A tenancy agreement protects the interests of both parties, the landlord and tenant. It helps prevent and solve a potential dispute between both parties, and it is legally binding as opposed to a verbal agreement which may be more convenient. A tenancy agreement will prove to be more beneficial for both parties.
Tenancy Agreement
A legal agreement between the landlord and tenant that outlines each party’s duties and obligations during the tenancy period.
It also states a detailed account/description of the rented-out property, including its furniture and facilities.
Landlords are advised to hire a lawyer to draft the tenancy agreement to ensure it is well-written, comprehensive, and detailed. Potential tenants can consult their lawyer to revise the contract until both parties are mutually satisfied with the final version.
However, hiring a lawyer to draft a tenancy agreement can be pricey. As a result, many landlords self-draft the contract and have the potential tenant agree to it. Also, Malaysia so far does not have federal rules regulating the allocation and scope of a tenancy agreement, which implies that either party can add as many terms and conditions as they want. Thus, benefiting each party.
What is in a Tenancy Agreement?
Essentially, a tenancy agreement should include the following details:
- Cover page
States the arrangement date, the landlord and tenant’s names and IC number.
- Definition of the agreement
Details the definition of landlord, tenant, and demised premises. It refers to the separate sections of the agreement known as schedule and inventory.
- Property Details
Indicate the type of property being leased and its’ location. Also, specify the unit number if it is a non-landed property.
The landlord must clearly state if they are renting out the entire property or only a portion of it. It is also helpful to indicate the state of the property.
- Rental and Deposit Amount
State the exact monthly rent, its’ due date and payment method.
Also, state the Earnest Deposit, Security Deposit and Utility Deposit amount.
- Tenancy Period
State the start and end date of the tenancy. This is the fixed period the tenant rents the property.
The tenancy period is usually covered yearly, and it is typically 1 – 3 years. A rental period of more than three years is considered a lease instead. Meanwhile, if the tenancy period is monthly, make sure to indicate that.
Furthermore, it is possible to add clauses for the tenant to renew or extend tenancy for a specified period.
- Landlord’s Responsibilities
This includes paying the annual property tax to the authorities, insuring the property, paying insurance premiums and ensuring the inventory is in good working condition.
- Tenant’s Responsibilities
This includes paying the rent and utilities promptly, maintaining the inventories, informing the landlord of any problems or defects, and obeying the house rules.
- House Rules, Prohibitions and Limitations
Outline what tenants cannot do. For example, tenants are not allowed to keep pets.
The property is for residential purposes only. The tenant cannot operate a commercial business.
Explicitly prohibit any illegal activities, anything that might jeopardize the property’s insurance coverage, and any renovations.
It is helpful to state the number of individuals allowed to use the property.
And of course, you can’t forget
- How to resolve disputes
This specifies the dispute resolution process, in the event issues or misinterpretations or misunderstandings concerning clauses and terms occur between the landlord and tenant.
- Special Conditions
Additional conditions used to define exceptions of an already agreed standard agreement.
- Signatures
The landlord, tenants, and witnesses’ signature.
- Schedule
Presents information such as the property address, and landlord’s and tenant’s contact information.
- Inventory
List of items included in the property that is provided by the landlord for the tenant. The tenant must confirm these items’ existence and condition, and they are expected to be in good working condition when returned at the end of the tenancy.
These details need to be carefully specified in clear and concise writing to avoid any misinterpretation .
Deposits
- Earnest Deposit
Earnest deposit is the money tenants pay to book the rental property so that the landlord will not rent it to other potential tenants for the next seven days.
It is usually the amount of one month’s rent. The real estate agent can keep it in escrow.
The landlord usually gives a letter of offer, a document expressing their intention to rent the property, to the tenant.
When the tenancy period starts, the landlord usually uses the earnest deposit as a rental payment for the first month.
- Security Deposit
The landlord keeps this deposit in the event the tenant violates the tenancy agreement. If the tenant successfully fulfils the contract without issues, the landlord then refunds the security deposit at the end of the tenancy.
It is usually the amount of two months’ rent, and the landlord can use it as payment for repairs and cleaning if the tenant breaches the agreement.
