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Recommendations for Fair Tenancy Legislation by FTFIC

About FTFIC

The Fair Tenancy Framework Industry Committee (FTFIC) was formed with representation from:

The committee’s role is to propose the adoption of landlord-tenant legislation in Singapore to address the growing imbalance in the relationship between institutional landlords and tenants which has resulted in the aggressive financial engineering and pricing behaviour of institutional landlords that goes against the grain of their tenants’ sustainability and incentive to value creation.

The advent of COVID-19 culminated in landlords taking advantage of the lack of legislation to avoid passing on government tax rebates that were given with the intent for these rebates to be passed on in full to tenants as a form of rental rebates. The gravity of the situation exacerbated the need for legislation to save businesses and the livelihood of the workforce.

Following years of tensions and lopsided powers of negotiation by SME tenants with their landlords, the 5 key stakeholder organisations have agreed to come together as a collective to submit this Position Paper containing Key Recommendations for Fair Tenancy Legislation.

Fair Tenancy Framework Industry Committee

Chairman – Kurt Wee President, ASME/Council Member, SBF/Chair, SBF SME Committee

Co-Chairman – Andrew Kwan Vice President, RAS, Founder/Group MD, Commonwealth Capital Group

Co-Chairman – R. Dhinakaran President, SRA/MD, Jay Gee Melwani Group

Members –

Terence Yow SGTUFF Representative/MD, Enviably Me Group of Companies

Cynthia Phua Chairperson, SBF SMEC Rental Practices Workgroup

Ang Yuit Vice President, ASME/CEO, The Adventus Consultants Pte Ltd

Douglas Benjamin Council Member, SRA/COO, F.J. Benjamin Holdings Ltd

Dellen Soh RAS Representative/Chairman/CEO, Minor Food Group Singapore

Edward Chia RAS Representative/Managing Director & Co-Founder, Timbre Group

Keith Chua RAS Representative/Chairman at Abr Holdings Ltd

Lik Wong SGTUFF Representative/Director, X-Boundaries Pte Ltd

Logan Wong SGTUFF Representative/MD, Pure Senses Pte Ltd

Ann Goh SGTUFF Representative/MD, Simply Toys Retail Pte Ltd

Legal & Research Committee –

See Chern Yang Member, SBF SMEC RPWG/Director, Drew & Napier LLC

Mark Lee Legal Counsel, TenX

Joshua Tan Partner, Aquinas Law Alliance LLP

Secretariat –

Lin Guoliang SBF SMEC Secretariat

Felicia Lee SBF SMEC Secretariat

Message from the Chairman

On 14 February 2014, I bemoaned the “cartel like” behaviour of institutional landlords in an article, “SMEs start to push back at rising rents” on The Business Times’ front page. Unfair rental situations have plagued tenant operators for years.

Since then, we begun the march to start the work of putting structure and substance to the issue of unfair tenancy situations faced by SMEs. In 2015, the Singapore Business Federation SME Committee formed the Rental Practices Workgroup and established the Fair Tenancy Framework to provide guidance to both tenants and landlords. Despite the efforts, over the years, no institutional landlords have come forth in support. We are however grateful that we did have 1 supporter that endorsed the Fair Tenancy Framework, that was Jurong Town Corporation.

COVID-19 brought to glaring views the dominant position that landlords wield. It first highlighted how landlords enjoyed good income in good times but the relationship was not symmetrical in bad times. When tax rebates were announced for the purposes of rental rebates to tenants, there was so much tussle between whether the landlords will issue the rental rebates to tenants, to how much they will release. Many institutional landlords even advantaged themselves with the tax payers’ monies by imposing conditions on tenants when giving rebates and it almost always came with an imposed gag order. Some did not even care about how urgent the SME tenants needed the speedy help, and proposed delayed-and-time-staggered payments through months ahead. This led to a parliament speech that saw Minister Chan Chun Sing beseech that landlords would be “Short-sighted not to pass on property tax rebates to tenants”. It eventually saw the Deputy Prime Minister Heng Swee Keat announcing that the government will legislate the passing of the property tax rebates “in full” to the tenants.

