This is a summary of the Federal Court judgment dated 5 October 2020 which holds management corporations of a residential strata building can prohibit residential units to be used for short-term rentals such as Airbnb, booking.com, agoda.com and klsuites.com through its own house rules/by-laws.
Facts of the Case
The respondent/plaintiff is a management corporation incorporated under the Strata Titles Act 1985 (‘the STA 1985’) to maintain and manage a development known as “Verve Suits” (‘Verve Suites’) located at No 8, Jalan Kiara 5, Mont Kiara, 50480 Kuala Lumpur. Verve Suites was built on a plot of land held under GM 8661, Lot 67344, Mukim of Batu, District of Kuala Lumpur (‘Land’). The category of land use is ‘Building’ with the express condition that the Land shall be used for commercial building with the purpose of service apartments and commercial only.
The 1st appellant/1st defendant (Innab Salil) is a tenant in Verve Suites. He owns 999.900 shares in the 2nd appellant/2nd defendant (Innab Trade Sdn. Bhd). The two other appellants and the other defendants as they originally were in the High Court are parcel owners in Verve Suites who leased out their units to the 2nd appellant/2nd defendant for short- and long-term rental. The other defendants either settled their suit at the High Court or chose not to appeal to this Court. The 1st and 2nd appellants/defendants had leased some units and managed the enterprise either for some or all of the other defendants.
On 18 November 2015, the Commissioner of Building Kuala Lumpur issued a Circular instructing all joint management bodies or management corporations to curb the prevailing issue of the use of buildings in and around Kuala Lumpur for short-term rental. The plaintiff then held an Extraordinary General Meeting on 25 March 2017 proposing a resolution to enact House Rule No. 3 which prohibits any unit to be used for short-term rentals which includes any stary for which a booking was made through services/applications/websites etc. such as Airbnb, booking.com, agoda.com, klsuites.com and other similar services. House Rule No.3 also imposes a penalty of RM200 for each day the infringement continues if the said rule is breached. The Management also reserves the right to deactivate the access cards and barred the unit from facilities booking. House Rule No.3 was passed with an overwhelming majority votes.
The plaintiff asserted that the House Rule was passed for the purposes of regulating, controlling, managing and administering the use and enjoyment of Verve Suites’ residential units and common property, and for matters relating to the safety, security and use of the individual units and to protect the common property. On 20 April 2017 and 21 August 2017, respondent had notified the residents of implementation of House Rule No. 3. However, appellants had continued to engage in short-term rental activities. Respondent also fined the defendants for breaching House Rule No. 3.
Eventually, some defendants initiated Strata Management Tribunal proceedings against the plaintiff seeking to challenge its implementation of House Rule No. 3. The action failed. The plaintiff, in turn, commenced a writ action in the High Court, where the plaintiff essentially sought to injunct the defendants from breaching House Rule No. 3 and to enforce the same. The defendants argued that their right to rent out their premises short-term is allowed within the ambit of ‘any other dealing’ as provided for in section 70(5) of the Strata Management Act 2013 (SMA 2013). Section 70(5) SMA 2013 states that:
“(5) No additional by-law shall be capable of operating —
(a) to prohibit or restrict the transfer, lease or charge of, or any other dealing with any parcel of a subdivided building or land….”
‘Dealing’ is not defined in the SMA 2013. Nonetheless, section 3 of the SMA 2013 stipulates that the SMA 2013 shall be read and construed with the Strata Titles Act 1985 (“STA 1985”) insofar as their provisions are not inconsistent. Section 5 of the STA 1985 in turn provides that it shall be read and construed as part of the National Land Code 1965 (NLC 1965). Section 5 of NLC 1965 define ‘dealing’ as follows:
““dealing” means any transaction with respect to alienated land effected under the powers conferred by Division IV, and any like transaction effected under the provisions of any previous land law, but does not include any caveat or prohibitory order;”
Section 213 of NLC 1965 states that ‘tenancy exempt from registration’ is a dealing. The defendants classify their transactions as ‘dealings’ on the basis that their short-term rental constitute ‘tenancies exempt from registration’ under section 213 of the NLC 1965. Hence, defendants argued that House Rule No. 3 violates section 70(5) of SMA 2013 because the House Rule No. 3 infringe the defendant’s right to deal with their land.
