The Movement Control Order (MCO), which was first implemented on 18 March 2020 and extended until 14 April 2020, created uncertainties and disruptions for most retail tenants, as the MCO affected their businesses due to closures of operations except for essential services, which were allowed to continue during the COVID-19 outbreak.
Since the MCO came into force, it greatly impacted businesses, especially those related to rentals of warehouses, office spaces, and shopping malls, as most of them do not fall under the “essential services” exception.
Pursuant to Regulation 5(1) of the Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020:
“Any premises providing essential services may be opened provided that the number of personnel and patrons at the premises shall be kept to the minimum.”
What will happen to tenants who fall under non-essential services and are directed to close their operations? What will happen when tenants eventually face financial difficulties and are unable to pay their monthly rental on time? The following FAQs aim to shed light on some foreseeable situations.
FAQ (1): Can tenants request a reduction or suspension of rental during the MCO?
Tenants must review their tenancy agreements to determine whether they have the right to reduce or suspend rental due to unforeseen circumstances such as COVID-19. A standard tenancy agreement usually includes a force majeure clause, which may allow the tenant to request a pro-rated reduction or suspension of rent during the MCO.
FAQ (2): What is a “force majeure” clause?
A force majeure clause defines events beyond the reasonable control of the contracting parties, including but not limited to acts of God, lockouts, riots, war, or other uncontrollable circumstances.
If the tenancy agreement includes such a clause, ensure that situations such as pandemics, epidemics, or compliance with government orders are covered. Only then can the tenant invoke the clause to request rent reduction or suspension.
If the landlord refuses to comply despite a clear provision, the tenant may terminate the tenancy prematurely and claim that the landlord breached its obligations — possibly entitling the tenant to claim losses or damages.
FAQ (3): Is COVID-19 considered a “force majeure” event?
If a tenant relies on the force majeure clause, they bear the burden of proving that COVID-19 qualifies as one of the events stated in the clause and that the pandemic prevented, hindered, or delayed rent payments.
FAQ (4): What happens if the landlord refuses to reduce or suspend rental after force majeure is established?
If the landlord refuses to comply despite a valid force majeure clause, the tenant may argue that the landlord breached the tenancy agreement. The tenant could then terminate the tenancy before its expiry and claim damages, subject to proof in court.
FAQ (5): What if the tenancy agreement does not have a force majeure clause?
If there is no force majeure clause, the tenancy agreement may still be terminated based on the doctrine of frustration.
FAQ (6): What is the doctrine of frustration?
Under Section 57 of the Contracts Act 1950:
(1) An agreement to do an act impossible in itself is void.
(2) A contract to do an act which, after it is made, becomes impossible or unlawful due to an event beyond the promisor’s control becomes void when the act becomes impossible or unlawful.
In simpler terms, the doctrine applies when performance of the agreement becomes impossible or unlawful, rendering the contract void.
FAQ (7): How can a tenant prove frustration?
The tenant must satisfy three elements:
(a) The MCO was an event not provided for or predicted in the tenancy agreement.
(b) The event was not caused by either party.
(c) The event made performance radically different from what was originally agreed.
Tenants must remember that frustration applies only when performance becomes impossible, not merely difficult. The Federal Court in Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 CLJ 430 stated:
“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.”
Thus, the tenant bears the burden to prove true impossibility.
FAQ (8): What happens if the three elements are satisfied?
If the elements are fulfilled, the tenancy agreement becomes void. However, most tenants prefer to negotiate rather than terminate. Tenants may instead discuss rent reduction, deferment, or waiver of late-payment interest with their landlords.
FAQ (9): What other avenues can tenants consider to minimise the risk of breaching the tenancy agreement?
Tenants may:
(i) Negotiate with landlords for rent reduction or rebates. While this is at the landlord’s discretion, the Malaysian Shopping Malls Association encourages both parties to find a win-win solution.
(ii) Negotiate to vary the existing terms of the tenancy agreement.
This publication is contributed by:
Tan Min Lee
Partner, Gan Partnership
minlee@ganlaw.my
Lee Hui Juan
Associate, Gan Partnership
huijuan@ganlaw.my
Disclaimer:
This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at 30 March 2020. For enquiries, please contact Tan Min Lee at minlee@ganlaw.my.
