Strata Management Case Updates – Does Restricting Short-Term Rental Amount To Prohibiting And Restricting “dealings” of a Parcel?

Innab Salil & Ors v Verve Suites Mont Kiara Management Corporation (Court of Appeal) [2020] 3 CLJ 480

We wrote on the High Court’s decision previously in the Strata Management Case Updates 9 and Case Updates 11. For convenience purpose, we will reproduce brief facts below.

Facts:

Plaintiff is a Management Corporation. The 1st Defendant is a tenant in a unit of Verve Suites and operates a short term rental business in Verve Suites.

Management Corporation held an EGM on 25.3.2017 and enacted House Rule No. 3 to prohibit the use of the residential units for business including short term rental which was passed by an overwhelming number of residents.

The Defendants however continued with the business of renting out units on short term basis and challenged the validity of House Rule No. 3 in the Strata Management Tribunal particularly on the provision that it violated Section 70(5) of the Strata Management Act 2013. The Tribunal dismissed the claim.

The Plaintiff commenced a writ action in Suit 461. Subsequent to that D4 registered a license with DBKL and DBKL confirmed there could not be any prohibition for short term rental to be carried out for property held under a commercial category. In the case of Suit 461, all parties agreed to dispose of the point of law first pursuant to Order 33 r 2 of the Rules of Court.

The sole issue to be determined was whether House Rule No. 3 violates Section 70(5) of the Strata Management Act 2013.

The House Rule No. 3 is reproduced below:

3.0 OCCUPANCY

3.1 Approved use of the Units

The unit shall be used only for the purpose of service suites and shall not be used for business or any other purpose (Illegal or otherwise) which may be detrimental to the credibility of Verve Suites Mont Kiara.

The use of any unit for short-term rentals is prohibited. For the purpose of these rules, a short-term rentals agreement shall be deemed unless proven otherwise if they fall within the following:

i. Any stay for which a booking was made through services/applications/websites etc. such Airbnb, booking.com, agoda.com, klsuites.com and other similar services;

ii. Any stay for which a signed and stamped tenancy agreement has not been filed with VSMO and tenants registered and issued with access cards;

iii. Any unit rented out with a tenancy agreement that permits the tenant from subleasing the property.

Any breach of the above shall attract a penalty RM200 for each day the infringement continues. The Management reserves the rights to deactivate the access cards and barred the unit from facilities booking.

Any infringement found shall be deemed to be at minimum an overnight stay thus deemed as 2 days unless proven otherwise.

All fines collected under this section shall be used for the effort to combat the prohibited practice of short-term rentals.

Section 70(5) of the Strata Management Act 2013 is reproduced below:

(5) No additional by-law shall be capable of operating-

(a) to prohibit or restrict the transfer, lease or charge of, or any other dealing with any parcel of a subdivided building or land; and

(b) to destroy or modify any easement expressly or impliedly created by or under the Strata Titles Act 1985.

The High Court ruled in favour of the Management Corporation but struck down the daily fine of RM200 for each day.

Decision of the Court of Appeal:

1. The MC is empowered by Special Resolution to make additional by-laws not inconsistent with the statutory prescribed by-laws for regulating the control, management, administration, use and enjoyment of the building or land and common property in a strata scheme.
2. House Rules No. 3 strictly confined to short-term rentals but not to genuine agreements for rental between parcel owners and tenants.
3. The legislative intent for the SMA as discerned from the preamble is to advance interest in communal living within a strata scheme. It would defeat the spirit and purpose of SMA to use the residential units in a form of business enterprise such as short-term rentals. The majorities’ wishes had to be taken heed of, and there is no violation of Section 70(5) SMA 2013.
4. Short-Term rentals are arrangements which are of temporary nature. This arrangement cannot be termed as “dealings” envisage under the National Land Code 1965. “Dealing” as defined in Section 5 of the National Land Code 1065 mean any transaction in respect to alienated land affected under the powers conferred by Division IV. In other words, Section 70(5) SMA 2013 is to prohibit and restrict dealings which can be registered. This was fortified by Section 34(1)(a) of the Strata Titles Act 1985 which says a proprietor shall have the power conferred by the National Land Code on a in relation to his parcel.
5. In short, House Rule No. 3 (in prohibiting short term rental) was not caught under Section 70(5) SMA 2013 read together with Section 5 of the NLC and House Rule No. 3 is not in violation of the SMA.
6. House Rule 3 did not come within the realm of “lease” or dealing as found in Setion 70(5)(a) of the SMA 2013. There was no security of tenure. In granting short-term rentals or stay, parcel owner never intended to grant a legal or equitable interest to the “guests” in the short-term arrangement which by its nature were mere transient lodgers.
7. The contention that it was a commercial building according to the land title (and not a residential building) and short-term rental business was not illegal was misconceived as by-laws are statutorily enacted and apply to both residential and commercial units under SMA.
8. Although Section 70(2)(i) of the SMA allows the imposition fo fine of RM200 for any breah, for the Plaintiff to impose a daily fine for each continuing breach, there must be an express provision stating as such. Since it did not provide for nor envisages an imposition of fine of RM200 for each day of continued infringement, the MC was not auhtorised to impose a fine of RM200 for each day the infringement continues.

Key takeaways:

1. A MC is allowed to enact house rules to prohibit short term rental activities;
2. House Rules in prohibiting short term rental activities do not violate Section 70(5) of the Strata Management Act 2013;
3. Self regulation mechanism is preserved and the by-laws if passed in accordance to law will be applicable regardless if it falls under a residential or commercial title.