COVID-19: Impact of MCO Regulations on tenants – are reduced rentals allowed?
On 16 March 2020, the Prime Minister of Malaysia, Tan Sri Muhyiddin Yassin, announced the imposition of a 14-day Movement Control Order (“MCO”) from 18 March to 31 March 2020 (“Announcement”) nationwide to curb the spread of the COVID-19 infection in Malaysia pursuant to the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1987. Subsequently, the Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 [link] (“Regulations”) was published to give effect to the Announcement. On 25 March 2020, the MCO was extended for a further 14 days, thereby pushing the end of the quarantine period until 14 April 2020.
This is Malaysia’s response to a steep spike in COVID-19 cases, bringing Malaysia’s total of confirmed cases to 1796 as at 25 March 2020. The imposition of the MCO is to ultimately help isolate and identify carriers of COVID-19 and to minimise the spread of the disease.
To know about the Regulations and MCO in detail, kindly refer to our recent articles – Movement Control Order in Malaysia – Immediate Implications [link] and Updates on Movement Control Order – Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 [link] comes into effect. We have also published a regional article entitled ASEAN’s Response to COVID-19: Employment Issues to Consider [link].
How do the Regulations affect the rentals by the tenants?
Pursuant to Paragraph 5(1) of the Regulations, it is provided that:
“Any premises providing essential services may be opened provided that the number of personnel and patron at the premises shall be kept to the minimum.”
For shopping malls, the Regulations do not expressly prohibit them from continuing their daily operation. Tenants that provide essential services such as banking, postal, healthcare & medical and food supply are permitted to operate subject to the conditions of the Regulations.
The crux of the matter is this – tenants providing essential services will continue to generate revenue, albeit at a smaller margin, but what about the tenants who have no option but to cease their operations under the Regulations as they are not in the business of essential services as defined by the Regulations? In this scenario, do these two categories of tenants have the right to a reduced rental?
Looking into the nitty gritty of the tenancy agreement
The tenancy agreement will need to be reviewed to determine if a tenant is entitled to reduced rental. Typically, a tenant would have covenanted to promptly pay the rental to the landlord in the agreed manner as set out in the tenancy agreement. If a tenant wishes to seek a reduced rental due to the unforeseen impact of the Regulations, such tenant will have to check if the tenancy agreement provides a force majeure clause.
What is a force majeure clause?
In the context of a tenancy agreement, the purpose of a force majeure clause is to contractually allocate the risks between the landlord and the tenant with regard to the occurrence of future events in specific circumstances, all of which are stipulated within the clause itself¹. Force majeure clauses are intended to include risks beyond the reasonable contract of a party. In essence, it frees both parties from liability or obligation when a supervening event takes place².
The specifics of the force majeure clause vary from one agreement to another as the contracting parties are free to stipulate the terms of the clause. If the tenancy agreement provides that rental shall be reduced due to any cause beyond the landlord or tenant’s control, such as flood, fire, earthquake and other Acts of God, as well as military operations, war, blockade, pandemic disease outbreak, act or actions of state authorities, i.e. the Regulations, then the tenant is entitled to a reduced rental under the force majeure clause.
If there is no such force majeure clause in the tenancy agreement, a tenant may have to look for another avenue – whether or not the tenancy agreement can be frustrated.
The doctrine of frustration
The doctrine of frustration is codified in the Contracts Act 1950, specifically Section 57³ :
“Agreement to do impossible act
57. (1) An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful
(2) A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
Following Section 57 of the Contracts Act 1950, a tenant pursuing frustration of the tenancy agreement must show three of the following elements⁴:
(a) the event, i.e. the MCO under the Regulations, upon which the tenant relies as having frustrated the tenancy agreement must have been one for which no provision has been made in the tenancy agreement;
(b) the event relied upon by the tenant must be one for which it is not responsible; and
(c) the event which is said to discharge the promise, i.e. the tenant’s covenant to pay full rental to the landlord, must be such that renders it radically different from that which was undertaken by the tenancy agreement.
