Federal Court holds house rule prohibiting short-term rentals of residential units not in violation of section 70(5) of Strata Management Act 2013

26 November 2020

Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation [2020] 1 LNS 1131

In Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation, the respondent/plaintiff was the management corporation (“MC”) of Verve Suites, a condominium which was built on a piece of land where the category of land use was “Building” with the express condition that the land was to be used for a commercial building with the purpose of service apartments and commercial development only. The appellants/defendants were parcel owners who leased out their units on short-term and long-term rental arrangements.

Following the issuance of Circular 2015/2016 by the Commissioner of Building Kuala Lumpur on 18 November 2015, instructing all joint management bodies or management corporations to curb the prevailing issue of the use of buildings in and around Kuala Lumpur for short-term rental, the MC held an extraordinary general meeting and passed, inter alia, a house rule prohibiting the use of the units for business or short-term rentals (“Rule”). The defendants, in defiance of the Rule, continued to engage in short-term rental activities. The MC fined the defendants for their failure to abide by the Rule and the defendants initiated the Strata Management Tribunal proceedings against the MC seeking to challenge its implementation of the Rule but failed. The MC commenced a writ action in the High Court to injunct the defendants from breaching the Rule and to enforce the same.

The questions before the Federal Court were whether, as a matter of law:

• the MC may enact and pass house rules to prohibit the owners of the commercial service suites from commercial usage, in particular, for short-term rental, which is consistent with the express land use endorsed in the document of title; and 
• the MC, which enacted and passed the Rule to prohibit the owners of the commercial service suites from using their property for short-term rental, is in violation of section 70(5) of the Strata Management Act 2013 (“SMA”) which prohibits any additional by-law from restricting dealings with any parcel.

The Federal Court dismissed the appeal and upheld the concurrent decisions of the High Court and Court of Appeal as follows:  

• The passing of the Rule was not unlawful as the restrictions imposed by the Rule were additional conditions for purposes of regulation under section 70 of the SMA and not for the purpose of revoking or altering any pre-existing express condition in the title of the land. Although Dewan Bandaraya Kuala Lumpur (Kuala Lumpur City Hall) issued a letter stating that there was no impediment to the defendants using their parcels for the purpose of short-term rentals so long as the condition of use of the land was not purely for residential purposes, the letter was not binding and did not have any force of law, as opposed to the Rule which was passed in accordance with section 70 of the SMA; and
• The said arrangements were nothing more than mere licences and did not amount in law to “tenancies exempt from registrations” to therefore be interpreted as “dealings” within the ambit of section 70(5) of the SMA as booking platforms on which short-term rentals were advertised (e.g. Airbnb) were only intended to be vehicles for the singular activity of short-term rentals for profit. The court therefore ruled that the Rule was not in violation of section 70(5)(a) of the SMA and was therefore enforceable against the defendants.