Although the amount of profit obtained from a property is less compared to ten years ago, it is still one of the best ways of generating a steady stream of income.
Personally, I would not equate providing rental as a type of passive income because of the amount of effort and cost involved.
With that said, tenancy is still an excellent way to make an income. To ensure that the whole process goes smoothly for both landlord and tenant, certain protections have to be put in place.
The landlord would like his property to be well-protected, while the tenant would like his interest to be protected during the tenancy period. Therefore, the tenancy agreement which encompasses the rights of both parties should be understood.
What is a tenancy agreement?
A tenancy agreement is a legal document between the tenant and the landlord which contains all the information concerning the legal rights and obligations of both parties.
On the outset, it is important to note that Malaysian tenancy agreements are usually set for a term of 1 – 3 years and the contract would require payment of several deposits.
These legal rights and obligations include the terms of the tenancy and the conditions to be complied with during the tenancy period. There are no standard forms for tenancy agreements, but they usually include:
i) Details of both the landlord and tenant;
ii) Beginning and end date of the agreed tenancy period;
iii) Details on the rent payment such as the amount to be paid, by what date it should be paid and when can there be an increase in payment;
iv) Amount of deposit to be paid and the mode of payment;
v) Responsibilities that are to be carried out by both the tenant and the landlord throughout the tenancy period;
vi) The notice period and the number of notices which both the landlord and tenant need to give to terminate the tenancy;
vii) Renewal options/ clauses;
viii) The methods to resolve disputes;
ix) What will be provided by the landlord for the tenancy such as furniture or fixtures;
x) Purpose of the rental;
xi) Details of the property that is rented.
Do take note that the above terms which are spelt out are known as express terms. There may be implied terms as well. Here are some examples:
i) The landlord would be responsible for repairing major or structural defects of the property;
ii) The tenant must not cause damage to the property.
The implied terms are enforceable only if there are no express terms in the contract which state otherwise.
Both the landlord and the tenant are allowed to negotiate the terms and conditions of the tenancy agreement. However, if they have signed the documents, they will be bound by the stated terms and conditions.
Although it is usually the case that the landlords will provide the tenancy agreement, I would still recommend that the tenant allow a lawyer to vet through the tenancy agreement as well. This is to ensure that the tenant’s rights are protected.
Documents required for the tenancy agreement
Usually, the tenancy agreement would require you to furnish the following documents:
a) Title of the property & Details of the property;
b) Assessment receipt of the property;
c) Copy of Identification Card of both the tenant and the landlord.
Tenancy agreement fee in Malaysia
Now the legal fees for drafting the tenancy agreement is usually paid by the tenant be it residential or commercial property.
However if the tenant hired his own lawyer for vetting the tenancy agreement, then the tenant would have to pay his own lawyer for vetting fees.
Do note that this is the amount of fees to be paid on the RENTAL. If you are a Landlord and you are interested to know more about the Rental Income Tax in Malaysia, feel free to read our article to know more about it.
Now, I would cover the legal fees and stamp duty that has to be paid in detail.
Calculation of Legal Fees to be Paid
Here are the standard rates for a tenancy agreement that is below 3 years.
For the first RM10,000 rental (Per month)
25% of the monthly rent
For the next RM90,000 of rental
20% of the monthly rent
If it is more than RM100,000
it would be negotiable
For tenancy agreement that is above 3 years (also known as a “Lease Agreement” in the National Land Code):
For the first RM10,000 rental
50% of the monthly rental
For the first RM10,000 rental
20% of the monthly rental
For the first RM10,000 rental
it is negotiable
Generally, the amount of fees paid for drafting a Lease Agreement would be higher because the Solicitor’s Remuneration Order provide for it and the procedures lengthier.
Stamp duty for tenancy agreement Malaysia (for LHDN)
Usually, the landlord will arrange for the stamping of the tenancy agreement.
The tenancy agreement will only be binding after it has been stamped by the Stamp Office.
While paying the stamp duty, there are 2 application forms which you need to submit: PDS 1 and PDS 49(A).
The amount paid would be calculated based on the ANNUAL RENT. Here is a detailed guide on it:
Rental for every RM250, which is in excess of RM2,400 rental
Less than 1 year: RM1
Between 1 to 3 years: RM2
More than 3 years: RM3
If the annual rental is below RM2,400, then no stamp duty has to be paid.
To further clarify this:
If the contract is more than 1 year, where it’s a two-year contract, the stamp duty rate would be RM2 for every RM250 of annual rent in excess of RM2,400.
Hence, if your one-year tenancy is RM1,500, the annual rent would be RM18,000. Here is how you can compute the amount of stamp duty paid:
For a one-year tenancy:
RM18,000 – RM2,400 = RM15,600
RM15,600/250 x RM1 = RM62.40 for Stamp Duty
For a two-year tenancy:
Using the same example –
RM18,000 – RM2,400 = RM15,600
RM15,600/250 x RM2 = RM124.80 for Stamp Duty
Deposits paid by tenants
Generally, the tenant has to pay 3 kinds of deposit:
1) Earnest Deposit
Earnest Deposit is paid to reserve the property, so that the landlord does not give the rental to another customer during the 7 days signing period.