Five weeks ago, five stakeholder organisations – Singapore Business Federation SME Committee (SBF SMEC), Association of Small & Medium Enterprises (ASME), Restaurant Association of Singapore (RAS), Singapore Retailers Association (SRA) and the Singapore Tenants United for Fairness (SGTUFF) came together to establish the Fair Tenancy Framework Industry Committee (FTFIC) to propose the establishment of a Fair Tenancy Legislation and a Fair Tenancy Commission.

The Position Paper and Recommendations for Fair Tenancy Legislation is the cumulative effort of many individuals who are passionate about fair tenancy and contributed their experience to the collective so that we can have a better ecosystem for business owners.

It was an intense effort by everyone over the initial two and a half weeks of meetings to complete the bulk of all the recommendations. Over the last 2 weeks, we finally completed further refinements and also included a Sample Lease Tenancy Template that can of use as a guide for a fairer tenancy contract.

I am heartened to share, that this morning, we submitted the complete Position Paper and Recommendations for Fair Tenancy Legislation to the Minister for Law, and also to the Minister for Trade & Industry. It is the hope that this proposal will seed the ground for a fairer tenancy ecosystem, which at this point, remains heavily weighted against tenants.

I would like to make Special mention to SBF SMEC Rental Practices Workgroup for the background work accomplished over the years. I also like to recognise SGTUFF’s efforts for sharing their research with FTFIC, and also substantial inputs from RAS to provide the F&B sector’s experiences and perspectives and SRA on the retail sector.

Special thanks go to the three legal eagles that generously gave many nights of their time pro-bono and the support provided by the secretariat team from SBF SMEC.

Lastly, I must thank both my Co-Chairs, and all the committee members of FTFIC who worked selflessly and tirelessly to make this possible.

We hope that today’s Press Conference will allow the 5 stakeholders to better share with you, the recommendations, the landscape, some of the key issues that tenants are facing that led to this push.

Thank you.

Kurt Wee,
Chairman, Fair Tenancy Framework Industry Committee
President, ASME
Council Member, SBF
Chair, SBF SME Committee

Role of the FTFIC

● FTFIC has been established to propose the adoption of landlord-tenant legislation in Singapore.

● In 2015, the SBF SMEC Rental Practices Working Group (RPWG) launched the Fair Tenancy Framework (FTF). The FTF was developed on the principle of fairness for all contracting parties and encouraged parties to conduct open, transparent and fair negotiations for leases.

● Chaired by Ms Cynthia Phua, the SBF SMEC RPWG said in an interview with TODAY on 25 March 2020 , “The framework has no teeth and that it was intended to be a roundtable for both tenants and landlords to come together to know the issues facing both parties and discuss a way where leasing practices can be fair and equitable.” She added, “Over the last five years, we have been trying to get landlords to come to the table but they refuse. They did not respond to us.”

● FTFIC recognises that landlords, including REITs, play an important function within the financial ecosystem that generates a healthy and stable rate of returns for investors. However, the sustainability of such trust frameworks also relies on an operating framework that ensures long term sustainability of the operating tenants.

● Prior to the formation of FTFIC, industry stakeholders have highlighted over the years the imbalance of the relationship between institutional landlords and tenants. Aggressive financial engineering and pricing behaviour by institutional landlords that goes entirely against tenants’ sustainability and incentive to value creation reached its peak during this COVID-19 period when landlords rely on the lack of legislative bite to avoid passing on government tax rebates that that were originally only “encouraged” to be passed in full to tenants in the form of rental rebates. The stakeholders have also sufficiently studied the imbalance over the years to be in the position to propose the need for legislation.

Guiding Principles of the FTFIC

● In submitting these key recommendations for legislation, FTFIC adopted the following principles:

(a) Incentivising Value Creation

Effective Fair Tenancy Legislation will provide a more balanced system of incentives and power of negotiation that will keep both tenants and landlords equally motivated to work together to create value instead of the predatory rent-seeking behaviour we see today from the side that holds an unfair advantage.

