Introduction
In a lease or tenancy agreement, it is common for the lessor or landlord and the lessee or tenant to include an option for renewal clause. Such a clause gives the lessee or tenant the right to extend the lease or tenancy for a further term upon expiry of the initial term, without any worry that the lessor or landlord may refuse to continue to rent the premises. Typically, the lessee or tenant may exercise this option subject to compliance with all existing terms and conditions of the lease or tenancy agreement.
Recently, we represented a tenant in Watson’s Personal Care Stores Sdn Bhd v Aluxcare Wellness Sdn Bhd [2025] MLJU 3119; [2025] CLJU 2495, where both the Sessions Court and the High Court have put the option for renewal clause into microscopic examinations. At the first instance, the Sessions Court ruled unfavourably against our client but after hearing our client’s appeal, the High Court allowed the appeal and set aside the Sessions Court’s decision.
Eventually, the High Court upheld the option for renewal clause as validly exercised by the tenant. Although the primary dispute centered on whether the tenant has complied with the conditions required to exercise the option for renewal, the case law cited by both parties raised some broader doctrinal questions: Can an option for renewal be validly exercised if the renewal rental is to be negotiated later? Or would the absence of an agreed renewal rental render the option for renewal clause void for uncertainty?
Background facts
Watson’s Personal Care Stores (Watsons) entered into a tenancy agreement with one Nik Mohamed Holdings Sdn Bhd (NMHSB) to rent the entire ground floor of a shoplot in Desa Sri Hartamas, Kuala Lumpur at a monthly rental of RM6,000. Later, NMHSB sold the premises and novated the tenancy agreement to Aluxcare Wellness Sdn Bhd (Aluxcare) as the landlord.
Clause 9.3 of the tenancy agreement provides that:
“9.3 Renewal
The Landlord shall at the written request of the Tenant made not less than three (3) months before the expiration of the Term hereby created grant to the Tenant a further term as stated in Part 1.5 of the Second Schedule with the same terms and conditions herein save for the adjustment in rental (if any) in accordance with Part 1.5 of the Second Schedule.”
Part 1.5 of the Second Schedule of the tenancy agreement provides that:
The term of the tenancy agreement commenced on 1 May 2021 and expired on 30 April 2024.
By a letter dated 24 August 2023 (“the Written Request”), more than 3 months before the expiration of the tenancy term, Watsons exercised its option to renew the tenancy agreement for a further term of 3 years from 1 May 2024 to 30 April 2027 and proposed a renewal rental of RM5,100 per month.
By a letter dated 19 September 2023, Aluxcare stated that it had decided not to renew the tenancy agreement and requested Watsons to vacate the premises by 30 April 2024. Aluxcare did not give a reason for its decision. It also did not counter-propose a renewal rental.
By an email dated 9 January 2024, Watsons proposed to have a meeting to discuss the renewal of the tenancy. By an email dated 31 January 2024, Aluxcare declined and instead invited Watsons to submit a “genuine offer” but it did not explain what this meant.
Due to Aluxcare’s refusal to engage in negotiations, Watsons had no choice but sent a letter dated 5 February 2024 proposing the maximum renewal rental of RM6,600 per month (i.e., 10% increase from the preceding term’s monthly rental of RM6,000 in accordance with the formula under Part 1.5 of the Second Schedule of the tenancy agreement). However, Aluxcare rejected the offer by email dated 7 February 2024 on the ground that the period for Watsons to exercise the option for renewal (i.e., 3 months before 30 April 2024) had lapsed.
By a letter dated 29 April 2024, Aluxcare sent a notice requesting Watsons to vacate the premises. By a letter dated 30 April 2024, as Watsons’ solicitors, Tay & Partners rejected the request and demanded Aluxcare to withdraw the notice to vacate.
The battle in the Sessions Court
On 24 May 2024, Aluxcare commenced a writ action in the Kuala Lumpur Sessions Court seeking, among others, a declaration that the tenancy agreement has expired on 30 April 2024, delivery of vacant possession and mesne profits or double rental from 1 May 2024 until the delivery of vacant possession.
On 30 August 2024, Aluxcare filed an application pursuant to Order 14A and/or Order 33 rule 2 of the Rules of Court 2012 for a summary determination of questions of law.
Four questions were posed to be determined by the court:
- Whether an agreement to renew the tenancy agreement had come into existence once a written request had been issued by Watsons under Clause 9.3 of the tenancy agreement?
- Whether there was an implied term in the tenancy agreement on both parties to act reasonably and in good faith to engage in negotiations, as soon as after the issuance of a written request pursuant to Clause 9.3 of the tenancy agreement to discuss and agree on the rental for the renewed term based on the prevailing market rate and in the event of any disagreement on the rental of the renewed term, to resolve such disagreement in accordance with and to abide by the formula provided under Part 1.5 Second Schedule of the tenancy agreement (“the purported implied term”) and if there was the purported implied term, whether Aluxcare had breached the purported implied term?
- Whether the principle of estoppel applied when Aluxcare sent the email dated 31 January 2024 to Watsons and whether Aluxcare was estopped from saying that the rental proposed by Watsons in the sum of RM6,600 for the renewed term made on 5 February 2024 was made out of time?
- Whether Watsons shall pay to Aluxcare mesne profit or alternatively double rental from 1 May 2024 until the date of possession of the premises is given to Aluxcare?
