|
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. |
