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Can a MC stop Short Term Rental in a stratified development area? Innab Salil & Ors v Verve Suites Mont Kiara (Federal Court) [2020]10 CLJ 285

We reported the decision of the Court of Appeal and the High Court previously.

Facts:

Brief Facts are as follows:

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 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.

The matter was appealed to the Court of Appeal but the Court of Appeal upheld the decision of the High Court.

Aggrieved by the decision, the Defendants obtained leave to the Federal Court and asked the following questions:

  1. Whether the House Rules override and supersede the express land use on the title imposed by the State Authority under Section 120 of the National Land Code; and
  2. Whether the Management Corporations’ enforcement of the House Rules No. 3 was in violation of Section 70(5) of the Strata Management Act 2013

DECISION OF THE FEDERAL COURT:

Question 1 is answered in the affirmative.

Section 120 of the National Land Code and Section 70 of the Strata Management Act 2013 (“SMA 2013”) can be read harmoniously. Just because the State Authority has issued conditions and restrictions of use in the title of the land, that does not preclude the management corporation from making further rules, regulations or by-laws for the purposes provided for by law.

Passing of House Rules No. 3 is not unlawful.

The restrictions imposed by the house rule were additional conditions for purposes of regulation under Section 70 of the SMA 2013 and not for purpose of revoking or altering any pre-existing express condition in the title of the land.

Question 2 is answered in the negative

There is no proof that the 3rd party vacationers or lodgers having exclusive possession on the parcels nor evidence suggest that the nature and quality of the occupancy of the renters intended to be a tenancy. The short term leases were nothing more than mere licenses and therefore did not amount in law to “dealings” within the ambit of Section 70(5) of the SMA 2013. Accordingly House Rule No. 3 is not ultra vires.

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.