On the other hand, the plaintiff argued that short-term rentals are mere licences and short-term rentals do not amount to a lease or a tenancy exempt from registration. Hence, it cannot be regarded as ‘dealings’ and go against section 70(5) of SMA 2013.
The High Court (HC) allowed the plaintiff’s application and held that:
The relationship between the houseguests and the defendants are like that of a hotel guests, one of licensee and licensor.
Plaintiff’s pleadings and affidavits set out numerous incidents where the defendants’ house guests had misused common facilities and caused a nuisance to the residents and compromised the safety and security measure put in place by the management corporation.
The SMA 2013 constitute social legislation. The duties and powers of the management corporation are set out in section 59 of the SMA 2013 and section 70(2) of the same Act empowers the management corporation, by special resolution to make by laws, for among others safety and security measures.
The interest of the community in the strata body prevailed over the individual commercial interests of the defendants. Moreover, all parcel owners had respectively signed a Deed of Mutual Covenants (‘DMC’) comprising certain positive and negative commitments which tally with House Rule No. 3.
Aggrieved by the decision, the defendants appealed.
The Court of Appeal (COA) upheld the decision of the High Court and dismissed the appeal. The COA opined that in determining the nature of the occupancy, it matters not what label parties ascribed to their transaction or even the length of the stay by the short-term renters. What matters is the nature of the stay. COA held that it is absurd to regard short-term stay as tenancies exempt from registration because it would mean that the defendants would need to endorse a short stay of each guests and cancel the same every upon departure.
The defendants then obtained leave to appeal to the Federal Court (FC) on 2 issues.
Issues of the Case
Whether as a matter of law, a Management Corporation established under the relevant statutes to maintain and manage commercial service suites built upon a land held under category of “Building” and express condition of “Commercial Building”, may enact and pass House Rules to prohibit the owners of the commercial service suites from commercial usage, in particular, for short-term rental (i.e. for a day or part thereof), which is consistent with the express land use found in the document of title?
Whether as a matter of law, a Management Corporation established under the relevant statutes to maintain and manage commercial service suites, built upon a land held under category of “Building” and express condition of “Commercial Building”, and who has enacted and passed House Rules to prohibit the owners of the commercial service suites from using their property for short-term rental (i.e. for a day or part thereof), are in violation of Section 70(5) of the Strata Management Act 2013 when enforcing the said prohibition in the House Rules against the said owners?”
Judgment of the Court
Issue 1: Whether the House Rules may override and supersede the express land use on the title imposed by the State Authority under section 120 of the NLC 1965.
Defendants contended that House Rule No. 3 cannot trump the express land use on the title of the Land as imposed by the State Authority and that House Rules only ought to regulate and not prohibit entirely the defendants’ business of short-term rentals.
The FC held that SMA 2013 was passed to facilitate the strata living for the good community or owners of the strata title. being a social legislation, it ought to receive a liberal interpretation and favours the interest of the community over the interest of the individual. Section 120 of the NLC 1965 provides for the general power of the State Authority to determine and impose the conditions and restrictions of use of any particular land or any part thereof. The SMA 2013 on the other hand is a more specific statute governing strata living and all other matters related thereto. Section 70(2) of SMA 2013 states:
“(2) A management corporation may, by special resolution, make additional by-laws or make amendments to such additional by-laws, not inconsistent with the by-laws prescribed by the regulations made under section 150, for regulating the control, management, administration, use and enjoyment of the subdivided building or land and the common property, including all or any of the following matters:
(a) safety and security measures;
(b) details of any common property of which the use is restricted;
(c) the keeping of pets;
(d) parking;
(e) floor coverings;
(f) refuse control;
(g) behaviour;
(h) architectural and landscaping guidelines to be observed by all proprietors; and
(i) imposition of fine not exceeding two hundred ringgit against any proprietor, occupant or invitee who is in breach of any of the by-laws.”
