Leasing Industrial Properties in Malaysia: Legal Framework and Essential Considerations

wwy
Mar 27
4 min read

Updated: May 25

Leasing Industrial Properties in Malaysia: Legal Framework and Essential Considerations

Introduction

With the rapid growth of manufacturing, logistics, and e-commerce in Malaysia, the demand for industrial properties has surged. Many businesses, especially startups, and companies wanting to reduce upfront costs, prefer leasing industrial spaces instead of buying them. Leasing offers lower initial investment and greater flexibility to adapt to market changes. However, while it can be a cost-effective option, it also comes with legal risks and potential challenges that businesses should be aware of.

2. Legal Framework for Leasing Industrial Properties in Malaysia

2.1 Difference Between Lease and Tenancy

All land-related matters in Malaysia are strictly regulated under the National Land Code 1965 (NLC). The legal classification of leasing arrangements depends primarily on the duration of the lease, which is categorized into Lease and Tenancy:

Lease: A lease refers to any rental arrangement exceeding three years and must be registered with the Land Office. Under Section 221 of the National Land Code 1965 (NLC), a registered lease is formally endorsed on the property's title, thereby making it legally enforceable. In the event the leased property is sold during the lease term, the new owner is legally bound to honour the existing lease agreement and cannot unilaterally terminate the tenant’s rights. This legal safeguard is especially important for businesses with long-term operational plans, such as large-scale manufacturing facilities or logistics centres. While leases exceeding three years must be registered under Section 221, registration of shorter leases (three years or less) may still be advisable depending on contractual terms—particularly if the lease is intended for long-term use—or as required by state-specific regulations tied to the nature of the business.
Tenancy: In contrast, a tenancy applies to rental agreements of three years or less and does not require registration with the Land Office. According to Section 213 of the NLC, such agreements fall under "Tenancy Exempt from Registration", meaning they do not create legally registrable property rights.

2.2 Key Legal Requirements and Essential Lease Terms

Under Section 229 of the NLC, a lease agreement should include the following key terms:

Detailed Property Description – Specifies the exact location, building size, and facility access.
Rental Terms & Payment Methods – Includes the rental amount, payment schedule, and security deposit.
Lease Duration & Renewal Mechanisms – Defines the lease term, renewal conditions, and rent adjustment mechanisms.
Maintenance Responsibilities – Clarifies whether the landlord or tenant is responsible for property maintenance, including electrical and plumbing systems.
Land Use Compliance – Ensures that the industrial property’s land use classification aligns with government zoning regulations.
Government Land Acquisition Clause – Determines whether tenants are entitled to compensation or rent refunds if the property is expropriated by the government.

3. Key Legal Issues in Industrial Property Leasing

3.1 Importance of Matching Land Use to Business Operations

Before leasing an industrial property, tenants must ensure that the land use classification aligns with their business activities. Malaysia’s land zoning system categorizes industrial land into light, medium, and heavy industry, each designated for specific types of manufacturing and production activities.

If the land use does not match the intended business operations, tenants may face permit rejections from the Department of Environment and may be unable to obtain factory operating licenses. Therefore, it is essential to verify land use compliance before signing a lease agreement.

3.2 Key Lease Agreement Terms

Since industrial leases are long-term commitments, the details of the lease agreement can significantly impact a company's operational stability.

Property Description

A well-drafted lease agreement should include comprehensive details about the industrial property. In addition to specifying location, building size, and facility access, it should confirm whether the property has the necessary licenses, such as a Fire Certificate (CF). If the tenant intends to modify the property, such as installing specialized equipment or altering the building structure, the agreement should clearly state whether the landlord's written consent is required and who will bear the cost. Additionally, the contract should specify whether common facilities, such as shared parking lots, storage spaces, or office areas, are included, along with their usage rules.

Rent & Payment Terms

Tenants should verify the rental amount, payment terms, and security deposit while also clarifying whether additional costs apply, such as property management fees, insurance premiums, or government-related taxes. In some cases, landlords may require tenants to cover extra expenses, such as Quit Rent and Assessment Tax, so it is advisable to clearly outline all financial obligations in the contract to avoid disputes over unexpected charges.

Lease Renewal Mechanism

Since industrial leases affect long-term business operations, the contract should specify renewal conditions to ensure that tenants have the first right of renewal at the end of the lease term. This prevents situations where a landlord refuses to extend the lease, forcing a company to relocate unexpectedly. To avoid unreasonable rent increases, tenants may also negotiate a predefined rent adjustment formula for renewal periods.

Maintenance Responsibilities

Industrial properties involve high maintenance costs due to heavy-duty equipment, industrial electrical systems, and wastewater treatment facilities. Therefore, the lease agreement should clearly define the maintenance responsibilities of both parties.

Typically, structural repairs (e.g., roof damage, external wall repairs) should be covered by the landlord.
Routine maintenance (e.g., electrical repairs, plumbing replacements) may be the tenant’s responsibility.

The contract should also specify whether the tenant is entitled to rent reductions (Rent Abatement) or compensation from the landlord if property maintenance issues disrupt business operations.

Government Land Acquisition Clause

Under the Land Acquisition Act 1960, the government has the authority to reclaim private land for development purposes. To protect tenants, lease agreements should include provisions specifying the tenant’s rights in the event of government acquisition, including possible reimbursement of unutilized rent or negotiated relocation assistance.

4. Conclusion

To establish a legally secure and compliant leasing arrangement, businesses must thoroughly understand Malaysia’s industrial lease laws and negotiate key contractual terms before signing a lease. By conducting thorough due diligence and implementing legal safeguards, companies can minimize potential risks and establish a stable, long-term business presence in Malaysia’s industrial sector.

📚 Series: Legal Guide to Real Estate Investment in Malaysia (For Chinese Investors)

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