There are many reasons why a tenant or landlord might want to terminate a tenancy agreement early. This may include unforeseen circumstances requiring relocation, poor business conditions leading to business closure by the tenant, or the landlord wanting to regain vacant possession of the property to let out for a higher rent. Whatever the reason, prematurely terminating a tenancy agreement is essentially a breach of contract, unless the agreement specifically permits early termination.
What are the risks and consequences associated with early termination?
The first reference point is the tenancy agreement itself, which governs the contractual obligations of the parties. Contrary to popular belief, each tenancy agreement is different, and its actual provisions could vary significantly. With that in mind, the points below are based on common practice and basic principles of law.
Security deposit
Typically, the most immediate consequence of early termination by the tenant is forfeiture of the tenant’s security deposit if provided in the agreement. The landlord’s ability to forfeit deposits is not automatic and should be expressly provided for in the agreement, failing which the tenant may still claim it back. Certain tenancy agreements also distinguish between security deposits and utility deposits, the latter of which should be refunded notwithstanding early termination if the tenant has duly paid up all outstanding utility bills.
The exercise of a right to forfeit the deposit is not final and does not prevent the landlord from seeking full recovery of losses suffered from any other breaches of the tenancy agreement by the tenant.
Damages
Damages is the most common form of remedy for a breach of contract. A tenancy agreement may contain a clause which entitles the landlord to claim the full rental of the unexpired term. This could mean substantial financial burden for tenants who do not have other choice but to terminate the tenancy early. But is this enforceable?
Generally, a plaintiff is only entitled to damages if he can prove that he has suffered losses as a result of the defendant’s breach. This is because damages are not meant to enrich the plaintiff but to put parties back to the position they would have been in had the contract been performed. Thus, a landlord is entitled to claim the full rental of the unexpired term if the landlord can prove that the amount represents the losses suffered (see Berjaya Times Square Sdn. Bhd. v Twingems Sdn. Bhd. & Anor (No.2) [2012] 4 MLRH 99).
Additionally, the landlord is also under a duty to mitigate his losses upon termination of the tenancy. This means that the landlord must take reasonable steps to mitigate his losses when it is clear that the tenancy is terminated – for example, by placing advertisements for new tenants to take over the tenancy. These additional costs would generally be borne by the tenant since it is incurred as a result of the tenant’s breach.
In assessing the quantum of damages, the court will also account for the security deposit amount already received by the landlord, otherwise the landlord may be receiving more than what was suffered and would be unjustly enriched which is contrary to the established principles of law.
Given that the damages are potentially significant, negotiating into the tenancy agreement a right to early termination by giving sufficient notice would be the best preventative step.
Specific Performance
What about early termination by a landlord, especially where tenants of properties that have incurred relocations costs or sunk in money in renovations? Are tenants entitled to the same remedies?
Generally, a landlord provides the assurance of allowing the tenant to occupy the premise for the full term, and should not have a right to terminate the tenancy agreement before the expiry of the term. The landlord’s early termination would amount to a breach of contract entitling the tenant to damages, and the basic principles relating to damages will apply. Alternatively, a tenant may seek the remedy of specific performance to compel the landlord to strictly observe the terms of the tenancy agreement and thus allow the tenant to remain in occupation for the remainder of the full promised term (Siew Soon Wah & Ors V. Yong Tong Hong [1973] 1 MLRA 726).
Conclusion
Before entering into a tenancy agreement, the parties should study the actual contractual provisions to understand each party’s ability to terminate the tenancy early and the respective consequences of such termination.
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This article was written by Shawn Ho (Partner) and Adryenne Lim (Legal Executive), from the corporate and commercial practice group of Donovan & Ho.
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