Under section 70(3), it states that the enacted by-law is binding on the proprietors, any chargee, lessee, tenant or occupier of the parcel.
FC held that the conditions and restrictions of use in the title of the land issued by the State Authority does not prohibit the management corporation from enact further rules, regulations or by-laws for the purposes stipulated in section 70(2) of SMA 2013. Under section 225 of the NLC 1965, it states that the power granting certain rights and the protections in respect of leases and tenancies may be subject to other rules and conditions stipulated by any other written law.
The FC referred to Weng Lee Granite Quarry Sdn Bhd v Majlis Perbandaran Seberang Perai [2020] 1 MLJ 211 and held that even if the State Authority permits the use of the Land for commercial purposes, such use is still subject to other laws in force, in particular to section 70 of the SMA 2013. Hence, the passing of House Rule No. 3 is not unlawful. The legal force of House Rule No. 3 is derived from section 70 of the SMA 2013 for the purpose of regulation.
Issue 2: whether the management corporation’s enforcement of the House Rule No. 3 is in violation of section 70(5) of the SMA 2013.
The Plaintiff contended that the various arrangements between the defendants and their short-term tenants were merely one of a licence and hence, not collectively a “dealing” caught within the confines of section 70(5)(a) of the SMA 2013. The defendants rejected the contention and maintained that those arrangements are tantamount to ‘tenancies exempt from registration’ and hence constitute collectively a “dealing”.
The Court proceeded to determine the ‘Test’ to distinguish a Tenancy from a Licence.
The learned authors of Land Law in Malaysia – Cases and Commentaries (Third Edition, LexisNexis 2012) at page 359-361 indicate that there are two different approaches for making that distinction. The first and the more traditional test is the exclusive possession test. The second test is to determine the intention of the parties. In the second test, exclusive possession is still an important element but the Courts are more concerned with whether parties intended for their arrangement to constitute more than just a licence.
After making references to Street v Mountford [1985] AC 809 (‘Street’), Radaich v Smith (1959) 101 CLR 209 (‘Radaich’), Marchant v Charters [1977] 2 All ER 918 (“Marchant”), Woo Yew Chee v Yong Yong Hoo [1979] 1 MLJ 131 (‘Woo Yoo Chee’) and Mohamed Mustafa v Kandasami [1979] 2 MLJ 109 (‘Mohamed Mustafa’), the FC held that the following principles may be distilled from the cases on the test to distinguish between a tenancy and a licence:
(i) Courts must first ask whether there is proof that the owner of the premises granted the occupier the right to exclusive possession of the premises. If the occupier can prove that he enjoys exclusive possession, then it is highly likely that the arrangement is a tenancy and not a licence. It would be for the other side, namely the grantor, to prove exceptional circumstances that despite the grant of exclusive possession to the occupier, parties did not intend to establish a tenancy.
(ii) Where the occupier is not conferred or is unable to establish that he has exclusive possession of the premises, the Court must nonetheless determine the nature and quality of the occupancy. This includes analysing the terms of any written or oral agreement between parties as to whether they intended for the nature and quality of the occupancy to be more consistent with the rights of an occupier under a tenancy.
(iii) ‘Intention’ or ‘nature and quality’ here refer to specific indicators such as whether parties intended the occupier to have certain rights and obligations which are consistent with that of a tenant under tenancy laws – including but not limited to control of rent, and other relevant protections sufficient to create an interest in the land.
(iv) Where there is no proof of exclusive possession and there is not manifest any intention that the nature and quality of the occupancy do constitute a tenancy, it would be appropriate for the Court, in those circumstances, to conclude that the arrangement was intended to be merely a licence and not a tenancy.
(v) Whatever labels parties use to describe their arrangement or the occupancy, for example, ‘lease’, ‘tenancy’ or ‘licence’ is relevant in the determination of their intention and the nature and quality of the occupancy, but is neither decisive nor conclusive. Accordingly, Courts and Judges must be mindful of the peculiar facts and circumstances of each and every case that comes before them.