(b) Increasing Transparency

Transparency provides the conditions that foster better and informed decision-making leading to a fairer and more efficient ecosystem that operates through (i) having sufficient market rental data for current and prospective tenants to use in rental terms negotiations (ii) prohibiting behaviour that leads to overt oligopolistic behaviour in the setting of rental terms. This is a long-established mechanism that promotes free market and fair trading. Singapore has used this mechanism very effectively in sectors like residential purchases and rentals.

(c) Protecting tenants from unfair tenancy practices

FTFIC highlights unfair tenancy agreement practices that we see today that comprise of lopsided clauses highly in favour of landlords. Such clauses include practices like forcing tenants to do renovation works that go way beyond the needs of the tenancy for e.g. water-proofing the floor and clauses that force tenants to pay for marked-up water & electricity bills. These unfair clauses have resulted in the difficult situation we have today during the COVID-19 crisis where tenants are completely helpless and powerless to negotiate with landlords to take on their fair share burden or to give fair treatment to businesses who are in big financial trouble due to COVID-19 drop in sales or Government ordered business restrictions.

(d) Building a more sustainable ecosystem

This paper seeks to rebuild and rejuvenate a frontline business sector based on symbiotic partnership between landlords and tenants. We recognise that for tenants to thrive, landlords must do well and vice versa. We seek to eliminate rent-seeking behaviour on either sides but instead reinstate fair trading practices that incentivise creativity and mutual value creation by both parties.

(e) Instituting the concept of reciprocity

FTFIC proposes the concept of reciprocity as the key mechanism to deliver fairness between landlords and tenants in the specific terms within Tenancy Agreements. FTFIC have identified 3 main areas that the concept of reciprocity between landlords and tenants should be applied onto, namely

(i) Early Termination,

(ii) Data Sharing, and

(iii) the parameters established in the enforcement of Force Majeure clauses between parties.

FTFIC supports the principles of fairness and conscionable conduct, which were promulgatedby the FTF.

The Approach of the FTFIC

● The FTF outlined a three-pronged initiative:

(a) Rental Data Transparency – Work with the relevant government agencies to develop rental data information for businesses;

(b) Education and Awareness – Develop a Business Leasing Guide and a Basic Reference Lease Agreement for Business Space to help small businesses understand lease terms and conditions;

(c) A Preferred Dispute Resolution Channel – Facilitates partnerships between trade associations and chambers (TACs) and the Singapore Mediation Centre (SMC) for mediation to serve as a preferred dispute resolution channel to resolve issues between tenants and landlords.

● The RPWG has been reviewing the FTF while engaging landlords these past years. Data transparency is at the national level and the RPWG has been engaging URA and HDB, in turn they are working with IRAS which has the rent data through the stamp duties of the leases. Over the years, URA has provided the rent data through its website and has made a few changes with the feedback of the RPWG of the data granularity and usefulness to the tenants. What is basically lacking is the rental data of the HDB shops where most SMEs are operating. The group has been engaging HDB since 2015 as the rental data at HDB estates level does not seem to be available. It is anticipated that this data will be made available sometime in 2021. RPWG continues to encourage the agencies to continue to provide at nation-wide the data as granular as possible for the tenants.

● While the review of lease terms under the FTF served merely as a guideline, RPWG has always hoped for Fair Tenancy Legislation and has given support for the effort of FTFIC in recommending for the same. In summary, the desired Fair Tenancy Legislation will augment the three pronged initiatives of the FTF to give it the teeth to balance the power of and encourage fair conduct between the landlords and the tenants.

● There are also three parts to FTFIC’s key recommendations:

(a) Part A: Transparent access to information – We recommend 2 levels of rental data be made available, namely (i) A public rental info database that is updated on a monthly basis, and (ii) A mall-level productivity and performance data that is to be made available by landlords to tenants from whom they require data like monthly sales data (concept of reciprocity).

(b) Part B: Regulation of conduct – We recommend for the Government to legislate and pass a Fair Tenancy Bill to prohibit undesirable or unfair tenancy practices and behaviour by either landlords or tenants and also to promote a more efficient and effective free market dynamic for this business sector.