The Sessions Court judge answered questions 1, 2 and 3 in the negative and question 4 in the positive – all in favour of Aluxcare. We advised Watsons to appeal, which they did.
The battle in the High Court
In the High Court, after hearing arguments from the respective counsel, the judge Su Tiang Joo allowed Watsons’ appeal and set aside the Sessions Court’s decision.
Whether there was an agreement between Watsons and Aluxcare to renew the tenancy agreement?
The judge agreed with our arguments on behalf of Watsons in distinguishing the Federal Court’s decision of Zainal Abidin v Century Hotel Sdn Bhd [1987] 1 MLJ 236. In Zainal Abidin, the Federal Court held that the option for renewal clause in a lease was void for uncertainty as it merely provided for the lease to be renewed “at a rent to be agreed upon” without a machinery or formula for determination of the new rental if the parties could not agree on the new rent. The option for renewal clause does not give rise to any legal obligations on the part of either party unless and until the lessee gives notice in writing within the stipulated period and the parties have mutually agreed to the new rent.
A comparison on the option for renewal clauses between Zainal Abidin and the present case is as follows:
Unlike Zainal Abidin, Clause 9.3 of the tenancy agreement contains a pre-agreed machinery for determination of the renewal rental. Therefore, the judge followed the test laid down by the Court of Appeal in Wisma Sime Darby Sdn Bhd v Wilson Parking (M) Sdn Bhd [1996] 2 MLJ 81, where VC George JCA decided as follows:
“An option clause is void for uncertainty unless the agreement provided the machinery or some formula that the courts can utilise to ascertain what otherwise is unascertainable without the parties coming to an agreement”.
In other words, where the option for renewal clause is clear and unambiguous and the parties have agreed on the machinery or formula for determination of the renewal rental, they are bound by it.
The judge also referred to two other case law, namely AmTrustee Bhd v The Store (M) Sdn Bhd [2019] 5 MLJ 253 and Common Ground TTDI Sdn Bhd v Ken TTDI Sdn Bhd [2022] 1 LNS 1611, which held that there can be no automatic renewal to the tenancy agreement as the rental were not agreed between the parties. However, His Lordship decided that these two case law were distinguishable on their facts. In our considered views, AmTrustee Bhd deals with the issue of consensus ad idem on the renewal rental and Common Ground TTDI involves an option for renewal clause with different requirements compared to the present case.
Whether the option for renewal had been validly exercised by Watsons?
The judge decided that Watsons had exercised the option to renew the tenancy agreement within the stipulated timeline, i.e., 3 months before the expiration of the tenancy term in accordance with Clause 9.3 of the tenancy agreement when Watsons sent the Written Request to Aluxcare. His Lordship decided that Clause 9.3 of the tenancy agreement does not require Aluxcare to accept the option to renew. Instead, once the option for renewal is exercised by Watsons within the prescribed contractual time, Aluxcare has to grant Watsons a further tenancy term of 3 years.
Whether there was a purported implied term for Watsons and Aluxcare to discuss and agree on the renewal rental based on the prevailing market rate? If yes, whether Aluxcare has breached the purported implied term?
The judge followed the Federal Court decision of Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998] 3 CLJ 503 that there are three types of implied terms: first, where the parties to a contract must have intended to include it; secondly, where it is implied by operation of law; and thirdly, where a term is implied by custom or usage. His Lordship decided that the first type of implied term applies to the present case in that once Watsons had exercised the option to renew the tenancy agreement for another 3 years, it is implied that the parties are to commence negotiations to ascertain what is the prevailing market rate of rental and failing such agreement, the prevailing market rate of rental can be ascertained with the assistance of experts and if necessary, by the court, subject to a maximum increase of 10% of the preceding term’s monthly rental.
As Aluxcare has outrightly rejected Watsons’ proposed rental and refused to state what to its mind the prevailing market rate ought to be, it has breached the purported implied term of the tenancy agreement.
All four questions of law posed by Aluxcare were answered in Watsons’ favour
Based on the reasons explained above, the judge answered question 1 in the affirmative; question 2 in the affirmative with the prevailing market rate for the renewal rental to be determined by the Sessions Court during the trial; question 3 as unnecessary by reason of the answer given in question 2; and finally, question 4 in the negative.
Conclusion
An option for renewal clause can offer valuable commercial certainty – allowing the lessee or tenant to maintain continuity of occupation while providing the lessor or landlord with predictability and stability in their lease or tenancy arrangements.
The key is to ensure that the option for renewal clause is drafted with clarity, certainty and a workable mechanism for determination of the renewal rental. A well-crafted clause should clearly set out the conditions for renewal, the machinery or formula for fixing the rent and the procedural steps required to validly exercise the option.
It is also important to include a clause to oblige the parties to act reasonably and in good faith to engage in negotiations, after the exercise of the option for renewal, to determine the renewal rental based on the agreed formula.
Postscript: As of the date of writing of this article, Aluxcare has filed an application for leave to appeal the High Court’s decision to the Court of Appeal.
This article is authored by our Partner, Mr Cheah Soo Chuan and Senior Associate, Ms Erin Lim Wen Xin. The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.
Cheah Soo Chuan
Partner
T: +603 2050 1987
Erin Lim
Senior Associate