The impact of termination of a tenancy on the unexpired term

August 2019 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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The retail sector in Malaysia has plenty to offer tenants and landlords alike. People love shopping complexes and hence tend to ‘mall crawl’. The industry is buoyed by this culture. There are plenty of mall-based real estate investment trusts (REITs) and publicly-listed entities that serve up decent dividends to investors. It is vital for mall owners to ensure that there is a steady flow of rental income, with as little disruption as possible to revenue streams.

By the same token, while tenants hope and pray that business is good and that they never have to relocate, such is the world of business that companies are not always insulated from economic turmoil. Some businesses have no choice but to reduce their overheads and this may well mean moving to less expensive, rented premises. Not the sort of news that would be well received by a landlord.

This brings into perspective the mixed emotions that follow the termination of a tenancy or lease well before its contractual expiry date. For the landlord, there is the potential loss of rental income. On the other hand, a tenant may breathe easier with better cash flow, pursuant to tightening budget conditions. Malaysian tenancies usually refer to periods of up to a maximum of three years. Anything beyond that would be a lease that requires the registration of the title at the relevant land office for the purpose of security, placing the lessee in a protected position. And while it is the intention of most parties to fulfil the full period of the contract, tenants do sometimes have to give up their tenancy for economic reasons. This article seeks to explore the respective parties’ rights when a tenant or lessee surrenders premises back to the landlord before the due date.

Usually, the landlord has a right to claim for an unexpired term in Malaysia, as parties are bound by the terms stated in the tenancy agreement. Unfortunately, there are no statutory provisions that govern this area; it is all based on common law. That said, the principle is stated in the case of Tractors Malaysia v. Kumpulan Pembinaan Malaysia, where the highest court of the land, the Federal Court, held: “Where a contract has been reduced in writing, it is in the writing that we must look for the whole of the terms made between the parties”. Therefore, if the parties are in agreement with the terms stated in the tenancy agreement, they are bound by those terms.

The issue of whether the landlord is entitled to claim for the rental of the entire unexpired term of the tenancy agreement is clearly stated in the case of Berjaya Times Square v. Twingems Sdn Bhd & Anor, where the High Court allowed the landlord’s claim for the unexpired term, based on the following reasoning: “The losses suffered by the Plaintiff in this case was actual losses incurred by the Plaintiff for the non-performance of the 1st Defendant’s obligation under the Tenancy Agreement. Pursuant to Clause 10(2) of the Tenancy Agreement the Plaintiff was entitled to claim for the unexpired term as liquidated damages as a result of the Defendants non fulfilment of its part of the bargain”.

One may query if such a right is akin to an unnecessary windfall. Leases are often between 10 and 30 years long, though some may be even longer. Imagine the sum involved if a US$10,000 per month rental was terminated by the lessee and the balance of the lease left was 12 years. That is a staggering $1,440,000 due from the lessee who may be trying to cope with a tightening financial situation, for example. This sum has to be paid upfront to the lessor. However, the lessor is unlikely to then leave the unit vacant – it will likely look for the next tenant. If the landlord is diligent or happens to have a number of prospective tenants patiently awaiting a space in its mall, the landlord will be in a position to collect two rentals for the same unit. Assuming the landlord maintains the US$10,000 per month rental, it will be entitled to another US$1,440,000 for the same period.

While some may consider this situation is unjust, in some cases, companies’ losses are mitigated. In Leong Kim Wai v. Minato Enterprise, the learned judicial commissioner held against the landlord as follows: “I am inclined to agree with the learned counsel for the appellant’s submission that the respondent not only had a duty to mitigate their losses but utmost importance is they should come to court with clean hands. As it was shown that the respondent had failed to prove the losses as pleaded, the appellant submits, the respondent’s claim must be dismissed”.

The judicial commissioner’s judgement is twofold; it applies equally to both the landlord and the tenant. Should a tenant be allowed to terminate the tenancy on a whim? What does the landlord have to go through in order to secure a tenant? Securing the services of a good real estate agent or negotiator, as the agent of the principal is known in Malaysia, would be a primary consideration in most instances. These agents carefully vet the profiles of potential tenants and ensure that only the most committed and capable individuals are successful.

However, certain judges have sought more effective mitigation from landlords. In the recent case of Sargunam Seeniappan v. Velloo Vallian @ Vellayan, High Court judge Amelia Tee Hong Geok Abdullah J held that, since a new tenant was found within six months of the tenancy being terminated by the previous tenant, six months rental was sufficient as agreed liquidated damages to cover for the period prior to the new tenant being secured. To that end, Sargunam Seeniappan demonstrates the court’s current approach with regard to the unexpired term of a tenancy. The court will only award the landlord a sum for a limited period, which essentially reflects the vacant period of the tenancy up to the time the landlord has secured a new tenant, but not for the balance of the unexpired term of the tenancy.

