Malaysia: How Does The COVID-19 Act Affect Tenancy Agreements In Malaysia?

The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 or better known as the COVID-19 Act ("COVID Act") has been enacted to, as its name suggests, reduce the impact of the COVID-19 pandemic on individuals and businesses in Malaysia. The COVID Act was enacted on 22 September 2020 but applies retrospectively from 18 March 2020. On 30.6.2021, the application of the COVID Act was extended to 31 December 2021.

This article will examine whether parties can rely on the COVD Act, specifically Section 7 of the COVID Act, as a defence for the failure to perform their contractual obligations under their respective tenancy agreements.

Section 7 of the COVID Act

Section 7 of the COVID Act aims to protect individuals and businesses who are affected by the COVID-19 pandemic by prohibiting a party to certain contracts from exercising their rights where the other party fails to perform its contractual obligation due to the COVID-19 pandemic. Section 7 of the COVID Act provides that:

The protection offered by Section 7 of the COVID Act only applies to contracts that fall under one of the nine contract categories specified in the Schedule in Part 2 of the COVID Act. The categories include contracts related to construction work, performance bonds, professional services, events, tourism, religious pilgrimage, hire-purchase, credit sales, and last but not least, contracts on lease or tenancy of non-residential immovable property.

Residential vs Non-Residential Property

Since Section 7 of the COVID Act only applies to 'non-residential immovable property', it is essential to understand the difference between residential and non-residential property.

Under the National Land Code, immovable property or land in Peninsular Malaysia is categorised into three broad categories: building, agricultural, and industrial. Lands categorised as building lands are further subdivided into commercial, residential and institutional.

Residential property would include a house, a condominium unit, an apartment or a flat, a service apartment and a small office home office (SOHO), owned by an individual used only as a dwelling house. Except for the aforementioned properties, all other properties would fall under non-residential property, for example, shop lots, malls, small office flexible office (SoFo) units, small office versatile office (SoVo) and so on.

Hence, Section 7 of the COVID Act does not apply to contracts that involve residential property.

This would mean that parties to leases or tenancy agreements for residential properties cannot rely on Section 7 of the COVID Act to avoid performing their contractual obligations under the agreements such as failing to pay their monthly rent.

Application of Section 7 of the COVID Act

Besides fulfilling the prerequisite of 'non-residential immovable property', parties under leases or tenancy agreements who intend to rely on Section 7 of the COVID Act would have to satisfy two other conditions:(i) an inability to perform any contractual obligation; and (ii) such inability was due to the measures prescribed under the Prevention and Control of Infectious Diseases Act 1988 to control or prevent the spread of COVID-19.

Therefore, Section 7 of the COVID Act does not apply automatically to all leases and tenancy agreements of non-residential immovable property. The defaulting party bears the burden of proof to show that it was unable to perform the contractual obligations due to the preventive measures prescribed under the Prevention and Control of Infectious Diseases Act 1988, such as the various Movement Control Orders or Standard Operating Procedures (SOPs) issued by the Malaysian National Security Council.

When interpreting the words 'inability to perform' under Section 7 of the COVID Act, the High Court in the case of Ravichanthiran a/l Ganesan v Lee Kok Sun [2021] MLJU 1876 held that the word 'inability' refers to 'the state of being unable to do something' and should not be interpreted as a mere refusal or unwillingness to perform. The High Court further held that parties cannot use Section 7 of the COVID Act in an attempt to avoid liability or debt merely because such debt arose during the COVID-19 pandemic.

As the COVID Act is a relatively new statute, there are not many reported cases on the interpretation of Section 7 of the COVID Act. However, Section 7 of the Act can generally be interpreted in two possible ways, namely by applying a wide or narrow interpretation.

Defaulting tenants of tenancy agreements would take the wide interpretation of Section 7 of the COVID Act. For example, a tenant who operates a hair salon business that was unable to operate during the implementation of the Movement Control Orders would argue that it was unable to pay rent due to the loss of income arising from the forced closure of its shops. In such circumstances, the non-performance of the tenancy contract, that is the non-payment of rent, is indirectly caused by the prescribed measures under the Prevention and Control of Infectious Diseases Act 1988.

On the other hand, landlords would take a strict approach to Section 7 of the COVID Act to argue that the tenant's inability to pay rent is caused by the tenant's poor or imprudent management of its resources and not by the prescribed measures. When the Movement Control Orders were in force, many businesses mitigated its impact by pivoting and selling their products or services online. As such, a tenant's low financial reserves, poor financial management, failure to raise capital, failure to make reasonable efforts to mitigate losses and so on cannot be said to be an 'inability to perform contractual obligations'. Therefore, Section 7 of the COVID Act would not be applicable, in such circumstances.

On a strict interpretation of the provision, Section 7 of the COVID Act would only apply to tenancy agreements where the Government prescribed measures have prohibited an individual or business from performing their obligations under their contracts. For example, it is common for shopping malls to require their tenants to operate daily from 10 am to 10 pm. However, as a result of the Movement Control Order, tenants who were not providing "essential services" were forced to close and were unable to meet that specific contractual obligation, and arguably, have breached their tenancy agreement. Here, Section 7 of the COVID Act would be applied by preventing the landlords (the shopping malls in this example) from enforcing their strict contractual rights under the tenancy agreement by terminating the tenancy contracts for breach, or impose a penalty on the tenants as they would be able to but for the existence of the COVID Act.

Claims after 31 December 2021

If a narrow interpretation of Section 7 of the COVID Act is adopted, Section 7 of the COVID Act would not be applicable in most tenancy disputes where the performance of the contractual obligations is not directly affected by the prescribed measures. Hence, parties would still be able to enforce their rights under the tenancy agreements and pursue a claim in Court should it become necessary. Even if a wide interpretation of Section 7 of the COVID Act is taken, parties' rights under the tenancy agreements are not extinguished but merely delayed until the date of which the COVID Act is no longer in force, i.e. after 31 December 2021.

31 December 2021 has passed and the Government did not extend the COVID Act. This means that parties will no longer be able to rely on Section 7 of the COVID Act and are now able to fully enforce their contractual rights.

Mediation

Apart from initiating litigation proceedings in Court, landlords and the tenants can agree to resolve their disputes via mediation as provided under Section 9 of the COVID Act. Mediation is an alternative dispute resolution where parties are required to attend a session before a mediator to work out a solution that is agreeable to both parties. Citizens of Malaysia may apply to refer their disputes (value not exceeding RM500,000) to the dedicated COVID-19 mediation centre set up by the Malaysian Government to try to reach an amicable settlement.

Conclusion

The protection offered by Section 7 of the COVID Act is limited. It does not serve as a general prohibition to every claim by landlords and tenants. Where the inability of a party to perform its contractual obligations is caused by its own actions or inactions and not by the measures prescribed by the Government, parties would still be able to enforce their contractual rights under the tenancy agreements in the usual manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.