Co-authored by Nuramira Binti Mazlan* and Amanda Pang**.
One of the most frequently asked questions by potential home buyers is whether they will be able to short-let their strata residential property i.e. for Airbnb services. The answer to this question has always been rather inconvenient: “It depends on management”. Unlike countries such as Japan and Singapore, there is no law in Malaysia regulating short-term rentals. In the absence of Local Authority prohibition, it appears that it is Management Corporation (i.e. the home owners themselves), who will determine whether short-letting is allowed in the property.
This was the position taken by the Federal Court, in the recent case of Innab Salil & Ors v Verve Suites Mont Kiara Management Corporation [2020] MLJU 1563. A three-member bench, chaired by Chief Justice Tengku Maimun Tuan Mat confirmed that Management Corporation (“MC”) has the power to prohibit short-term rentals under the Strata Management Act 2013 (“SMA”).
In this article, it will be stressed that the Verve Suites case should be interpreted with caution – the Federal Court did not ban short-term lettings, but merely confirmed the power of building management to do so upon a special resolution being passed. Further, it is proposed that safeguards in the form of guidelines and legislation is imminent to prevent misapplication of the power endorsed onto MC.
BRIEF FACTS OF THE CASE
The dispute arose as a result of several owners of Verve Suites having engaged in Airbnb rental activities, in breach of the property’s “House Rule No. 3”. House Rule No. 3 was passed by the MC in an EGM held on 25th March 2017, in response to COBKL’s request for all building managements to resolve issues relating to short-term rentals in and around Kuala Lumpur.
The MC of Verve Suites then instituted legal proceedings against the offending owners, seeking an order for injunction to prevent them from continuing with short-term rental activities in the building or to advertise such lettings on booking websites such as Airbnb, booking.com, agoda.com and klsuites.com. The suit was eventually won by the MC at all levels of court – the High Court, Court of Appeal and Federal Court.
ISSUES BEFORE THE FEDERAL COURT
- Whether MC can enact and pass House Rules that override and supersede State Authority – in this case, the document of title issued by the land office allows the land that Verve Suites was sitting on, to be used for commercial purposes.
- Whether enactment of House Rule No. 3 is in violation of Section 70(5) of the SMA 2013 – which states that MC cannot enact by-laws capable of prohibiting or restricting owners’ dealing with their land.
DECISION OF THE FEDERAL COURT
The Federal Court held as follows:-
- That simply because State Authority has issued conditions on the use of the land (‘for commercial purposes’), does not preclude MC from promulgating rules or by-laws for the purposes of managing the building. The reason given by the Court was that “the SMA 2013 is a social legislation, and ought to be interpreted in a way which favours the interest of the community over the interest of the individual”. Therefore House Rule No. 3 was validly passed.
- As to whether MC can enact rules that interfere with homeowners’ dealing with their property, the Federal Court unanimously found on the facts that it could. This was because the Airbnb services in this case were likened to hotel services, whereby guests do not have exclusive possession of the rented property. Accordingly, the Airbnb services did not fulfil the definition of ‘dealing’ under the section 70(5) prohibition and MC was not prohibited from enacting House Rule No. 3.
IMPACT OF THE DECISION
The Federal Court essentially endorsed the power of building managements to enact by-laws that prohibit short-term rentals in strata residential buildings. This is so even if the issue document of title allows the land to be used for commercial purposes.
Nevertheless, there are a number of caveats to the Federal Court’s ruling:
a) A special resolution must be passed before MC can enact and enforce House Rules prohibiting short-term rentals. In other words, there is no blanket ban on short-term lettings. Owners must still vote on whether to issue a ban.
b) Not all forms of short-term lettings can be prohibited by building management. As per Tengku Maimun CJ in Verve Suites, “What matters is the nature and quality of the occupancy, not the length of stay or what label the parties ascribe to their transaction”.
Despite such caveats, it was reported that following the judgment, Penang is drawing up guidelines for management bodies of apartments and condominiums to enforce the ban on homestays or short-term rentals through their house rules.