(vi) In each and every case, particular emphasis needs to be paid to the substantive obligations parties have under the agreement, whether written or oral, and not so much the language and labels they ascribed to the words. This is important because unscrupulous parties might attempt to disguise the true nature of their agreement by bending the language they use to disguise it as one form of occupancy over another.
From the above, it is clear that there is no singular test to determine whether an occupancy is a tenancy or a licence. Instead, the Court will have to consider the whole circumstances of each case to determine the question of whether the agreement to occupy is in law and in fact a tenancy or a licence.
The defendants maintained that their arrangements with their house-guests do confer on them the rights to exclusive possession and by that token, the short-term rentals are tenancies as opposed to mere licensees. In support of their proposition, the defendants relied on the decision of the Supreme Court of Victoria in Swan v Uecker [2016] VSC 313 (‘Swan’).
The COA did not examine in detail the Swan decision which was relied heavily by the defendants, it did nonetheless compare Swan with other analogous judgments such as that of the Privy Council in O’Connor (Senior) & Ors v The Proprietors, Strata Plan No 51 [2017] UKPC 45 (‘O’Connor’) in addition to other tribunal level decisions. The FC hold the view that the decision of the Supreme Court of Victoria in Swan is not in accordance with the larger body of principles articulated by decided cases in Australia, England and Wales, and even our own Malaysian authorities and hence does not lend much support to the arguments advanced by the defendants.
The defendants also argued that exclusive possession creates tenancy. In this respect, the FC examine whether on the evidence, the defendants have successfully established that the third-party short-term renters are tenants on the basis that the renters were in exclusive possession of the premises.
The learned HC judge had referred to clause 8.2.1 of Airbnb Terms of Service which provides:
“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.”
it is crucial to observe that the clause specifically informs the occupant that in the event that they fail to leave the premises on time, the host retains the right to re-enter and remove them. This is inconsistent with tenancy rights in that even if a tenant holds over, he cannot be removed except in accordance with an order of possession.
Another relevant provision in the Airbnb agreement is clause 8.1.3 which reads:
“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.”
The above clause clearly negates any inference that the defendants granted their third-party guests’ exclusive possession of their premises. The fact that the defendants can, by virtue of the Airbnb Terms of Service, regulate the number of guests the short-term renters can allow into the premises, indicates that the said renters do not have the right to manage their own use of the premises to the exclusion of the defendants.
At all material times relevant to this appeal, the defendants let out their premises to third-party vacationers or lodgers for commercial purposes. The purpose of the letting, as can be gauged from the terms of the Airbnb Terms of Service and as dictated by common sense, suggests that the defendants intended their premises to be used like a hotel or a lodging facility. The terms such as ‘Host’ used to describe the defendants and ‘Guests’ to describe the short-term renters therefore mean exactly what they say. It is therefore safe to assume that be it via Airbnb, klsuites.com or any other booking site, these platforms were only intended to be vehicles for the singular activity of short-term rentals for profit. There is no proof by the defendants of exclusive possession on the part of short-term renters nor does the evidence suggest that the nature and quality of the occupancy of the said renters was ever intended to be a tenancy.
On another point, Swan explained that the shortness of the length of stay in itself is not indicative of an intention to deny exclusive possession and hence does not by itself negate the creation of a tenancy. In this regard, FC note that section 223(2) of the NLC 1965 recognises tenancies created by word of mouth and that section 224(a) allows week-to-week tenancies. Thus, the fact that the duration of stay is short in itself is not lack of proof of the creation of tenancy.
For the above reasons, the FC hold that the said arrangements are mere licences and therefore do not amount in law to “dealings” within the ambit of section 70(5) of the SMA 2013. Accordingly, House Rule No. 3 is not ultra vires section 70(5). As concurrently found by the High Court and the Court of Appeal, the said House Rule was enacted for the many legitimate purposes under section 70(2) or for that matter, for the purposes under which the plaintiff was established under section 59 of the SMA 2013.
Hence, the Federal Court dismiss the appeal with costs and upheld the decisions of the courts below.
The full judgment of the Federal Court can be found at the link here.
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