"We are leasing the land for 15 years. Is a private agreement enough?"

A company identifies a parcel of land for its new warehouse.

The registered proprietor agrees to grant the company the use of the land for 15 years. The company will spend RM2 million constructing the warehouse, installing machinery and improving the access road.

The parties prepare a private agreement setting out the rent and the construction period.

The landowner says:

“There is no need to register anything. We have both signed the agreement.”

That assumption may expose the company to substantial risk.

A long-term arrangement involving land is not merely a longer version of an ordinary residential tenancy. Its structure, registration and effect against third parties require separate consideration.

1. A tenancy and a lease are not interchangeable labels

Under the National Land Code, a tenancy for a term not exceeding three years is generally treated as a tenancy exempt from registration.

A lease exceeding three years is capable of being registered, subject to the statutory requirements and the terms of the title.

A proprietor may generally grant a lease over the whole of the land for a term not exceeding 99 years, or over part of the land for a term not exceeding 30 years. The available term will also be limited by the remaining duration of the proprietor’s title.

The substance of the arrangement matters. Calling a 15-year arrangement a “Tenancy Agreement” does not necessarily remove the legal requirements associated with a long-term lease.

2. A private agreement and a registered lease perform different functions

The parties may require a detailed lease agreement to record their commercial bargain. This can address rent, construction, maintenance, insurance, default and many other operational matters.

Registration ordinarily involves the prescribed statutory instrument, such as Form 15A for a lease of alienated land.

These documents should work together.

The private agreement records the detailed contractual terms. The registrable instrument creates and records the registrable interest in the land, subject to registration and the National Land Code.

A private agreement alone may provide contractual or equitable rights depending on the circumstances. It should not automatically be treated as giving the lessee the same protection as a registered lease.

This distinction becomes critical if the owner sells the land, creates a subsequent security, becomes insolvent or dies during the term.

3. Begin with a full title review

Before committing to construction or paying a substantial premium, the lessee should confirm:-

• the identity of the registered proprietor;

• whether the land is freehold or leasehold;

• the remaining term of the title;

• the category of land use;

• the express conditions;

• any restriction in interest;

• existing charges, liens or caveats;

• whether the entire land or only part is being leased;

• the legal boundaries of the leased area; and

• whether lawful access is available.

If only part of a larger parcel is leased, a plan identifying the leased area, access roads, common facilities and utility routes should be attached.

A description such as “the rear portion of the land” is unlikely to provide sufficient operational certainty for a 15-year investment.

4. The proprietor may not be free to grant the lease without consent

The title may contain a restriction in interest requiring the consent of the State Authority.

If the land is charged to a bank, the financing documents and the National Land Code may also require the chargee’s consent.

The lessee should not assume that the owner’s signature alone resolves these matters.

A bank may be concerned that a long lease affects the value or enforceability of its security. It may impose conditions, require amendments or refuse consent.

Where the lessee intends to make substantial capital investment, the parties should determine who bears the risk if consent or registration cannot be obtained.

5. Can the land legally be used for the intended business?

A lease grants a right to use land. It does not itself provide planning permission, building approval, an operating licence or approval for a change of land use.

A warehouse, factory, restaurant, school or workers’ accommodation may require different approvals.

The lessee should investigate:-

• zoning and planning requirements;

• the category and express conditions of the title;

• building plan approvals;

• environmental requirements;

• fire and safety approvals;

• road and drainage requirements;

• utility capacity; and

• licences required for the proposed operation.

The agreement should identify which party is responsible for obtaining each approval and what happens if the intended use is refused.

6. The commencement date requires careful definition

A long-term project may involve several possible dates:-

• the date the agreement is signed;

• the date possession is delivered;

• the date consent is obtained;

• the date the lease is registered;

• the date construction begins; or

• the date the business starts operating.

These dates should not be treated as identical unless that is the parties’ intention.

The agreement should state when the lease term begins, when rent becomes payable and whether there is a rent-free construction or fitting-out period.

If approvals are delayed for nine months, the lessee should know whether those nine months form part of the 15-year term.

7. Who owns the buildings and improvements?

A lessee investing in construction must address what happens to the improvements during and after the lease.

The agreement may need to determine:-

• who approves the design;

• who obtains construction approvals;

• who bears the construction cost;

• whether the works become part of the land;

• whether machinery may be removed;

• who insures the building;

• who bears reinstatement obligations;

• whether compensation is payable at expiry; and

• what happens to incomplete works following early termination.

Without clear provisions, the lessee may discover that it must leave valuable improvements behind or pay to demolish them at the end of the term.

8. Rent is only one part of the financial arrangement

A commercial lease may include:-

• an upfront premium;

• security and utility deposits;

• stepped rent;

• periodic rent reviews;

• turnover rent;

• service charges;

• assessment tax and quit rent;

• insurance contributions;

• maintenance costs; and

• taxes applicable to the rent or services.

The rent review mechanism should be workable.

A clause stating that the rent will be “revised to market rate” may create a dispute unless the lease explains how the market rate is determined, the relevant valuation assumptions and what happens if the parties disagree.

9. Assignment and subleasing may affect the lessee’s future plans

A business may later restructure, sell its operations, bring in an investor or move the lease to a related company.

The lease should specify whether the lessee may:-

• assign the lease;

• sublease part of the premises;

• share occupation with a related company;

• undergo a change of control; or

• charge its leasehold interest to a financier.

A complete prohibition may reduce the flexibility and value of the business. The landlord, however, may reasonably want to control who occupies the land.

The parties can establish consent criteria, financial requirements and circumstances in which consent must not be unreasonably withheld.

10. Default provisions should recognise the scale of the investment

A lease should not permit termination for every minor breach without a reasonable opportunity to remedy it.

The agreement should distinguish between:-

• non-payment of rent;

• breach capable of being remedied;

• serious or repeated breach;

• insolvency;

• unlawful use;

• abandonment; and

• damage to the land.

Notice and cure periods should be appropriate to the nature of the breach.

Where a financier funds the lessee’s development, the financier may also require notice of default and an opportunity to remedy the breach before the lease is terminated.

11. An option to renew must be exercised properly

A lessee should not assume that discussions about an extension create a binding renewal.

The lease should state:-

• the length of the renewal term;

• the deadline and method for giving notice;

• whether the lessee must be free from default;

• how the renewed rent is calculated;

• whether further consent is required; and

• which provisions continue during the renewed term.

If the lessee misses the contractual deadline, the landlord may not be obliged to grant the extension.

12. Stamping and registration are separate processes

A lease agreement and its associated instruments may attract stamp duty. HASiL identifies tenancies and statutory leases as instruments creating interests in property for stamp-duty purposes.

Payment of stamp duty does not itself register the lease at the land registry. Similarly, preparing the prescribed land form does not eliminate the need to address stamping and the supporting contractual documentation.

The parties should establish who will bear the stamp duty, registration fees, consent fees, survey costs and professional expenses.

13. What should be resolved before the lessee begins construction?

At minimum:-

• title and land-use due diligence;

• the precise leased area;

• access and utilities;

• the term and commencement date;

• conditions for consent and registration;

• rent and rent-review mechanisms;

• development rights;

• ownership of improvements;

• insurance and indemnities;

• assignment and subleasing;

• default and termination;

• renewal;

• expiry and reinstatement; and

• priority against existing financiers.

A 15-year lease can determine whether a business has a secure operating site or merely an expensive building standing on another person’s land.

The documentation should reflect the length of the commitment and the value of the investment.