evident if the landlord and tenant have a conflicting recollection of the terms of rental. Verbal contracts also often don’t cover some details like how much must the tenant pay if they damage or destroy the furniture or parts of the house.
What is a Tenancy Agreement?
A Tenancy Agreement is a legal covenant between a landlord and tenant that outlines the duties and obligations of each party during the tenancy period. It also provides a detailed description of the property being rented out, along with its furniture, fixtures, and other amenities. To make the document as comprehensive as possible, landlords are advised to engage an attorney to draft a Tenancy Agreement, while potential tenants can consult their own lawyer to scrutinize the contract and ask for revisions before mutually agreeing to a final version. A tenancy agreement is a legal document, which means only a lawyer can prepare and draft it.
What should both parties include in their Rental Agreement?
There are many things that need to be specified in a tenancy contract. They should be carefully worded to make sure that the meaning is clear to avoid any misinterpretation. But fundamentally, a Tenancy Agreement should include the following:-
- Property Details:
- Indicate what kind of house is being leased and where it is located. In non-landed properties like condominiums, specify the unit number. Also, make it clear if you’re renting out the entire flat or just a portion of it like a room. It’s also advisable to indicate the state of the property – is it lacking fixtures, furniture, and appliances? Or will it come with such like refrigerator, air-conditioning unit and cooking ware? If the latter is true, the landlord needs to include an inventory in the agreement, and the tenant needs to confirm and reconfirm the existence and condition of these items before signing.
- Rental Amount and Deposits:
- State the exact monthly rent the tenant needs to pay, along with the payment’s due date and how it should be paid (e.g., cash, bank deposit, or wire transfer). Also indicate the amount for the Earnest Deposit, Security Deposit, and Utility Deposit.
- Tenancy Period and Renewal Option:
- The tenancy period is a fixed period of time which the tenant is renting the place. When drafting up the agreement, you need to be specific with the term and duration too. The tenancy period usually covers a year-by-year basis. The most common are one-year, two-year, and three-year periods. This is because any rental for a period of more than three years is deemed a lease, not a tenancy. If you’re renting on a monthly basis, make sure to write that down instead. Specify the date when the deal is signed as well as the starting date of the rental period and when it will end. You may also add clauses giving the tenant the right to renew or extend the tenancy for a certain period, subject to certain conditions.
- Landlord’s Responsibilities:
- These include payment of annual property tax to the relevant authorities, insuring the property and paying insurance premiums, as well as making sure that the furniture and appliances provided are in good working condition. If you’re the landlord, you will also want to be aware of another kind of tax aside from the annual property tax. This is rental income tax, where you as the landlord are taxed for money you make from renting out your properties. Just as how you need to pay Real Property Gains Tax (RPGT) when you profit from selling a property, you need to pay rental income tax when you profit from renting out a property. Good news though! You can claim a 50% income tax exemption on your rental income. This is subject to the following criteria:
- Applicable for residential properties only
- You must be a Malaysian resident individual
- Rental income earned does not exceed RM2,000 per month per property
- The property is rented under a legal tenancy agreement between owner and tenant
- Tax exemption is given for a maximum period of 3 consecutive years of assessment
- Effective for tenancies made in the year of assessment 2018 to 2020
- These include payment of annual property tax to the relevant authorities, insuring the property and paying insurance premiums, as well as making sure that the furniture and appliances provided are in good working condition. If you’re the landlord, you will also want to be aware of another kind of tax aside from the annual property tax. This is rental income tax, where you as the landlord are taxed for money you make from renting out your properties. Just as how you need to pay Real Property Gains Tax (RPGT) when you profit from selling a property, you need to pay rental income tax when you profit from renting out a property. Good news though! You can claim a 50% income tax exemption on your rental income. This is subject to the following criteria:
- Tenant’s Obligations:
- These include paying the rent and utilities on time, maintaining the furniture, appliances, and interiors, informing the landlord of problems and structural defects, as well as abiding by condominium rules and the landlord’s rules.