The above report was taken as a sample response to the Federal Court Judgment. In reality, allowing homeowners/building management to self-regulate short-term rental permissions would eventually lead to a complete ban of short-term rental activities in strata buildings. This is because of the composition of MC which generally consists of higher home occupier to home investor ratio. In other words, it is easier to enact a ban on short-term rentals, than to prevent it. This could present innumerable problems as will be discussed below.
SUGGESTION
Regulate, not ban.
Why?
Without turning into property gurus, here are some obvious benefits of short-term rentals:
1. Tourism recovery. It was reported that prior to the Covid-19 pandemic, the Airbnb community in Malaysia made a significant contribution to the local tourism industry and economy. A blanket ban on short-term lettings of strata residences could therefore threaten Malaysia’s tourism recovery.
2. Housing market growth. Short-term letting is attractive to property investors who want higher rates than long-term rentals and greater flexibility to extend tenancy contracts. A ban on short-term lettings could indirectly drive down the sale of residential properties, not to mention run counter-purpose to the government’s aims of reducing the supply overhang of condominium and apartments in urban areas.
3. Potential source of government income. Notwithstanding the fact that less rental restrictions attract more local and foreign property investments, there is also suggestion that short-term rentals i.e. Airbnb services may soon be taxed to ensure level playing field with the hotel industry. Thus, a ban on short-term rental activities is a loss of potential government revenue.
How to regulate?
Guidelines
Earlier this year, the Malaysia Productivity Corporation released a best practice guidelines for regulating short-term accommodation in Malaysia. The guidelines addressed, among others, issues relating to licensing requirements, night cap and safety of occupiers. See http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.work.nc.custom.regulation.cls?regId=48.
Legislation
This goes without saying. There must be primary legislation to ensure guidelines have the force of law. Below is a comparative study on Japan and Singapore, showing the examples and effects of legislation of short-term rentals.
Japan
In June 2018, Japan introduced the Private Lodging Business Act to regulate short-term stays at privately owned homes. The Act, among others, imposed requirements for home-letters to:
- Register with the relevant government offices
- Submit details of all guests every two months
- Restrict operation to only 180 days per year
(Note: Homeowners are still subject to short-term rental restrictions enforced by the local authority)
Immediately after the implementation of the Private Lodging Business Act, Airbnb removed nearly 80% of properties available on their website because the hosts have not registered with the local authorities. One year after the implementation of the Act, it was reported that the short-term rental industry in Japan began to recover. There had been a significant increase of private lodgings registered with local authorities compared to the year the Act was enforced.
Singapore
In Singapore, the Planning Act (Chapter 232) makes it illegal for private homeowners to let out their properties for a period of less than 3 months. These regulations however, did not deter some homeowners from continuing to list their properties for short-term rentals creatively i.e. purportedly letting out the property for three months, but providing guests/tenants the option to terminate the rental at anytime.
CONCLUSION
The absence of guidelines on Management Corporation’s newly validated power to ban short-term rental activities in strata buildings, can present a serious blow to our economy. A comparative study of countries such as Japan and Singapore shows that legislating for short-term rentals have varying degrees of success. This does not mean that legislation should be dispensed with, but that one should be tailored to the demographics of the area. Regulate, not ban.
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*Nuramira Binti Mazlan obtained her Bachelor of Laws from the International Islamic University of Malaysia. She commenced her legal profession in 2013 at Messrs Christina Chia Law Chambers where she remains in practice to date. Her legal practice consists of conveyancing and corporate matters.
**Amanda Pang Tsu Teng completed her studies in law at Cardiff University with an LLB Law (Hons), LLM (International Commercial Law) and Bar Professional Training Certificate (BPTC). She is a dispute resolution lawyer and occasionally writes in her law blog at latenightlaws.com.
Agreed. Mgmt bodies could always set conditions on the short-term rentals to protect the interests of the other residents. A flat-out ban is just unfair on homeowners who want to rent out especially in these tough economic times. Quite ironic when the SMA is said to be a social legislation and all.
Yeah especially post-covid recovery! We can suffer. Management has no incentive, they’re made up of mainly residents themselves. However, I’ve been informed that property agents are teaming up to make sure they have the votes to block the bans, even before sale. Not sure about that but what we always want is balance and fairness.
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