Legal Issues at the Intersection of Malaysian Real Estate and COVID-19
COVID-19 is a new strain of coronavirus that first emerged in central China at the end of 2019 and continues to spread around the globe. On 11 March 2020, the COVID-19 outbreak has been declared a pandemic by the World Health Organization (WHO) and is already having a major effect on international commerce. As the outbreak expands in Malaysia, all industry stakeholders should be well prepared to monitor and address concerns impacting the industry. In this article, we will share the key impacts of COVID-19 on the real estate industry and back to work considerations as we prepare for reopening the economy.
(a) Considerations for Property Managers
Duty of care.
The general rule of law is that Property Managers owe a duty to exercise due care for their residents’ safety. This duty is generally the areas under the Property Manager’s control. As such, it is important that Property Managers thoroughly read through their respective governing documents (i.e. property management agreement) to determine what areas or services are under their control (i.e. elevators, gymnasium, sky lounge, pool, janitorial services, security, stairwells) and what obligations they have to their residents in maintaining these common facilities or areas.
Stay informed of the latest compliance information.
It is equally important that Property Managers shall keep abreast of the directives, orders or official announcement being issued by both federal and state governments that may affect day-to-day operations at their properties. Not only are these directives and orders important in helping Property Managers make informed decisions about next steps during the COVID- 19 crisis, such as whether to close the common areas or limit visitor access, they may also give additional powers to Property Managers to help protect their residents and their properties during the COVID-19 event.
Compliance with the Personal Data Protection Act 2010.
Personal data regarding an infected individual should not be shared with other residents within the building, unless prior written consent is obtained.
Property Managers may, however, provide residents in the building with a general statement that an individual on the premises tested positive for COVID-19 and include information on the procedures the Property Manager plans to implement to clean and sanitise the common areas of the building. Further, Property Managers should immediately notify the local department of health that an individual in the building has tested positive for COVID-19 and request further guidance on procedures they should enforce within the building to stop the community spread of the disease.
(b) Considerations for Hospitality and Leisure Industry
Reviewing major contracts and insurance policies.
The Contracts Act 1950 does not provide for implied terms. Therefore, force majeure clauses will not be implied into contracts. In the absence of a force majeure clause, doctrine of frustration may apply.
In either application, they should always be analysed on a case-by case basis as there is no one-size-fit-all solution as the legal consequence of the coronavirus outbreak on any contractual relationship will vary depending on the nature of the contract, the type of obligations, the circumstances in which the obligations are to be performed and the foreseeability of the change in circumstances. With regard to insurance policies, the hotel owners and operators should check that by operating out with “normal” conditions, they are not doing things that would void their policy or allow an insurer to refuse indemnity in the event of a claim.
Hotel employees are at the heart of the guest experience and are the cornerstone of the hospitality industry. Hospitality businesses that are considering retrenchment exercise or across-the-board wage reductions in response to COVID-19 should first consult with human resource or legal counsel to understand all of their contractual and statutory obligations with respect to any such action.
While salary reductions are one of the recommended steps to be taken in order to avert retrenchment, it is advisable that employees’ consent be obtained for any salary reduction. Employers should communicate transparently with their employees about the reason for the salary reduction, and explain that this is an attempt to prevent more drastic action such as a retrenchment. For any hotel staff that do remain, there are statutory obligations on the employer to ensure a safe and healthy work environment.
Reopening with stringent SOPs.
Before re-opening, every aspect of operation should be reviewed. Hotel owners and operators have to understand best practice in the context of legal requirements (i.e. social distancing, no mass gatherings, temperature checks etc.) and how the cost of implementing a new health and safety regime will be dealt with.
(c) Considerations for Homebuyers and Developers
Delivery of vacant possession of the property.
Pursuant to Housing Development (Control and Licensing) Act 1966 (HDA 1966), housing developers must complete their respective developments and deliver vacant possession within the timeframe stipulated under Clause 25 of Schedule H and Clause 24 of Schedule G.
Otherwise, they will be penalised for the delay with liquidated assessment damages. Looking at the legal obstacles (i.e. as mode of issuing notice for delivery of vacant possession and absence of force majeure clause) faced by the developers during the COVID-19 situation, it is advised that the developers get in the driver’s seat by seeking the direction or any guideline from the Ministry of Housing and Local Government.
So long as progressive billing has been issued by developers to purchasers or their end financier, the homebuyers still have to make payment within stipulated time.
