THIS is the first of a four-part series article intended as a simple guide to tenancy agreements for landlords who wish to rent out their property in Malaysia.
It covers tenancy agreements in Malaysia, what they are, why you need it as a landlord, the tenancy process, deposit amounts, and sample tenancy agreement as reference.
RENTING OUT PROPERTY IN MALAYSIA
Even though the profit from rental property has dropped over the years (a landed house will fetch 2.5 per cent rental yield today versus five per cent a decade ago), it’s a tried and tested way to generate income while owning an appreciating asset.
However, while many people think that rental income is equivalent to passive income, this is not always true. There are many expenses and much effort needed when it comes to managing a rental property. These include listing costs, property agent fees, as well as upkeep of the property (during and in between tenancies).
There are hidden costs, too, especially if you run into problems with your tenant. If you don’t have a tenancy contract drawn up between you and the tenant, it will be harder to resolve any disputes. A prolonged dispute can quickly cancel out any profits that you have gained from the rental income.
That’s why a clearly-worded tenancy agreement is important to protect both the landlord and the tenant’s welfare.
WHAT IS A TENANCY AGREEMENT?
A tenancy agreement is a legal contract between the landlord and the tenant. It covers the responsibilities of both sides for the duration of the tenancy.
To make the tenant agreement as complete as possible, a landlord can hire a lawyer to draft it out. And the tenant can engage their own lawyer to review the agreement and make any changes before signing.
But hiring a lawyer to draft a tenancy agreement can be expensive. So, many people choose to draft their own agreement and ask the other party to agree to it.
A word of caution about tenancy contracts in Malaysia: there are no government regulations about what can and cannot be added. If either party is not careful, one side can add lots of unfair clauses in their own favour.
Until the Residential Rent Act comes into effect, the tenancy agreement is the only document that protects the rights of the landlord and the tenants.
Property expert Mark Chua prefers to think of tenancies as business arrangements. As he puts it: “(He) is not my tenant. I am not his landlord. We are equal business partners aiming for a win-win relationship.”
WHAT SHOULD BE INCLUDED IN A TENANCY AGREEMENT
There are many details to cover. And the details have to be worded carefully so that there is minimal room for misunderstanding.At its basic level, a tenancy agreement should cover these items:
• The details of the property being rented (type of house, address).
• The purposes of rental (in this case, residential).
• The duration of the tenancy.
• The rental amount.
• The deposit amounts.
• How and when the monthly rental will be paid.
• What will be provided by the landlord as part of the tenancy (such as furniture, utilities).
• The obligations of the landlord throughout the tenancy.
• The obligations of the tenant throughout the tenancy.
• What happens in case of disputes.
• Renewal clauses.
WHEN IS TENANCY AGREEMENT SIGNED?
The landlord and tenant will sign the tenancy agreement when the security deposit is paid. Here is the typical sequence:
1. After you have renovated your property (and optionally furnished it), you can put it on the rental market, or engage a property agent to help you.
2. Your rental property can also be added to many rental listing websites in Malaysia, including iProperty, PropertyGuru, Wonderlist, and Speedrent.
3. After the potential tenant has viewed the property and is agreeable to the terms of rental, they will give you a letter of offer, together with an earnest deposit.
4. Within seven days, the tenancy agreement needs to be signed by both parties. The tenant will also pay a security deposit and utility deposit.
5. Finally, the signed tenancy agreement is stamped and becomes an official legal document.
DEPOSITS NEEDED IN RENTAL AGREEMENT
There are three deposits in total:
• Earnest deposit: It is basically a booking deposit, or a deposit to “reserve” the property so that the landlord will not rent the property to anyone else for the next seven days. The amount is equivalent to the first month’s rent. It can be kept in escrow by the property agent. When the tenancy starts, the earnest deposit is usually considered the first month’s rent. Or, it can be used as the security deposit, or it can even be returned to the tenant.
The earnest deposit is also accompanied by a signed “letter of offer” from the tenant. This is a simple one-page document that signifies the tenant’s intent to rent the property.
• Security deposit:This is collected to protect the landlord in case the tenants violate the terms of the tenancy. The amount is usually equivalent to two month’s rent. It can be used to pay for damages, cleaning, keycard replacements, or even be forfeited entirely if the tenant leaves before the tenancy has ended. But if there are no problems by the end of the tenancy, the full amount is returned to the tenant.
• Utility deposit: This is paid to cover any outstanding utility bills at the end of the tenancy, such as gas, electricity and water. The amount is usually equivalent to half a month’s rent.
The security deposit and utility deposit is paid at the same time as the signing of the tenancy agreement.
This article first appeared on Recommend.my. It is written for informational purposes only and does not constitute legal advice from Recommend.my. You should always look for professional help before entering into a legally binding agreement.