(c) Part C: Fair Tenancy Commission – We recommend the establishment of a Fair Tenancy Commission (FTC) that will oversee the creation and generation of market rental data in accordance to our data transparency recommendations. Landlords and tenants frequently find themselves in complex situations or disputes where the tenants face many difficulties. The FTC will also provide guidance on gaps, disputes, regulate matters between landlords and tenants and undertake periodic review and revision of the Fair Tenancy Legislation. The FTC can also act as the arbiter should situations of Material Adverse Conditions arises and can be required to review and implement conditions on tenancy contracts.

● As an ancillary, FTFIC also encourages the adoption of a national standard for retail leases as a reference point for the industry. This standard format should be in plain English and easily understood by both tenants and landlords. FTFIC has annexed such a proposed sample as Annex C.

● FTFIC has reviewed practices in Australia, Hong Kong, U.K. and U.S.A. As a reference point for the recommendations in this paper, the FTFIC will refer extensively to the tenancy legislation in Australia.

● Australia has no national laws on retail tenancy legislation. In May 1997, the House of Representatives’ Standing Committee on Industry, Science and Resources released a report on fair trading in Australia called Finding a Balance: Towards Fair Trading in Australia (the “Reid Report”).

● The Reid Report included recommendations made on retail tenancy after examining:

(a) major business conduct issues arising out of commercial dealings between firms including retail tenancy;

(b) economic and social implications of the major business conduct issues particularly whether certain commercial practices might lead to sub-optimal economic outcomes; and

(c) whether the impact of the business conduct issues it identifies is sufficient to justify Government action taking into account existing legislative and common law protections and overseas developments in the regulation of business conduct.

● The aim in the Reid Report was to “ensure certainty in the market place, contract dealings and other commercial transactions, minimise the regulatory burden on business, and keep litigation and costs to a minimum”.

● The Reid Report led to the introduction of unconscionable conduct in legislation after findings that small businesses were often disadvantaged in their business dealings. In 2008, the Australian Government Productivity Commission published a report detailing an inquiry into the market for retail leases in Australia titled The Market for Retail Tenancy Leases in Australia (the “PC Report”).

● The FTFIC also observed that the existence of legislation in Australia has not crippled the market cooperation between landlords and tenants. During the COVID-19 crisis, the National Retail Association, Australian Retailers Association, Pharmacy Guild of Australia and Shopping Centre Council of Australia proactively met, discussed and agreed on a common Code of Conduct to govern behaviours of landlords and tenants during this time. This was before the Australian Government passed national laws on the same issues.

● The approach by the stakeholders in Australia is in stark contrast to the developments in Singapore, particularly surrounding the necessity for government intervention to legislate conduct between landlords and tenants.

● FTFIC’s view is that the key difference is that the historical existence of legislation against unconscionable conduct in Australia has conditioned the stakeholders to automatically adopt such a collaborative effort during such unprecedented times.

● It is with this context that the FTFIC proposes for the adoption of fair tenancy legislation in Singapore and for the Fair Tenancy Bill to minimally contain the recommendations set out in this paper. In particular, FTFIC will be making specific extensive references to the Retail and Commercial Leases Act 1995 in South Australia (“RCLA”).

SUMMARY OF RECOMMENDATIONS

FTFIC has made a total of 15 key recommendations, separated into the three different parts:

(a) Transparent access to information;

(b) Regulation of conduct; and

(c) Fair Tenancy Commission.

PART A – TRANSPARENT ACCESS TO INFORMATION

● FTFIC has received feedback that there is substantial information asymmetry between landlords and tenants, which should be mitigated through reciprocal sharing and disclosure of material information about the lease. This will facilitate better and informed decision-making by parties and militates against any possible abuse of market power by the landlords. FTFIC has set out three key recommendations in this Part.

● Recommendation 1.1

o If a retail shop lease requires the tenant to provide the tenant’s sales or turnover information to the landlord, the landlord must make specified mall-level information available to the tenant in a written report on a quarterly basis.

● Recommendation 1.2

o The confidentiality of information exchanged between landlords and tenants should be a mandatory covenant for both parties to a retail shop lease, with disclosure permitted only in specified circumstances.

