Written by Marlysa Razak and Wong Zi Ying

This article is related to our previous article entitled “Should Short-Term Rental Accommodation be regulated?” published on Richard Wee Chambers’ website.

“The passing of the house rules is not unlawful.”

—Chief Justice, Tengku Maimun binti Tuan Mat

On 5 October 2020, the apex court with a bench of three led by Tengku Maimun binti Tuan Mat CJ upheld the Court of Appeal and High Court’s decision which ruled that the management corporation bodies can enact house rules to prohibit short term rentals in residential strata buildings

Verve Suites Mont Kiara’ Management Corporation (“the Verve Management”) filed a suit against Innab Salil, Innab Trade Sdn Bhd and some of the parcel owners (“the Defendants”) for violating ‘House Rule No.3’ (“the HR”). The HR was enacted by the Verve Management following the Circular 2015/2016  issued by the Commissioner of Building Kuala Lumpur on 18 November 2015 (“the Circular”) instructing all joint management bodies or management corporations to curb the use of buildings in and around Kuala Lumpur for  short term rental. The HR prohibits any short-term rental in the Verve Suites booked through online websites and any other platforms. This is to protect the safety, security and the rights of the existing residents or tenants. 

Although the management bodies had released two notifications on the implementation of the HR, the defendants continued to engage in short-term rental activities. Consequently, the defendants were fined RM200.00 daily for not complying with the HR. 

The case was brought to the apex court to challenge the validity and legality of the HR. The issues to be determined are as follows:-

  1. Whether the HR may override and supersede the express land use on the title under Section 120 of the National Land Code (“NLC”)?
  2. Whether the implementation of HR is ultra vires Section 70(5) of the Strata Management Act 2013 (“SMA”)?

For the first issue, the Defendants argued that the HR cannot supersede the express land use on the title of the land as imposed by the State Authority, therefore shall not prohibit entirely the Defendants’ business of short-term rentals. The contention was made based on the contradiction between Section 70(2) of the SMA confers the power to the management corporation to enact by-laws for certain matters while Section 120 of NLC provides the State Authority with the power to determine and impose conditions and restrictions to the land usage. The Federal Court held that both provisions must be read harmoniously to avoid contradiction. Although the State Authority has the power to issue conditions and restrictions, this does not prevent the management corporation to promulgate by-laws for the matters stated in Section 70(2) of the SMA.

On the second issue, the Federal Court first looked at the differences between “tenancy” and “licence” before determining the applicable category for short-term rentals. In deciding this issue, the court sets out a test by looking at (i) whether the occupier has the right to exclusive possession; (ii) the nature and quality of the occupancy; and (iii) the labels that are used by the parties to describe the short-term rental arrangement. 

Referring to Clause 8.1.3 and 8.2.1 of the Airbnb Terms of Service, it can be inferred that the owners merely intended to use their parcel as a hotel or a lodging facility. There is nothing to suggest that the short-term renters have exclusive possession and the nature and quality of the occupancy was intended to be a tenancy. The short-term rentals are of such a temporary nature that it does not give rise to a true relationship of landlord and tenant. The Defendants themselves do not actually dispute that the occupancies they have allowed via the online booking sites are no different from the arrangements that hotels make with their guests. 

Moreover, the Defendants argued that short-term rental classifies as “dealings” under Section 70(5)(a) of the SMA on the basis that their short-term rental is  ‘tenancies exempt from registration’ under section 213 of the NLC. Pursuant to these various provisions of the law, the Defendants argued that the HR violates Section 70(5) of the SMA and that the HR is ultra vires because it restricts the Defendants’ rights to deal with their land. On the contrary, the Plaintiff argued that the Defendants’ various arrangements with holidaymakers and tourists for short-term rentals are merely licence and not to be regarded as “dealings” and as such shall not be caught by Section 70(5) of the SMA. The Plaintiff maintained that it has the power to enact the HR.

Having heard both parties and with references to decided cases, the Federal Court held that such short-term rental arrangements are, therefore, “licence” and do not fall under the definition of “dealings” as provided in Section 70(5) of the SMA. Therefore, the HR enacted by the Verve Suites Management is not ultra vires to Section 70(5) of the SMA and can be enacted under Section 70(2) of the SMA for legitimate purposes.

This case is now a landmark case in Malaysia and it has indeed shed some light in the Tourism & Hospitality industry, in particular for short-term rentals providers in Malaysia as it has been a huge and long debate among joint management bodies or management corporations with house owners pertaining to this issue. It is now clear that the management corporations of strata buildings may enact by-laws or house rules prohibiting short-term rentals in the building until and unless complete and clear regulations are enacted and gazetted by the lawmakers of the country

Kindly click here for  for the detailed judgment.

1. In the matter at the Federal Court of Malaysia at Putrajaya Appeal No: 02(j)-74-10/2019(W) between Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation.

2. Clause 8.1.3 

“If you book a Host Service on behalf of additional guests, you are required to ensure that every additional guest meets any requirements set by the Host, and is made aware of and agrees to these Terms and any terms and conditions, rules and restrictions set by the Host. If you are booking for an additional guest who is a minor, you represent and warrant that you are legally authorized to act on behalf of the minor. Minors may only participate in an Experience, Event or other Host Service if accompanied by an adult who is responsible for them.”

3. Clause 8.2.1 

“You understand that a confirmed booking of an Accommodation (“Accommodation Booking”) is a limited license granted to you by the Host to enter, occupy and use the Accommodation for the duration of your stay, during which time the Host (only where and to the extent permitted by applicable law) retains the right to re-enter the Accommodation, in accordance with your agreement with the Host.

 

Published on 19 October 2020

Photo by Uta Scholl on Unsplash

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