Introduction

Management Corporations of residential strata buildings are now empowered through their own house rules to bar short-term rentals of units in their buildings.

The Federal Court in Innab Salil & 3 Ors v Verve Suites Mont’ Kiara Management Corporation [2020] 1 LNS 1131 decided in favor of Verve Suites Mont Kiara Management Corporation in respect of the enactment of House Rule No 3, which was passed by an overwhelming number of resident present and voting during an extraordinary general meeting to prohibit the use of the residential units in Verve Suites for business including short-term rental.

By this dismissal, the Federal Court had endorsed the Court of Appeal decision of Innab Salil & Ors v Verve Suites Mont Kiara Management Corporation [2020] 3 CLJ 480.

Accordingly, the prohibition by the Management Corporation to bar short-term rentals will not be an unlawful act with reference to the Strata Management Act 2013 (“SMA”) and Strata Management (Maintenance and Management) Regulations 2015 (“SMR”).

Brief Facts

Verve Suites Mont Kiara Management Corporation (the Plaintiff) was incorporated pursuant to the Strata Titles Act 1985 (“STA”) to maintain and manage a residential development known as Verve Suites.

Innab Salil (the 1st Defendant) was a Swedish national and a tenant in a unit of Verves Suites. The 1st Defendant owned 999.900 shares in the 2nd Defendant, a company incorporated in Malaysia, which operated rental in Verve Suites and managed by the 1st Defendant. The 2nd Defendant rented out units in the Verve Suites on a short-term and long-term rental basis.

The Commissioner of Building Kuala Lumpur (“COBKL”) issued a circular, instructing all Joint Management Corporation (“JMC”) or Management Corporation (“MC”) to address issues relating to short-term rentals in strata buildings.

Verve Suites Mont Kiara Management Corporation then held an Extraordinary General Meeting (“EGM”) and proposed the enactment of House Rule No 3 which was passed by an overwhelming majority of 96-4 at the EGM.

House Rule No 3 prohibited the use of the residential units in the Verve Suites for business, including short-term rental.

The Defendants however continued the short-term rental basis in clear defiance and in total breach of House Rules 3. Fines of RM 200.00 per day were issued by the Plaintiff against the residents who failed to abide by House Rule No 3.

In The High Court

The Plaintiff filed a Writ action against the Defendants for the enforcement of House Rule No 3. During a Case Management, the High Court Judge ruled that the matter was suitable for disposal pursuant to Order 33 rule 2 of the Rules of Court 2012 (which the parties mutually agreed) to determine the question of law as to whether, the enforcement of House Rules 3 had violated Section 70(5) of the SMA.

The High Court allowed the claim of the Plaintiff and entered Judgment as against the Defendants but struck down the part of the House Rule No 3 that imposed the fines of RM 200.00 per day as it violated Section 70(2) of the SMA.

In The Court IOf Appeal

The salient parts of the Court of Appeal decision can be summarized as follows:-

1. That under Section 70(2) of the SMA to be read together with Regulations 5 and 28 of the SMR, a MC is empowered by special resolution to make additional by-laws and subject to the limitations found in Section 70(5)(a) of the SMA 2013.
2. That the MC has the right to enact House Rule No 3 consonant with Section 59 and Section 70(2) of the SMA to be read together with Regulations 5 and 28 of the SMR.
3. That the House Rules No 3 had been registered with the COBKL pursuant to Section 70(6) of the SMA.
4. That House Rule 3 had not violated Section 70(5) of the SMA. House Rule 3 was an additional by-law within the meaning of Section 70(2) of the SMA which is valid and enforceable. House Rules 3 is not oppressive and unreasonable.
5. Short-term rental created problems like cloning of access cards as a serious breach of security and safety in community living.
6. The legislative intent of the SMA was to advance the communal living within a strata scheme. It would therefore defeat the spirit and purpose of the SMA for proprietors to use their residential units in the form of business enterprise such as short-term rentals.
7. MC is not authorized by Section 70(2)(i) of the SMA to impose a fine of RM200.00 for each day the infringement continues.

In The Federal Court On THe Questions OF LAW

Two Questions of Law were posed in the Federal Court. The Federal Court in answering Question 1, “On whether a Management Corporation 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)”, answered in the affirmative, meaning House Rules may be passed by the MC.

On Question 1, the Federal Court held as follows:-

1. The SMA is a social piece of legislation and passed to facilitate the affairs of strata living for the good of the community or owners of the strata title.
2. The legal force of House Rule No 3 derives from the SMA and the restrictions imposed by the said House Rule No 3 are additional conditions for purposes of regulation under Section 70 of the SMA.

The Federal Court in answering Question 2, “On whether the Management Corporation was 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”, answered in the negative, meaning the prohibition can be enforced by the MC.

On Question 2, the Federal Court held as follows:-

1. That short-term rentals amounted to licences and not tenancies. Short-term rentals do not amount in law to "dealings" within the ambit of section 70(5) of the SMA.
2. The formation of a tenancy lies on the requirement of exclusive possession.
3. House Rule No. 3 is not ultra vires Section 70(5) of the SMA.

Conclusion

The decision of the Federal Court focused on ensuring the security and safety measures in residential strata properties by not permitting short-term rental activities for strata properties.

Incoming and outgoing occupants can pose a problem for the communal living and the dangers of cloning of access cards can lead to unwarranted breach of security and enjoyment of safety and peace.

Be that as it may, it will be a misconception to say that the Federal Court decision has a far-reaching consequence to prohibit all short-term rentals. If the House Rules of a particular apartment or condominium permits short-term rentals then there should be no impediment at all. At the end of the day, it will be up to the Management Corporation of a respective building whether short-term rentals would be allowed in their building.

It must also be borne in mind that Airbnb is a popular short-term rental concept in Malaysia. Airbnb, being more affordable option for tourists, helps boost tourism where the property is in a strategic location easy for public transportation, restaurants, shopping and tourist attractions. In 2019, Airbnb in Malaysia contributed an estimated RM3 billion to the economy.

The Malaysian Productivity Council (“MPC”) has set up guidelines on short-term rentals for economic productivity which include safety requirements, nuisance control and a licensing framework.

Perhaps the Legislature ought to consider regulating short-term rentals to address both the economic and social impact and ensure its viability in Malaysia such as what Japan has done with the introduction of the Private Lodging Business Act in 2017.