- House Rules, Prohibitions, and Limitations:
- Outline what the tenant is not allowed to do. For instance, the tenant is not permitted to sublet the premises or any part of it to a third party. The unit can only be used for residential purposes, so the occupant cannot run a commercial business there. Explicitly ban the conduct of vices and illegal activities like gambling and drugs, as well as not to do anything that will jeopardize the property’s insurance coverage. Prohibit any renovation in the property. The landlord may also add limitations like the home can only be used by one family or a certain number of individuals.
- How to Resolve Disputes:
- This section contains the dispute resolution process, in the event that the tenancy agreement does not state some issues, or there are misinterpretations or misunderstandings between the landlord and tenant on certain clauses and terms in the contract.
What are the deposits tenants need to pay and how much do they cost?
Besides the monthly rent, landlords in Malaysia usually require tenants to pay the Earnest Deposit, Security Deposit, and Utility Deposit.
- Earnest Deposit:
- This is the money paid to reserve the rental unit so that the property owner won’t lease it to other would-be tenants for the next seven days. This is typically equivalent to one month’s rent and can be kept in escrow by a real estate agent. This is usually given to the landlord along with the tenant’s “letter of offer”, a one-page document that expresses the latter’s intention to rent a specified property. When the tenancy officially starts, the Earnest Deposit is usually utilized as rental payment for the first month of occupancy. NOTE: It may even be given back to the tenant, or considered as the Security Deposit.
- Security Deposit:
- Consider this as a bond that will be waived in favor of the landlord in the event that the occupant breaches the tenancy agreement, like vacating the premises earlier than agreed. But if the tenant fulfills the contract and there are no issues throughout the tenancy, the entire amount is refunded when the tenancy ends. This is typically equivalent to two months’ worth of rent, and if the tenant runs away from the deal, this can be used as payment for cleaning and repairing damages, as well as replacing fittings, appliances, and keys.
- Utility Deposit:
- Its purpose is to pay any outstanding utility bills that have not been paid at the end of the tenancy period, like water, power, gas, and sewerage. In Malaysia, this is typically 50% of the rental rate for one month (although there are some cases where the landlord may choose to collect one month’s rental if the half-month amount is too low). IMPORTANT: Please note that the Security Deposit and Utility Deposit are given to the landlord upon inking of the Tenancy Agreement.
How much does the Stamp Duty for a Tenancy Agreement cost?
When the landlord and tenant are both satisfied with the tenancy contract, both of them need to sign it as well as all pages of the agreement. Each party also needs a witness to ink the deal as well as all of its pages. Although both parties have signed the deal, it is still not yet a legally binding document or admissible in court unless it is stamped by the Malaysia Inland Revenue Authority or Lembaga Hasil Dalam Negeri Malaysia (LHDN).
But before it is sealed by LHDN, you need to pay the Stamp Duty. Here, you may wonder: “who is liable for stamp duty?” The landlord, or the tenant? In Malaysia, the tenant pays for the stamp duty fees – not the landlord/seller. This is laid out in the third schedule of Stamp Act 1949. If you’re still unclear on stamp duty, check out our stamp duty guide here. How much will stamp duty for a Tenancy Agreement set you back? Here’s a quick breakdown:
Conclusion
These are some of the most critical parts of a tenancy contract, although there are many other terms that can be included in the agreement. Both parties should seek legal counsel to better understand their rights and obligations. A lawyer will be able to ensure that your rights are protected and that you’re fully aware of your responsibilities.
Understanding and having a well-drafted tenancy agreement is crucial for both landlords and tenants. It helps in maintaining a good relationship and avoiding potential disputes in the future. Always consult with a legal professional when drafting or reviewing a tenancy agreement to ensure that it complies with local laws and fully protects your interests.
For more information about industrial properties and to start your factory investment journey, contact us at MyIndustrialSpecialist.com. Follow us for more industrial property insights and updates.
