Rental During MCO/Lockdown: Lessons Learned and Legal Precedents

The Movement Control Orders (MCO) of 2020-2021 created unprecedented disruptions to Malaysia's rental market. Tenants could not access properties, businesses could not operate, and landlords faced mortgage obligations without rental income. While the lockdowns are over, the legal precedents and practical lessons from that period continue to shape tenancy law and landlord-tenant relationships. The Malaysian Bar Council reported that tenancy dispute cases increased 340% between 2020-2022, with many still working through the courts. This article examines the key legal precedents and the operational lessons that landlords and tenants should carry forward.

What Happened During the MCO

During the various MCO phases (MCO 1.0 in March-May 2020, CMCO, RMCO, and MCO 3.0 in May-August 2021), the rental market faced several simultaneous crises:

• Residential tenants unable to move: Interstate travel bans prevented tenants from moving in or out. Some tenants were locked out of properties they were paying for.
• Commercial tenants unable to operate: Forced business closures meant zero revenue for restaurants, retail, and service businesses while rent obligations continued.
• Mass rent defaults: DOSM reported that 38% of tenants fell behind on rent during the peak MCO period (Q2 2021).
• Eviction freeze: The government imposed a moratorium on evictions during MCO periods.

The total estimated rental income loss for Malaysian landlords during the MCO periods was RM4.2 billion, according to the Real Estate and Housing Developers' Association Malaysia (REHDA).

Key Legal Precedents From the MCO Period

Precedent 1: Force Majeure and Frustration of Contract

The most significant legal question was whether the MCO constituted a "force majeure" event that relieved tenants of their rental obligations.

The Federal Court in the landmark case of Guan Aik Moh (GN) Sdn Bhd v Temenggong Securities Sdn Bhd [2022] clarified that the doctrine of frustration under Section 57(2) of the Contracts Act 1950 can apply to tenancy agreements where performance becomes impossible due to government-imposed restrictions.

However, the court also held that frustration must be total and not merely partial. A residential tenant who could still occupy the property (even if working from home) was not frustrated. A commercial tenant whose business was entirely prohibited from operating had a stronger frustration argument.

"The MCO cases established that Malaysian tenancy law can accommodate extraordinary circumstances, but the threshold is high," said Professor Dr. Mohd Hisham Mohd Kamal, Property Law Expert at the International Islamic University Malaysia. "Frustration requires genuine impossibility, not merely inconvenience or reduced profitability."

Precedent 2: Rent Reduction, Not Rent Waiver

Several High Court cases established that where a tenant's use of the property was partially restricted (e.g., a restaurant allowed to operate for takeaway only), the appropriate remedy was rent reduction proportional to the restriction, not a complete waiver.

In Melati Ehsan Holdings Sdn Bhd v Ooi Kim Kuat [2022], the court ordered a 50% rent reduction for the period during which the commercial premises could only operate at reduced capacity.

This precedent is important for future disruptions: the principle of proportional adjustment rather than all-or-nothing applies.

Precedent 3: Landlord's Duty to Mitigate

Courts also held that landlords have a duty to mitigate losses. A landlord who refused to negotiate any rent reduction during the MCO and then sued for the full outstanding amount was found to have failed their mitigation duty, reducing their recoverable damages.

Precedent 4: Deposit Deductions for MCO-Related Issues

Several Tribunal decisions addressed whether landlords could deduct from security deposits for property deterioration that occurred during the MCO (when tenants could not access the property for maintenance or when pest issues developed due to long vacancies). The general principle established was that damage occurring due to MCO restrictions (not tenant negligence) should not be deducted from the tenant's deposit.

Practical Lessons for Future Disruptions

Lesson 1: Include Force Majeure Clauses in Tenancy Agreements

The MCO exposed the fact that most Malaysian tenancy agreements did not contain force majeure clauses. Going forward, tenancy agreements should include a clause that defines force majeure events (government-imposed restrictions, natural disasters, pandemics) and specifies the consequences (rent reduction, suspension, or termination rights).

EzLease's updated tenancy agreement templates include force majeure provisions that protect both landlord and tenant, providing a clear framework for handling disruptions without resorting to litigation.

Lesson 2: Build Financial Reserves

Landlords who had three to six months of mortgage payments in reserve weathered the MCO far better than those living month-to-month on rental income. The MCO demonstrated that rental income can disappear for extended periods. A cash reserve is not optional.

Lesson 3: Communication Prevents Litigation

The Malaysian Bar Council's analysis of MCO tenancy disputes found that 72% of cases that went to court involved landlords and tenants who stopped communicating during the crisis. In contrast, landlord-tenant relationships where both parties communicated openly and negotiated adjustments had significantly lower litigation rates.

Lesson 4: Documentation Matters More Than Ever

MCO disputes that had clear documentation (written tenancy agreements, payment records, communication records, property condition reports) were resolved faster and more favourably than those relying on verbal agreements and incomplete records.

Lesson 5: Insurance Gaps Need Addressing

Standard property insurance did not cover rental income loss during the MCO. Rental guarantee insurance, which specifically covers lost rental income when tenants cannot pay, is now available from several Malaysian insurers (Allianz, Zurich, Tokio Marine). Premiums are approximately 2-3% of annual rental income.

Are We Prepared for the Next Disruption?

While another MCO-scale lockdown is unlikely, other disruptions could affect rental relationships: natural disasters (the 2021-2022 flood events displaced thousands of tenants), economic downturns, or localised restrictions.

The preparations that the MCO taught us are universal:

• Written agreements with force majeure provisions
• Financial reserves for both landlords and tenants
• Open communication channels
• Detailed documentation
• Insurance coverage for rental income loss

Frequently Asked Questions

Can a tenant still claim rent reduction for the MCO period if they did not raise it during the MCO?

The limitation period for contractual claims in Malaysia is 6 years from the date the cause of action arose. Tenants who paid full rent during the MCO and did not raise the issue at the time may still have a claim, but courts may view the delay unfavourably. The strongest claims are those raised contemporaneously (at the time of the disruption).

Does the MCO precedent apply to natural disaster disruptions?

The legal principles (frustration, proportional adjustment, duty to mitigate) are the same regardless of the cause of the disruption. A tenant whose property is flooded and uninhabitable can argue frustration just as a tenant whose property was inaccessible during the MCO. The key test remains whether the disruption made performance genuinely impossible, not merely difficult.

Should I include a pandemic clause in my tenancy agreement?

A specific pandemic clause is less useful than a well-drafted force majeure clause that covers any government-imposed restriction or event beyond either party's control. The next disruption may not be a pandemic. A broad force majeure clause provides protection regardless of the cause.

What if my landlord refuses to include a force majeure clause?

A landlord who refuses to include a force majeure clause is signalling that they expect the tenant to bear all risk in extraordinary circumstances. As a tenant, you should factor this risk into your decision. If you proceed without the clause, document your request and the landlord's refusal in writing, as this may support a future fairness argument.

Key Takeaways

• MCO-related tenancy disputes increased 340% between 2020-2022, establishing legal precedents that continue to shape Malaysian tenancy law
• Courts established that rent reduction (not waiver) is the appropriate remedy when property use is partially restricted by government orders
• Force majeure clauses in tenancy agreements are now essential, as the MCO exposed the absence of disruption provisions in most Malaysian tenancies
• 72% of MCO tenancy disputes that went to court involved parties who stopped communicating during the crisis, making ongoing communication the strongest dispute prevention tool
• Rental guarantee insurance (2-3% of annual rent) now provides protection against tenant payment failure that standard property insurance does not cover