Unravelling validity of tenancy agreement that contravenes land’s express condition

Our Tan Min Lee and Lee Hui Juan discuss the Federal Court’s decision in Singma Sawmill Co Sdn Bhd v Asian Holdings (Industrialised Buildings) Sdn Bhd.

In Tan Sri Dato’ Lim Cheng Pow v Bellajade Sdn Bhd & Another Appeal,(1) the key issue was whether a tenancy for the commercial use of land, where the express condition was for residential use, was illegal and void taking into account the Federal Court’s decision in Singma Sawmill Co Sdn Bhd v Asian Holdings (Industrialised Buildings) Sdn Bhd (Singma).(2)

Facts

Bellajade Sdn Bhd (Bellajade), the first respondent, was the registered owner of a 23-storey office building called Plaza Palas (the premises). Bellajade entered into a tenancy agreement (TA) with CME Group Berhad (CME) for a fixed term of three years from 20 February 2013, being the date of completion of a sale and purchase agreement (SPA) between Orion Choice Sdn Bhd (OC), the previous owner of the premises, and Bellajade. Tan Sri Dato’ Lim Cheng Pow (Tan Sri Lim), the appellant, was named as CME’s guarantor.

OC was named in the SPA as the beneficial owner when Kris Angsana Sdn Bhd (Kris), who owned the land the premises was on (the land), went into liquidation. At that time, the category of the land use was “building” with “residential” as its express condition (the express condition).

In 2011, Kris applied to the land administrator (LA) for a surrender, re-alienation and change of the express condition from “residential” to “commercial” and “mixed development” under section 204D of the National Land Code (NLC) (the application).

In 2012, Bellajade applied for a change of condition of the land and was granted a certificate of occupation (CFO) by the Kuala Lumpur City Council (the Council) to use the premises for commercial purposes. Following the full payment of the premium imposed by the LA on converting the express condition, a certificate dated 18 February 2013 was issued by the Department of Land and Mines, Kuala Lumpur, acknowledging the payment and stating that the application had been approved.

CME only paid six months’ rent upon taking possession of the premises, which triggered an action filed in court by Bellajade for the rental in arrears and rental for the remaining period of the tenancy. CME filed a counterclaim against Bellajade, alleging that the TA was void for contravening the express condition. The high court ruled in favour of Bellajade.

Court of Appeal

The Court of Appeal reversed the decision of the high court in dismissing Bellajade’s claim and allowing CME’s counterclaim.

Federal Court

The Federal Court granted leave to CME and Tan Sri Lim on three questions of law:

  • Point one – does an approval by the state authority given under section 204D of the NLC operate as an approval of land use under section 124 of the NLC?
  • Point two – does a change of condition of land under section 124 of the NLC take effect upon endorsement of the same on the issue document of title to the land?
  • Point three – is a tenancy for the commercial use of land where the express condition is for residential use illegal and void in view of the Federal Court’s decision in Singma?

Point 1
The Court answered this question in the affirmative as it was of the view that Kris’s application to the LA had been made under both sections 204D and 124(4) of the NLC.

The Court took into consideration the letter from the LA and the certificates, among others the CFO and certificate dated 18 March 2013, confirming the approval. These documents showed that the application was expressly stated to have been made under section 204D of the NLC and the certificates clearly stated that the condition of the land title was mixed development for the purpose of apartments and offices only. As such, the application had not been made solely for the change of condition under section 124(4) of the NLC.

Point 2
The Court answered this question in the affirmative upon considering other provisions in the NLC, and concluded that the effective date would be the date of endorsement on the title to the land as section 124 does not provide the effective date for approval of the change of condition.

Point 3
The Court answered this question in the negative. The Court looked into the intention of Bellajade when the TA was executed. In view of the positive steps that had been taken to procure the approval for the change in the land’s condition and Bellajade’s payment of the assessment tax on a commercial rate when the TA was entered, there had been no intention by Bellajade to commit or perpetuate the illegality, unlike the landowner in Singma. Further, at the time the TA had been entered into by Bellajade, the change of condition had effectively been in place, though not formally endorsed on the title to the land.

While a tenancy for the commercial use of land which was by condition for residential use was found to be illegal and void, with the approval of the application and full satisfaction of the condition imposed to the effect of the change of land use, the last step to be done at that material time was the administrative act of endorsing the change on the title of the land. Thus, the TA had not been void from the start. The question of knowledge and intention to commit the alleged illegality on the part of CME was immaterial to the issue of its liability to pay the rentals as claimed, unlike in Singma.

Comment

The Court’s decision has clarified the effective date for approval of change in the condition of land title and cleared up the misunderstanding about the legality of tenancies for the commercial use of residential land.

While it is right to say that Singma was decided correctly, it is pertinent to look at the surrounding circumstances to determine the parties’ intention prior to the execution of a tenancy agreement. To avoid similar litigation from happening, it is prudent for a tenant to conduct due diligence to ascertain the condition of the land use or procure an undertaking from the landlord that the permitted use of the demised premises is in line with the condition of the land use.

For further information on this topic please contact Min Lee Tan or Hui Juan Lee at Gan Partnership by telephone (+603 7931 7060) or email (minlee@ganlaw.my or huijuan@ganlaw.my). The Gan Partnership website can be accessed at www.ganlaw.my.

Endnotes

(1) [2021] 10 CLJ 183.

(2) [1979] 1 LNS 96.

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