Nevertheless, the homebuyers may in reality face less or no difficulties in coping with their financial commitments as most of the financial institutions have recently offered their customers, including homebuyers a six-month loan/financing deferment programme. In addition to that, there have also been recent adjustments made on Overnight Policy Rate (OPR) by Bank Negara Malaysia in favour of loan borrowers.
Defect liability period.
Likewise, due to the legal limitations caused by the HAD 1996, in respect of the time under the defect liability period, it is safe to assume that time continues to run. Unless there is direction or regulation issued or gazetted by the relevant ministry, the obligations of the parties still remain and the time frames under Schedules G and H respectively will be considered as continuing.
(d) Considerations for Commercial/ Retail Landlords and Tenants
Force majeure clause or doctrine of frustration.
There are various types of force majeure clauses. The effect of such clauses will depend on the scope of the unforeseeable events contemplated by the parties. It is important to note that a force majeure clause can only be invoked and relied upon if it has been expressly provided for in the tenancy agreement. The burden of proof lies on the party wishing to invoke the clause. On the other hand, the doctrine of frustration would only apply when the performance or further performance of a contract has been rendered impossible or has been indefinitely postponed in consequence of the happening of an event which was not and could not have been contemplated by the parties to the contract when they made it. The test applicable to determine whether an event is a frustrating event is the radical change in the obligation test. Such change must be more than merely onerous or more expensive, it must be positively unjust to hold the parties to their bargain.
Eviction and forfeiture rights.
In the event tenants are unable to pay rent as a result of the COVID-19 situation, the landlords may choose to terminate the tenancy and further pursue legal remedies such as eviction by way of writ of possession or forfeiture by way of writ of distress.
Should the tenant refuse to vacate the property after the termination notice period is up, the landlord will be compensated in law by requiring the tenant to pay higher rent starting from the expiry of the notice period until the date of the court order.
Insolvency of companies and personal bankruptcy.
The Companies Commission of Malaysia has recently increased the minimum threshold of indebtedness under section 466 of the Companies Act 2016 from the current threshold RM10,000.00 to RM50,000.00. Additionally, the time frame to respond to a statutory demand will also be increased from twenty-one (21) days to six (6) months. These changes are in place until 31.12.2020. However, there are no temporary measures in personal insolvency in light of COVID-19. Having said that, if an individual owes more than RM50,000.00 and is being served with a bankruptcy notice, he must within seven (7) days after service of a bankruptcy notice, make the necessary payment or satisfy the court that he has a counterclaim, failing which, the creditor can then proceed to file a bankruptcy petition. Seven days is definitely too short a period of time, especially in such trying times and this period should instead equally be increased to at least three to six months to allow an individual to sufficiently recover financially in order to make payment of his debts.
Re-negotiate terms with contracting parties.
Many landlords are initially taking “hardball” positions to preserve asset values but ultimately recognise that they need their tenants to successfully navigate the crisis. Moving forward, landlords may seek to work closely with their tenants to get through these challenging times in ways that benefit all parties.
(e) Considerations for Real Estate Negotiators
Negotiation of new deal agreement.
Let it be sale and purchase agreement, tenancy agreement or other real estate related agreement, businesses negotiating contracts should ensure their “force majeure” clauses are carefully crafted to cover the current COVID-19 pandemic, government ordered lock-downs or movement controls.
The clauses should also provide for clear procedure for a party to avail itself of any force majeure provision. The parties’ respective rights and remedies upon a force majeure event should be expressly provided for.
Stay updated on latest stamp duty and property tax reforms.
On 05 June 2020, the government of Malaysia has reintroduced its Home Ownership Campaign (HOC) in a bid to revitalise the country’s property market and provide financial relief to home buyers. There will be stamp duty exemption on the instruments of transfer and loan agreement for the purchase of residential homes priced between RM300,000 and RM2.5 million. The exemption on the instrument of transfer is limited to the first RM1 million of the home purchase price while full stamp duty exemption is given on loan agreement effective for sales and purchase agreements signed between June 1 this year and May 31, 2021, subject to at least 10 percent discounts provided by the developer.
Further, real property gains tax (RPGT) exemption will be made available to all Malaysians for disposal of up to three residential properties between June 1, 2020 and Dec 31, 2021.
Zuhaidi Mohd Shahari (Partner) firstname.lastname@example.org
Charlie Ng Zheng Hui (Senior Associate) email@example.com