Penang Proposes Guidelines Regulating Short-Term Accommodation – A Commentary

Short-Term Accommodation (“STA”) or Short-Term Rental Accommodation (“STRA”) has become a popular option amongst tourists, offering affordably priced accommodation coupled with different choices of lodging. The benefits are also felt by the community, bringing about economic opportunities to the area.

Yet, STA is not without its downside. Public nuisance issues have arisen from the influx of tourists causing noise pollution, traffic congestion and other manners of disturbance. Residents of stratified buildings (i.e., apartments and condominiums) have also raised concerns regarding the adequacy of the safety and protection of their homes. They believe that their safety has been compromised by unregistered guests, giving rise to increased risk of break-ins, theft, drug abuse, sex crimes, illegal gambling, money laundering, vandalism as well as increased risk of COVID-19 transmission amongst the tenants.

To address these problems, the Penang State Government intends to issue guidelines to regulate STA through by-laws set down by the Joint Management Bodies (“JMB”) and Management Corporations (“MC”) of each of the stratified buildings (“Proposed Guidelines”).

Under the Proposed Guidelines, STA will be regulated in the following manner:

• owners or operators of stratified premises/units will be required to register with the local authorities after obtaining approval from the JMB/MC through a special resolution which is supported by no less than ¾ valid votes which are counted at the AGM or EGM or any special meetings under section 70(2) of the Strata Management Act 2013 (“SMA”);[1]
• the maximum annual rental period is 30 days (except for service apartments). The operational days for every rental transaction are limited to three days. Any additional days requires approval from the relevant JMB/MC.[2] This would mean that each rental transaction can only be for a period of three days subject to further approval from JMB/MC, but any such period shall be subject to the maximum annual cap of 30 days;
• body temperature scanning and MySejahtera verification is mandatory;[3]
• the number of tenants in one premise/unit is controlled according to the size of the particular premise – a maximum of two people are allowed for each room;[4] and
• the owner or operator of the premises/units is required to produce annual statements and a STA operation report to the JMB/MC. The JMB/MC will then submit the reports to the Commissioner of Buildings (COB) with the Yearly Meeting Report.[5]

Current interpretation of section 70(2) Strata Management Act 2013 – are the Proposed Guidelines in line with it?

Pursuant to section 70(2) of the SMA, MC may, by special resolution, make additional by-laws to regulate the control, management, administration, use and enjoyment of the subdivided building or land and the common property, which includes for safety and security measures.

Furthermore, the ability of MC to create by-laws restricting the engagement in short-term rentals have been clarified by the Federal Court in Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation [2020] 12 MLJ 16 (“Innab”). In Innab, the Federal Court held that management bodies may pass additional by-laws to restrict the use of parcels for short-term rentals. The Federal Court suggested that the defendants intended their premises to be utilised like a hotel or lodging facility, which amounted to the grant of a license instead of a tenancy.

Section 70(5) of the SMA states that no additional by-law shall be capable of operating:

1. to prohibit or restrict the transfer, lease or charge of, or any other dealing with any parcel of a subdivided building or land; and
2. to destroy or modify any easement expressly or impliedly created by or under the Strata Titles Act 1985 (“1985 Act”).

While “dealing” is not a defined term under the SMA, section 3 of the SMA provides that the SMA 2013 will need to be read with the 1985 Act as long as the provisions are not inconsistent. Within the 1985 Act, section 5 provides that it shall be read and construed as part of the National Land Code (“NLC”). Naturally, moving to section 5 of the NLC, dealing is defined as “any transaction with respect to alienated land effected under the powers conferred by Division IV, and any like transaction effected under the provisions of any previous land law, but does not include any caveat or prohibitory order”. Section 213 of the NLC (which is contained in Division IV), states that a “tenancy exempt from registration” is a dealing. In this case, the defendants argued that their transactions were “dealings” as short-term rental constitutes “tenancies exempt from registration” under section 213 of the NLC, and therefore the house rule prohibiting the use of parcels for short-term rentals was ultra vires. On this issue, the court held that when there is no proof of exclusive possession on the part of short-term renters and there is no evidence to suggest that occupancy of the renters is intended to be a tenancy, the said arrangements are nothing more than mere licenses and do not amount in law to ‘dealings’ within the ambit of section 70(5) of the SMA.

Guidelines passed by the JMB/MC will be considered as additional by-laws under section 70(2) of the SMA. The ratified by-laws will regulate the administration of the property on matters stated in section 70(2) of the SMA, to the extent that it is not inconsistent with the prescribed regulations under section 150 of the SMA (namely the Strata Management (Maintenance and Management) Regulations 2015) (“Strata Management Regulations”). They will be treated as additional conditions for purposes of regulation. The Strata Management Regulations covers the duties and powers of the JMB/MC, including regulations on matters such as inter-floor leakages, damage to party walls and requirements for the first annual general meeting held by the JMB/MC. Any by-laws passed under section 70(2) of the SMA must not be inconsistent with these regulations to be effective.

Premised on the above, the Proposed Guidelines are in line with the current interpretation of section 70(2) of the SMA.

Do the Proposed Guidelines have any force of law?

It should however be noted that without anything further, the Proposed Guidelines do not have any force of law. The issuance of the Proposed Guidelines alone is insufficient for the Penang State Government to compel MC to pass them.

The method and basis under which the Penang State Government intends to bring the Proposed Guidelines currently remains unclear. It therefore remains to be seen whether the Proposed Guidelines will have any legal force.

