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Leasing and Tenancy
19/02/2002 The Star Articles of Law with Bhag Singh
I have often referred to the words “lease” and “leasing”. In the context of
the use of such words terms such “lessor” and “lessee” do come in for consideration.
A lessor is a person who owns a property and therefore grants the lease while
the lessee is the person to whom the lease is granted.
A reader asks what the difference between a “lease” and a “tenancy” is. Those
words are also used in the context of vehicles and equipment and other such
items.
Basically the word “lease” conveys the meaning of “to rent” which is to have
the benefits of something in return for payment of a certain sum of money. Traditionally
this relationship existed in the context of land and landed property.
The owner of the property allows another to occupy it and in return the other
person pays money in a lump sum in advance or periodically such as weekly, monthly,
quarterly or yearly. The payment is referred to as rent.
Traditionally, the word “tenancy” has been used for letting for short periods.
When such a letting is for a longer period, it is called a lease. In the context
of our National Land Code which only applies in peninsular Malaysia, a tenancy
is for a period of up to three years. Any longer than that and it becomes a
lease.
Difference
Under the National Land Code all leases have to be registered. Registration
results in the fact of the letting to be endorsed on the title deed and therefore
in the Register of Titles. In fact a lease that is not registered is said to
be void.
The registration is thus highly beneficial to the lessee because his interest
in the title is effectively made known to third parties. Any person taking a
subsequent charge does so subject to the existing lease.
On the other hand a tenancy is exempted from registration. Therefore if a third
party is buying the land or creating a charge, such a person may not know about
the tenancy which is not registered.
In consequence when there is a tenancy which by its nature is not required to
be registered or a lease that ought to have been registered but is not, then
a person having a charge or buying the property may not be aware of the earlier
transaction.
If the person registers the charge or transfers of the property in his favour,
he will have what is referred to as a registered interest which will have priority
over any unregistered interest such as that the person having the tenancy or
an unregistered lease may otherwise have.
Disadvantaged Position
Thus the person with an unregistered interest will be in a disadvantaged position.
As stated earlier the national Land Code stipulates that an unregistered lease
is void. However what this really means is that the rights of an unregistered
lessee are inferior in comparison to a charge or buyer who has obtained a legal
charge or transfer.
This means that such a person could exercise his right to sell off the land
or to require the tenant or unregistered lessee to vacate the premises even
though there is an agreement to occupy the premise with the previous owner for
a specified number of years.
This does not mean that the tenant or lessee has no remedy. He could in turn
take action against the previous owner for a breach of contract for having deprived
him of his rights to continued occupation by charging or selling the property.
The tenant or lessee does not in such circumstances have a defence against the
chargee or new buyer who has asked him to vacate the premises. The situation
would have been different if the lease had been registered in which case the
right to continuation of occupation for the entire duration would have been
assured.
Thus it will be seen that the provision for registration exists for the protection
of the lessee who takes on rent premises. Yet ironically, most people would
avoid registration of a lease because of the need to register and the additional
cost incurred.
Leasing Equipment
However the word leasing is no longer confined to renting of landed property
alone. It has for long time also been used for the acquisition of vehicles,
equipment and machinery and other movable items. In these contexts, its applications
are somewhat different.
This is because leasing in these areas is a means of acquiring eventual ownership
of an item or object through periodic payments.
Unlike landed property where rentals are based on a reasonable annual return
on the value of the property, the underlying basis of leasing transaction is
the rental is based on the price of the item to which is added interest or a
reasonable amount of return and divided by the number of months over which it
is intended to recover the capital cost and the desired returns.
At the end of the lease period, it is quite common for the lessee to have a
“right” to purchase the items at a nominal cost. In this sense there is little
difference between a lease transaction and a hire purchase transaction where
it is an agreement to acquire an item by paying rental with an option to purchase.
What makes a leasing transaction attractive is the manner in which tax is computed
in respect of lease payments as compared to hire purchase transaction only capital
allowances are allowed but in the case of lease payments, the entire payment
is deductible as expenditure against income.
This is of course only applicable where a commercial entity is concerned where
the deduction of the entire lease payment in the year against the gross income
is perceived to be more beneficial. It is for this reason that such leasing
arrangements normally do not involve individuals.
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