ARC News   •   March 06, 2018

In most tenancy agreements, a default clause on termination would normally be prescribed. The standard default clause would provide, among others, that should the tenant wishes to terminate the tenancy before the expiration of the term of the tenancy, the tenant would need pay some form of compensation to the landlord (depending on the agreed arrangement by parties).

A sample of the said clause is as follows:

“in the event of the Tenant vacating from the Demised Premises before the expiration of the term or renewed term of this Tenancy (as the case may be), the Tenant shall forthwith pay to the Landlord a sum equal to the rent for the whole of the unexpired period of the term of this Tenancy as agreed liquidated damages, provided that the Landlord shall refund out of such sum any rent that it shall receive if the Demised Premises is let out during the said unexpired period.”

Standing on the sample clause above, if the tenant wishes to terminate the tenancy before the expiration of the term of the tenancy, the tenant shall pay to the landlord “a sum equal to the rent for the whole of the unexpired period of the term”.

In a way, the provision safeguards the landlord’s rights for the tenant’s breach of the tenancy by compensating the landlord for the remaining period of the tenancy which the landlord expects to receive should the breach did not occur.

However, if the landlord having received the compensation and during the unexpired period of the tenancy subsequently rented out the property to another, the landlord shall refund the rent he received to previous tenant.

The landlord’s rights are protected as far as to compensate him should he is unable to find any new tenant to the property. The provision does not allow the landlord to be making profits out of tenant’s breach.

Alas, this is what the sample clause above prescribed. It would entirely be depended on how your counsel drafted your tenancy’s default clause.

The question that arises at this juncture is whether the compensation/damages as provided in the sample clause above are allowed under the law?

By virtue of section 75 of the Contracts Act, when a contract has been broken and the contract stipulated the amount to be paid for the breach, the innocent party is entitled to receive a reasonable compensation not exceeding the amount named in the contract, whether or not actual damage or loss is proved:

“when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”

Pursuant to the said section, as per the normal claim for damages, “he whom claims must prove his loss.” On this basis, the landlord has to prove his actual loss and damage as a result of the breach.

One may argue that the compensation for the remaining unexpired term of tenancy is only a loss of expectation and that the loss did not even materialise at the time of the breach.

However, the Court in the case of Berjaya Times Square Sdn Bhd v Twingems Sdn Bhd & Anor and another action[1] (“Twingems’ case”) held that the losses suffered by the landlord owing to non-performance by the tenant of its obligations under the tenancy agreement were actual losses. Asmabi Mohamad JC held at 525:

“Whether the plaintiff was entitled to claim for rental for unexpired term of the tenancy agreement and or whether the plaintiff had a duty to mitigate its losses

[49]     The defendants contended that the plaintiff had taken over vacant possession on 18 June 2004 but was seeking for the rental for the entire remaining period of the tenancy which was until November 2006, late interest payment, service charges and advertising fees amounting to RM780,190.66 as at 31 December 2007. Since the first defendant left the said premises earlier which was, on 17 June 2004 the plaintiff had a duty to mitigate its losses and not to take advantage of the defendants and made an exorbitant claim against the defendants.

[50]     Further the defendants alleged that the plaintiff’s claim for rentals for the unexpired term of the tenancy agreement tantamounted to a penalty under s 75 of the Contracts Act 1950 which required proof of actual damage or loss in order to succeed in its claim.

[51]     The losses suffered by the plaintiff in this case was actual losses incurred by the plaintiff for the non-performance of the first defendant’s obligations under the tenancy agreement. Pursuant to cl 10(2) of the tenancy agreement the plaintiff was entitled to claim for the unexpired term as liquidated damages as a result of the defendants non-fulfilment of its part of the bargain.

[52]     Pursuant to cl 10(2) of the tenancy agreement as the tenancy was for a period of three years and the first defendant had prematurely terminated the tenancy and vacated the premises before the expiry of the full term of three years the first defendant is therefore liable to pay the plaintiff these rentals as liquidated damages for the monthly rentals and service charges for the entire duration of the tenancy under the tenancy agreement. The plaintiff therefore had no obligation to mitigate its losses as claimed by the defendants. The plaintiff’s claim was therefore valid and proper and ought to be entertained by this court”[2]

From the above, it is clear that should the tenancy prescribed a compensation/damages to be paid by the tenant for a premature termination, such compensation/damages is allowed under the law. Further, following the Twingems’ case, the landlord is not even obligated to mitigate his losses.

Mohammad Afif Daud is a Partner at Messrs. Afif Rahman & Chong.

Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.

[1]           [2012] 9 MLJ 510.

[2]                [2012] 9 MLJ 525.