A commercial tenancy arrangement in Malaysia can appear straightforward enough, until something goes wrong and difficult questions suddenly demand answers:
- What happens if the premises cannot be used for several weeks?
- Who pays for a major repair?
- Can the tenant renovate or change its business use?
- What happens if either party wants to terminate early?
These potential issues mean a standard tenancy agreement may not always address the risks of a particular business and a tailored agreement should be settled before the tenancy begins.
Whether as a tenant or landlord, here are five key issues to consider when drafting a commercial tenancy agreement.
1. Payment obligations
Negotiation usually focuses on the monthly rental, the deposit and the tenancy period.
The total cost of occupying premises, however, can depend on a longer list of items.
| Item | What the agreement should specify |
| Service charge and maintenance fees | Usually payable by the tenant in managed buildings. State the current rate and whether increases can be passed on during the term. |
| Utilities | Usually payable by the tenant, including electricity, water and other utilities applicable to the premises. |
| Quit rent and assessment | Usually payable by the landlord. |
| Insurance | The landlord usually insures the building, while the tenant insures its own equipment and fit-out. Additional insurance requirements may apply depending on the tenancy. |
| Structural repairs | Usually the landlord’s responsibility, except for damage caused by the tenant. |
| Air-conditioning, plumbing and electrical systems | Responsibility varies depending on who installed the equipment and the terms of the tenancy. |
| Damage caused by the tenant | Usually the tenant’s responsibility, excluding fair wear and tear. |
| Rent review | Any increase during or after the term, whether capped, formula-based, linked to market rent or subject to further agreement. |
| Stamp duty and legal fees | Stamp duty is usually borne by the tenant. Legal fees may also be allocated to the tenant depending on the agreement. |
The agreement should make the allocation clear before the bill arrives. Where an item is not addressed, the parties may end up arguing about who should bear the cost.
2. Responsibility for loss
Premises can be put out of use for weeks by fire, flooding, a burst main or a structural defect, and when that happens:
- Does rent continue to run while the premises cannot be used?
- Who is responsible for rectifying the damage, and who bears the cost?
Where the agreement is silent, these questions may be left to discussion between the parties and can escalate into a dispute.
A well-drafted agreement can allocate responsibility for repairs, reinstatement costs and the consequences of the premises being unusable.
The nature of the tenant’s business also matters. A factory tenant operating heavy machinery, for example, may cause cracking to the floor slab. Structural repair may ordinarily fall within the landlord’s responsibilities, but the agreement should deal expressly with damage caused by the tenant’s own operations.
The key points are:
- abatement or suspension of rent during the affected period
- who is responsible for reinstating the premises and to what standard
- how insurance proceeds are to be applied
- when either party may terminate if the premises cannot be restored within a reasonable time
If a force majeure clause is included, the events it covers should also be stated clearly rather than left to general wording.
3. Permitted use, renovations and restrictions
A tenant can sign a tenancy agreement and still find that the premises cannot be used in the way it intended.
The permitted use clause defines what business activity is allowed on the premises. It should reflect what the tenant actually intends to do, including any planned change or expansion of its business.
The clauses to check together include:
- Permitted use
- Renovation and alterations, including whose consent is required
- Signage
- Subletting and assignment
- Operating hours, particularly in mall and managed building tenancies
- Compliance with building or centre management rules
- Licences and regulatory approvals required for the business
Renovation terms deserve particular attention where the tenant is spending substantially on fit-out. The agreement should be clear on what approvals are required, who bears the cost of reinstatement, and what happens to the renovation works at the end of the tenancy.
4. Early termination
A stated tenancy period does not by itself say what happens if one party wants out sooner.
Where there is no contractual right to terminate early, leaving before expiry may expose the terminating party to significant financial liability, depending on the circumstances and the terms of the agreement.
A commercial tenancy agreement should usually set out:
- termination for breach, including any cure period and the notice required
- termination for convenience, if applicable, and the notice period
- the sums that become payable on early termination
- the landlord’s remedies where the tenant defaults, and the tenant’s remedies where the landlord fails to meet its own obligations.
A fixed term is not necessarily better than a flexible one. A tenant testing a location for a short period may benefit from flexibility while one making a long-term commitment and spending substantially on renovation may instead want greater certainty over the tenancy period, together with clear protection against premature termination.
What matters is that the tenancy period and termination rights are considered together rather than in isolation.
5. Expiry, reinstatement and deposits
Commercial tenancies often involve more than one deposit. A security deposit may cover rent and damage, while a utilities deposit may cover unpaid bills. Mall tenancies may also involve fit-out deposits or deposits for access cards and other facilities.
Each deposit should be dealt with separately, including:
- what the deposit secures;
- what may be deducted from it, and on what basis;
- whether any part may be set off against the final month’s rent; and
- when the deposit must be refunded after the tenant vacates.
On exit, the tenant is typically required to:
- deliver vacant possession;
- remove its own property from the premises;
- reinstate renovation works, where required;
- repair damage;
- return keys, access cards and other items provided by the landlord;
- settle final utility bills; and
- pay the applicable holding-over rent or charges if it remains in occupation after expiry.
Reinstatement is one of the areas most likely to produce disagreement. The agreement needs be clear about what the tenant is required to reinstate and what condition the premises should be returned in.
Recording the condition of the premises in photographs at the start of the tenancy gives both parties a baseline to work from and can reduce disputes when the tenancy ends.
What makes a good commercial tenancy agreement
Commercial tenancies in Malaysia cover a wide range of premise types, including:
- shoplots
- mall and retail
- offices
- factories
- warehouses
Risks also differ depending on how the premises will be used – a mall tenancy governed by centre management rules raises different issues from a standalone factory tenancy.
The value of a good commercial tenancy agreement is in whether it clearly allocates costs, responsibilities and exit rights before they become a dispute.
A standard template may work for a straightforward office tenancy but may not address the risks of a restaurant, retail outlet, factory or warehouse. Landlords and tenants also carry different risks and have different commercial priorities.
The agreement should therefore be reviewed against how the premises will actually be used, what the business is committing to, and where the commercial risks should sit.
Let ELP review your tenancy agreement
If you are looking to rent a commercial unit for your business, or to rent out your own unit, ELP can assist in reviewing and drafting the tenancy agreement to ensure that the allocation of responsibilities is clear and the key commercial risks are addressed before signing. Contact us for an initial consultation.