This ruling must be explored with regard to the point of penalties. Claiming the unexpired term under the tenancy agreement could be tantamount to being construed as a penalty, which is prohibited under Section 75 of the Malaysian Contracts Act 1950. This is also stated in a recent unreported Court of Appeal case, Tekun Nasional v. Plenitude Drive, where the Court of Appeal held that: “Clause 11.2 appears to us to be a penalty under section 75 of the Contracts Act because it stipulates and specifies the sum as being payable upon breach. It is settled law that if a sum is named in a contract as the amount to be paid in case of breach, it is to be treated as a penalty and therefore void under section 75 (see Selvakumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 2 CLJ 374; Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd [2009] 4 CLJ 560). As clause 11.2 contravenes section 75 of the Contracts Act, we are bound to strike it down under Selvakumar and Johor Coastal. It follows that the learned judge was correct to disallow the plaintiff’s claim for RM29,829,132.40.”

This finding is a problem for those landlords who wish for as little disruption to their yields as possible. In the retail sector, for example, the ruling will affect the amount of dividend distribution to investors. Singapore is the only other country in South East Asia to have encountered this issue to date. A tenant would typically have a minimal right to terminate the lease. A landlord would also be able to terminate the lease and exercise re-entry in the event of breach of conditions by the tenant. Singapore does not have statutes that govern landlord and tenant relationships in their entirety, and this includes the issue of prematurely terminating a tenancy agreement. The court will look at how the lease is constructed, and what the clauses are which provide protection in these situations.

In the Singapore High Court case of Ng Poh Guan v. Chan Ai Leng & Ors, the court held that the plaintiff directly caused the breach of tenancy, hence he was ordered to pay damages for the unexpired term in the tenancy agreement sought by the landlord. In the case of SM Integrated Transware Pte Ltd v. Schenker Singapore, the court awarded the plaintiff the loss of rent suffered as a result of early termination by the defendant. To summarise, Singapore and Malaysia have a similar practice when it comes to dealing with early termination.

In other Commonwealth jurisdictions, the decisions could go either way. Hong Kong is pro landlord, for example. Assuming the landlord had taken reasonable steps to mitigate its losses, even where the tenant did not occupy the property after termination, it may become prima facie liable to compensate the landlord the outstanding rent for the remainder term as ‘consequential losses’. This could end up in a very harsh result for the tenant in the event that the unexpired term is a long one.

In Canada, it is the other way around. In the Supreme Court case of Red Deer College v. Michaels et al, the Court explained the duty to mitigate as follows: “a wronged plaintiff is entitled to recover damages for the losses he has suffered but the extent of those losses may depend on whether he has taken reasonable steps to avoid their unreasonable accumulation”. Years later in Adanac Realty, Ltd v. Humpty’s Egg Place Ltd, the facts were that the landlord leased a restaurant and gas bar to the tenant for a term of five years. Two years later, the tenant stopped paying rent and informed the landlord that it would not continue with the lease. The landlord accepted the repudiation of the lease and demanded arrears of rent and future rents on the unexpired term of the five-year lease. The tenant paid the arrears in rent but refused to pay for the unexpired term. The landlord did not put the premises up for rent, and eventually sold it with no part of it ever being re-let. The Court found that the lease document contemplated damages for future loss and held that the landlord was entitled to damages as the law of contracts would allow. However, it was unreasonable for the landlord to fail to rent the premises and thus the damages recoverable were adjusted to take into account the landlord’s failure to mitigate the losses.

In conclusion, it is vital to look at the terms stipulated in the lease in order to understand the rights and obligations of tenants and landlords. In most countries, the mitigation of losses will very likely be a main consideration in awarding a landlord the whole of the rental for the unexpired term of a tenancy or lease.

Jeyakuhan Jeyasingam is a partner, Neo Chi Chyn is a senior associate and Karen Ting Shi Chien is a trainee associate at Zaid Ibrahim & Co. Mr Jeyasingam can be contacted on +603 2087 9987 or by email: jeyakuhan.jeyasingam@zicolaw.com. Mr Neo can be contacted on +603 2087 9918 or by email: chi.chyn.neo@zicolaw.com. Ms Ting can be contacted on +603 2087 9999 or by email: karen.ting@zicolaw.com.

Jeyakuhan Jeyasingam, Neo Chi Chyn and Karen Ting Shi Chien

Zaid Ibrahim & Co.