Differences between lease and tenancy

I have often referred to the words “lease” and “leasing”. In the context of the use of such
words terms such “lessor” and “lessee” do come in for consideration. A lessor is a person
who owns a property and therefore grants the lease while the lessee is the person to whom
the lease is granted.

A reader asks what the difference between a “lease” and a “tenancy” is. Those words are
also used in the context of vehicles and equipment and other such items.

Basically the word “lease” conveys the meaning of “to rent” which is to have the benefits
of something in return for payment of a certain sum of money. Traditionally this
relationship existed in the context of land and landed property.

The owner of the property allows another to occupy it and in return the other person pays
money in a lump sum in advance or periodically such as weekly, monthly, quarterly or
yearly. The payment is referred to as rent.

Traditionally, the word “tenancy” has been used for letting for short periods. When such a
letting is for a longer period, it is called a lease. In the context of our National Land Code
which only applies in peninsular Malaysia, a tenancy is for a period of up to three years.
Any longer than that and it becomes a lease.

Difference

Under the National Land Code all leases have to be registered. Registration results in the
fact of the letting to be endorsed on the title deed and therefore in the Register of Titles.
In fact a lease that is not registered is said to be void.

The registration is thus highly beneficial to the lessee because his interest in the title is
effectively made known to third parties. Any person taking a subsequent charge does so
subject to the existing lease.

On the other hand a tenancy is exempted from registration. Therefore if a third party is
buying the land or creating a charge, such a person may not know about the tenancy
which is not registered.

In consequence when there is a tenancy which by its nature is not required to be

registered or a lease that ought to have been registered but is not, then a person having a
charge or buying the property may not be aware of the earlier transaction.

If the person registers the charge or transfers of the property in his favour, he will have
what is referred to as a registered interest which will have priority over any unregistered
interest such as that the person having the tenancy or an unregistered lease may otherwise
have.

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Disadvantaged Position

Thus the person with an unregistered interest will be in a disadvantaged position. As

stated earlier the national Land Code stipulates that an unregistered lease is void.
However what this really means is that the rights of an unregistered lessee are inferior in
comparison to a charge or buyer who has obtained a legal charge or transfer.

This means that such a person could exercise his right to sell off the land or to require the
tenant or unregistered lessee to vacate the premises even though there is an agreement to
occupy the premise with the previous owner for a specified number of years.

This does not mean that the tenant or lessee has no remedy. He could in turn take action
against the previous owner for a breach of contract for having deprived him of his rights
to continued occupation by charging or selling the property.

The tenant or lessee does not in such circumstances have a defence against the chargee or
new buyer who has asked him to vacate the premises. The situation would have been
different if the lease had been registered in which case the right to continuation of
occupation for the entire duration would have been assured.

Thus it will be seen that the provision for registration exists for the protection of the
lessee who takes on rent premises. Yet ironically, most people would avoid registration of
a lease because of the need to register and the additional cost incurred.

Leasing Equipment

However the word leasing is no longer confined to renting of landed property alone. It
has for long time also been used for the acquisition of vehicles, equipment and machinery
and other movable items. In these contexts, its applications are somewhat different.

This is because leasing in these areas is a means of acquiring eventual ownership of an

item or object through periodic payments.

Unlike landed property where rentals are based on a reasonable annual return on the value
of the property, the underlying basis of leasing transaction is the rental is based on the
price of the item to which is added interest or a reasonable amount of return and divided
by the number of months over which it is intended to recover the capital cost and the
desired returns.

At the end of the lease period, it is quite common for the lessee to have a “right” to
purchase the items at a nominal cost. In this sense there is little difference between a lease
transaction and a hire purchase transaction where it is an agreement to acquire an item by
paying rental with an option to purchase.

What makes a leasing transaction attractive is the manner in which tax is computed in

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respect of lease payments as compared to hire purchase transaction only capital
allowances are allowed but in the case of lease payments, the entire payment is deductible
as expenditure against income.

This is of course only applicable where a commercial entity is concerned where the
deduction of the entire lease payment in the year against the gross income is perceived to
be more beneficial. It is for this reason that such leasing arrangements normally do not
involve individuals.