- Utility Deposit
By the end of the tenancy period, the landlord uses this deposit to pay for any outstanding utility bills that was not paid for.
It is usually the amount of half a monthly rental rate.
Please note that the tenant pays the Security Deposit and Utility Deposit upon signing the tenancy agreement.
Stamp Duty
To make the tenancy agreement legal and admissible in court, the LHDN (Lembaga Hasil Dalam Negeri Malaysia) needs to stamp it after the landlord and tenant have signed it.
However, the tenant needs to pay for the Stamp Duty before the LHDN seals it. Please note that it is the tenant that pays for it and not the landlord. This is stated in the third schedule of the Stamp Act 1949.
The process includes the LHDN giving you two application forms to submit – PDS 1 and PDS 49(A).
- How much is it?
One year or less tenancy agreement
RM1 for every RM250 of the annual rent above RM2400. It is free if the annual rent is below RM2400.
1 – 3 years tenancy agreement
RM2 for every RM250 of the annual rent above RM2400. It is free if the annual rent is below RM2400.
3+ years tenancy agreement
RM4 for every RM250 of the annual rental above RM2400. It is free if the annual rent is below RM2400.
For example:
The monthly rent for a 1-year tenancy is RM1800 that makes the annual rent RM21600.
The first RM2400 is then exempted from stamp duty RM21600 – RM2400 = RM19200.
The stamp duty would then be charged according to the tenancy duration. Which means RM19200/250 X RM1 = RM76.80
If the tenancy is 1-3 years:
[(RM1800 X 12) – RM2400] / 250 X RM2 = RM153.60
If the tenancy is 3+ years:
[(RM1800 X 12) – RM2400] / 250 X RM 4 = RM307.20
It is advisable to obtain original copies stamped for both parties.
Administrative Fee
Administration fees are charged once based on the monthly rent, and the tenant pays it. The following is a guideline for the amount. Although the final amount is up to the landlord’s discretion.
| RENT/MONTH | AMOUNT |
| RM1000 and below | RM100 |
| RM1000 – RM1999 | RM150 |
| RM2000 – RM3000 | RM200 |
| RM3000 – RM4000 | RM250 |
| RM4000 and above | RM300 |
Legal Fee for Tenancy Agreement
In Malaysia, the legal fee is standardized. The following are the charges:
| ANNUAL RENT AMOUNT | CHARGES |
| First RM 10,000 | 25% of the monthly rent |
| Next RM 90,000 | 20% of the monthly rent |
| More than RM100,000 | Negotiable |
The charges for 3+ years tenancy are as follows:
| ANNUAL RENT AMOUNT | CHARGES |
| First RM 10,000 | 50% of the monthly rent |
| Next RM 90,000 | 20% of the monthly rent |
| More than RM100,000 | Negotiable |
Usually the landlord and tenant split the legal fees.
Typical Rental Process in Malaysia
- Potential tenants visit the property and acknowledge the stated rent and deposits.
- The landlord can give a Letter of Offer to the satisfied potential tenant. The tenant then pays the Earnest Deposit.
- Both parties draft, then review, revise, and agree upon the tenancy agreement. They then need to sign the contract within seven days of the tenant’s Earnest Deposit payment. Both parties also need witnesses and their signatures. The tenant then pays the Security Deposit and Utility Deposit upon signing the agreement.
- Lastly, the LHDN stamps the finalized and signed Tenancy Agreement.
Income tax exemption on rental income
Landlords are taxed for the money they earn by renting out a property; this is called rental income tax.
Rental income is assessed on a progressive tax rate ranging from 0 – 30%. It is calculated on a net basis, meaning the amount of final rental earnings are derived from subtracting the permitted incurred expenses.
Landlords can claim a 50% income tax exemption if they meet the following criteria:
- If the rental income isn’t more than RM2000/month for each residential property owned by a Malaysian resident.
- The rented-out property is under a legal tenancy agreement between the landlord and the tenant.
- Tax exemption is applied for a maximum of 3 consecutive years of assessment.
- Only applicable to tenancies made from 2018 onwards.
Please note that initial expenses like stamp duties and legal fees cannot be exempted as they were not incurred in the production rental income.
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