On top of the three elements above as laid out by the Court of Appeal, the Federal Court also weighed in on its opinion. In the case of Public Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor⁵ it was held that:
“A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration. Neither can he plead frustration because the terms of the contract make it difficult to interpret. If it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead frustration. The doctrine of frustration is only a special case to discharge a contract by an impossibility of performance after the contract was entered into… A contract is frustrated when subsequent to its formation, a change of circumstances renders the contract legally or physically impossible to be performed…”
Guided by the statutory provision of the Contracts Act 1950 and the legal precedents set by the Malaysian courts, a tenant will face an uphill battle in proving to the court that the tenancy agreement may be frustrated due to the reason that it will face financial difficulty in coming up with the monthly rental. Even if a tenant is able to frustrate the tenancy agreement, the effect of frustration is that the tenancy agreement shall be rendered void, and not the intended effect of a reduced rental throughout the period of the MCO.
Can a tenant dealing in non-essential services claim frustration?
Usually, a tenant’s type of business is expressed in the tenancy agreement. Pursuant to the MCO and Regulations, if a business falls under the category of non-essential services, it shall shut down temporarily until 14 April 2020. If the tenant is unable to run its business in the leased premises due to the MCO, the tenant may claim frustration.
Despite the tenant not being able to use the leased premises to generate any revenue throughout the period of the MCO, it does not alleviate the tenant of its contractual liability to pay the full monthly rental. In proving frustration, the tenant will face challenges as difficulty in meeting monthly rental is not an impossible act to frustrate the tenancy agreement.
Can a tenant claim frustration since its leased premises was ordered to close but the shopping mall remains open?
In a shopping mall scenario, a tenant may wish to claim frustration on the basis that its business was ordered to cease operation, and this runs counter to the tenancy agreement which stipulates that the tenant shall keep its leased premises open for business daily.
In compliance with the MCO and Regulations, tenants running non-essential businesses in shopping malls shall not operate during the MCO period. Supervening events such as disruptions arising from COVID-19, unless expressly provided for, shall not automatically operate as a grounds for frustration of the tenancy agreement. A tenant facing financial constraints in meeting the monthly rental does not amount to an impossible act to frustrate the tenancy agreement.
What is the effect of an exemption clause in a tenancy agreement in relation to the MCO and Regulations?
An exemption clause is a clause which excludes or modifies an obligation that would otherwise arise under the tenancy agreement by implication or law⁶. It is common for a landlord to include exemption clauses to its benefit in a tenancy agreement.
One common example is as follows – ‘the landlord does not expressly or impliedly warrant that the demised premises is or shall, during the tenancy period, remain suitable or adequate for all or any other use of the demised premises by the tenant.’
As long as the exemption clause in the tenancy agreement is clear with no inconsistencies in interpretation⁷, such exemption clause is effective to negate a tenant’s claim for a rental reduction on the basis of a compulsory closure of premises due to the MCO. Under the tenancy agreement, the landlord has no contractual obligation to meet the tenant’s demand for a rental reduction.
So what can a tenant do to seek reduced rental?
If a tenant is unable to rely on a force majeure clause or the doctrine of frustration, the best option is to appeal to the landlord personally for rental reduction or rental rebates. Whether to grant the said rental reduction or rebates will be in the landlord’s discretion.
For shopping malls, the Malaysian Shopping Malls Association (“MSSA”) had urged its members to come up with a win-win solution with their tenants amidst this challenging time⁸. At the moment, the MSSA has yet to issue any statement nudging the shopping malls to offer rental reduction to their tenants.
We hope this provides a useful guide for tenants in Malaysia. The ZICO Law network has a growing collection of articles and materials relating to the COVID-19 outbreak that is accessible at ZICO Law COVID-19 Resource Hub.
¹RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and Another Appeal  4 SLR 413
²RHB Capital Bhd v Carta Bintang  10 MLJ 469
³Section 57 of Contracts Act 1950 [Act 136]
⁴Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd  4 MLJ 201
⁵ 6 MLJ 293
⁶Suisse Atlantique SociÉtÉ D’armament Maritime SA v NV Rotterdamsche Kolen Centrale  1 AC 361
⁷Malaysian Newsprint Industries Sdn Bhd v Perdana Cigna Insurance Bhd  2 MLJ 256
⁸Malay Mail, 28 February 2020, ‘Shopping malls association to work on reducing tenants’ overheads as suggested in 2020 Economic Stimulus Package. Accessed on 25 March 2020.
This alert is for general information only and is not a substitute for legal advice.