A considerable possibility of implementing the Proposed Guidelines would be through the implementation of a license requirement by the Penang State Government. Pursuant to section 102 of the Local Government Act 1976 (“LGA”), every local authority may from time to time make, amend and revoke by-laws for matters that are necessary or desirable for the maintenance of the health, safety and well-being of the inhabitants or for the good order and government of the local authority area and in particular for purposes specified under the section. Notably, under section 102(s) of the LGA, local authorities are allowed to make by-laws to control and supervise, by registration, licensing or otherwise, including in proper cases by prohibition, a trade, business or industry which is of an obnoxious nature or which could be a source of nuisance to the public or a class of the public.

As an illustration, the city council of Kuala Lumpur – Dewan Bandaraya Kuala Lumpur (Kuala Lumpur City Hall, “DBKL”), under its authority under section 102(s) of the LGA, implemented the Licensing of Trades, Businesses and Industries (Federal Territory of Kuala Lumpur) By-Laws 2016 (“2016 By-Laws”), which brought into effect the requirement of a business premises license. Pursuant to paragraph 3 of the 2016 By-Laws, any person who utilises a premise to carry out a business activity, as defined in the Schedule to the 2016 By-Laws, is required to obtain a business premise license from DBKL. Failure to comply attracts a fine not exceeding RM2,000 or imprisonment for a term not exceeding one year or both. If the offence continues, a fine not exceeding RM200 for each day during which the offence is continued after conviction.

As the operation of STA may be considered as an industry of its own, it is possible for the Penang State Government to pass a by-law requiring STA operators to register with the Penang State Government to operate as STA. The requirements for license registration could mirror the Proposed Guidelines, thereby bringing the Proposed Guidelines into effect.

Parallels to New South Wales STRA Code

In Australia, the New South Wales (“NSW”) government, in particular the NSW Fair Trading Department of Customer Service, has implemented the Code of Conduct for the Short-term Rental Accommodation Industry (“Code”). The Code lays down the rights and obligations of STRA industry participants and facilitates the oversight of the STRA industry as a whole.

The Code implements the requirement of a premises register, whereby premises used as STA must be registered on a premises register. Notably, hosts are required to take reasonable steps to ensure that guests comply with their obligations in the Code, which include not to:

• create noise that because of its level, nature, character, or quality, or the time it is made, is likely to harm, offend, or unreasonably disrupt or interfere with the peace and comfort of neighbours and other occupants of the premises;
• act in a violent or threatening manner towards neighbours or other occupants of the premises;
• act in a manner that could reasonably be expected to cause alarm or distress to neighbours and other occupants of the premises;
• use or enjoy the premises in a manner, or for a purpose, which interferes unreasonably with the use or enjoyment of common property by neighbours and other occupants of the premises;
• intentionally, recklessly or negligently cause damage to premises, any common property or any other communal facilities within the immediate vicinity of the premises, or any public property in the vicinity of the premises; or
• intentionally, recklessly or negligently damage the personal property of neighbours of the premises or other occupants of a strata or community scheme.

Guests are also responsible for the actions of visitors that they invite onto the premises during the occupancy period. They must ensure that visitors to the premises comply with the same obligations as if they were guests on the premises.

A notable difference between the Code and the Proposed Guidelines is that in addition to the hosts, obligations are placed on booking platforms and letting agents as well. The Code represents a comprehensive guideline that regulates the STRA industry in NSW.  We believe that the Code may serve as a suitable reference point for the Proposed Guidelines moving forward.

Treatment from stakeholders

Hotels, represented by the Malaysia Budget and Business Hotel Association (MyBHA), have refuted Airbnb’s claim that the Proposed Guidelines may affect Malaysia’s tourism industry and Penang’s economic growth. They have stated that they “do not agree [with] and refute the claim as … an accommodation through STRA is a business that does not have laws or regulations to regulate the business, and an unlicensed business is an illegal business”.[6] Based on public news sources, the hotel industry generally welcomes the Proposed Guidelines, stating that it will directly help to restore the hotel and tourism industry in Penang.

Airbnb has urged the Penang State Government to reconsider the Proposed Guidelines, noting that the Proposed Guidelines will affect the recovery of the tourism industry as well as the Penang economy.[7] The Malaysian Association of Homestay (Short-Term Rental) Practitioners has also joined the call, urging the Penang State Government to reconsider the Proposed Guidelines in high-rise buildings.[8] They have pointed out that this would make it harder for owners who rely on STA to pay off their housing loans.

Commentary

The Proposed Guidelines introduced by the Penang State Government will significantly alter the STA industry as it will change the landscape of the STA industry in Penang. Penang stratified homeowners may expect an improvement in the quality of living through the increased protection offered by the Proposed Guidelines.

In contrast, the effect of the Proposed Guidelines on STA platforms such as Airbnb, Agoda Homes, and Booking.com remains to be seen. In complying with the Proposed Guidelines, these STA platforms would need to adapt, through creative methods, to remain relevant in the tourist accommodation industry.

We believe that the introduction of the guidelines will improve competition in the hotel industry. STA homeowners and platforms will now be required to innovate to remain competitive with hotels.

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the Zaid Ibrahim & Co. partner you usually deal with. This article was prepared with the assistance of Tee Kai Yan, a Trainee Associate in Zaid Ibrahim & Co.

This article is for general information only and is not a substitute for legal advice

[1] Article 17 of the Guidelines.

[2] Article 18 of the Guidelines.

[3] Article 19 of the Guidelines.

[4] Article 19 of the Guidelines.

[5] Article 20 of the Guidelines.

[6] https://www.theedgemarkets.com/article/malaysian-hoteliers-refute-airbnbs-claim-shortterm-rental-accommodation accessed 29 September 2022

[7] https://www.theedgemarkets.com/article/airbnb-urges-penang-govt-reconsider-draft-proposal-shortterm-rental-accommodation accessed 29 September 2022

[8] https://www.penangpropertytalk.com/2022/09/high-rise-owners-urge-penang-govt-to-review-homestay-restrictions/ accessed 29 September 2022

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