The amount paid usually would be equivalent to the amount paid for one-month rental. If the agreement goes through, the Earnest Deposit would be treated as the amount paid for the first month’s rental.
2) Security Deposit
The Security Deposit is meant to protect the landlords, just in case if the tenant violates any terms of the contract.
If the tenant breaches the tenancy agreement, the landlord has the right to forfeit or set-off from the deposit.
For the amount of the Security Deposit, it is usually the amount of 2 month’s rental.
If the tenant did not commit any breach of the tenancy agreement, this deposit would be paid back to the tenant at the end of the tenancy period.
3) Utility Deposit
The Utility Deposit is paid so that the landlord can use this money to pay any outstanding utility bills.
The amount of utility deposit is usually half month’s rental.
Both the Security Deposit and Utility Deposit would be paid to the landlord at the time of signing of the tenancy agreement.
As an example, the amount of deposits a tenant needs to pay (when the rental is RM1,500);
Earnest Deposit paid
= RM1,500
Security Deposit paid
= RM3,000
Utility Deposit paid
= RM750
Total amount paid for deposit
= RM5,250
Renting Procedure in Malaysia
After discussing about the deposits to be paid, it is proper to talk about the renting procedure because it is highly related to the type of deposits paid. I will number it accordingly so that it is much clearer:
(1) The tenant would usually visit the property first and do his due diligence. Then, he confirms the amount of rent and deposits that has to be paid.
(2) If the tenant is agreeable with the rates and property that he has rented, the landlord will then provide a “Letter of Offer” to the Tenant.
(3) Next, you need to pay the Earnest deposit to lock-in the deal. This is to ensure that the landlord does not give away the deal to somebody else. The Earnest Deposit is paid when the Letter of Offer is given by the landlord.
(4) In 7 days, the agreement must be signed by both the landlord and the tenant. Both of them would need witnesses when affixing their signatures.
(5) Upon the signing of the agreement, the Security Deposit and the Utility Deposit have to be paid.
(6) After the signing of the agreement and payment of deposits, the tenancy agreement has to be stamped by the Stamp Office for the agreement to be enforceable. This is where the stamp duty is paid.
Tenancy agreement - The Malaysia law
In Malaysia, there is no single Act that governs the matters relating to rental and tenancy. The main legislation, however, is the National Land Code, where in Part 15, it covers matters on Leases and Tenancies (from Section 221 – 240).
However, there are other sources of law to take note of:
Contracts Act 1950 – which is relevant to matters relating to the tenancy agreement;
Civil Law Act 1956 – laws governing matters relating to rent payment;
Specific Relief Act 1950 – based on this Act, the landlord is prohibited from evicting the tenant and changing the locks without a court order;
Distress Act 1951 – this act embodies the rights of both tenant and landlord when it concerns a claim for arrears of rental;
Case Law – reference would be made to case laws for all other matters relating to tenancy.
On a sidenote, the Residential Tenancy Act is targeted to be implemented in 2 years’ time. The Act is aimed at protecting both tenant and owner involved in house renting. You can read more about it here.
Termination of Rental Contracts
Usually, how the tenancy agreement will be terminated will be based on the express terms agreed in the contract. The terms of the tenancy agreement will state how the agreement must be terminated.
It is the norm that the party that wants to terminate the contract has to give 2- or 3-months written notice.
For situations when the tenant is required to leave the country, it will be covered by the ‘diplomatic clause’. There are some situations where the tenant has a valid reason to leave the country. However, the tenant has to furnish the evidence on why the tenant has to leave the country.
Compensation if the tenancy agreement is terminated without notice
If the tenancy agreement was terminated unlawfully, both the landlord or the tenant would have a legal remedy against the party that wrongfully repudiated the contract.
Remedy for the Landlord
The amount of compensation paid would be subject to the express terms of the tenancy agreement.
Usually, the landlord would be entitled to forfeit the rental deposit as compensation because of the premature termination.
For a specific situation when the tenancy has come to an end but the occupier remains in occupation, the landlord similarly would be unable to evict the tenant without a court order. He must go through court proceedings, as required by Section 7(2) of the Specific Relief Act 1950.
Even if the tenants do not pay their rent, the landlord must follow the required legal procedure. First, a notice to pay the rent must be given. After that, only can the landlord serve the tenant with a notice of termination.
Remedy for the Tenant
Similar to the above, the amount of compensation would depend on the express terms and conditions. The tenant should be able to get the deposit back from the landlord and he would be entitled to bring an action against the landlord for breach of contract.