● Recommendation 1.3

o Landlords should publish anonymised lease data for each retail lease, by submitting the prescribed information in the format set out in Annex A for each lease to a publicly accessible site administered by an appropriate governmental authority. For the purpose of confidentiality, the FTC may exclude prescribed leases from disclosure, such as anchor tenants who fall within only one trade category.

PART B – REGULATION OF CONDUCT

● FTFIC has received feedback from stakeholders on various examples of unconscionable or unfair practices between landlords and tenants pertaining to restraint of trade, payment of a landlord’s outgoings, termination of leases and forfeiture, and renewal of leases.

● FTFIC has identified these examples and made ten key recommendations in this Part setting out how such conduct should be regulated by the enactment of a Fair Tenancy Legislation.

● Recommendation 2.1

o A retail shop lease must not contain a provision which has the effect of preventing or restricting the tenant from carrying on business outside the retail shopping centre, either during the term of or after the expiry of the lease.

● Recommendation 2.2

o Where a tenant is liable to pay any amount (other than rent) to the landlord including other expenses incurred by the landlord in connection with the preparation, stamping and registration of a retail shop lease (preparatory costs), the tenant is not required to make the payment until it is provided with a copy of any account given to the landlord for the expenses. The tenant’s liability for the preparatory costs cannot exceed:

(a) the actual amount of the stamp duty payable on the lease and the government fees for registration of the lease; and

(b) one-half of the other preparatory costs.

● Recommendation 2.3

Where the tenant is required under the leasing agreement to enter into contract with a third-party, or to make payment to the landlord or any other third-party for services (excluding utilities and its associated charges) or equipment (including set-up and maintenance costs) that is incurred ancillary to the rent paid to the landlord. And in each case:

(a) the landlord and tenant shall agree prior to the commencement of the lease term on the ancillary services and the proportion of the expenses that each party shall be obliged to pay; and

(b) the tenant shall not be obliged to make payment of more than one-half of each of the expenses incurred for the ancillary services.

● Recommendation 2.4

o Advertising and Promotion charges shall not be adjusted during the term of the tenancy and the landlord be required to produce an account of the fund clearly detailing the expenses incurred by the landlord and the identity of the receiving third-party on a quarterly basis.

o The landlord shall not be allowed to charge a mark-up greater than three percent (3%) of the price provided by the third-party for such services.

● Recommendation 2.5

o FTFIC proposes that pre-termination of a retail shop lease due to actions within a landlord’s control should not be permitted, except where the landlord is electing to have a part of the premises under that retail shop lease renovated, retrofitted, refurbished, reconfigured and/or altered, provided that such a right of pre-termination can only be exercised in compliance with the following conditions:

(a) the right of pre-termination may only be exercised after the first year of the retail shop lease;

(b) at least 6 months’ prior written notice must be provided to the tenant;

(c) the landlord must pay to the tenant compensation in the sum of the aggregate of the tenant’s (i) capital expenditure incurred for the retail space (including design fees), and (ii) costs incurred for installation and removal of furniture and fixtures, pro-rated based on a 6-year depreciation formula to be prescribed by the FTC.

(d) The termination notice period may be shortened by a lump sum payment by the landlord to the tenant of the amount of base rent that would have been payable by the tenant for the shortened notice period.

● Recommendation 2.6

o FTFIC proposes that pre-termination of a retail shop lease by a tenant must always be permitted, provided that such a right of pre-termination can only be exercised in compliance with the following conditions:

(a) the right of pre-termination may only be exercised after the first year of the retail shop lease;

(b) at least 6 months’ prior written notice must be provided to the landlord; and

(c) the tenant must pay compensation to the landlord in the sum of 3 months’ worth of base rent under the retail shop lease. The termination notice period may be shortened by a lump sum payment by the tenant to the landlord of the amount of base rent that would have been payable by the tenant for the shortened notice period.

● Recommendation 2.7

o Provisions in a retail shop lease that permits or otherwise provides for the termination of the lease on the ground that the tenant or the business of the tenant has failed to achieve a particular level of sales or turnover should be made unenforceable.

● Recommendation 2.8

o An adverse circumstances clause should be mandatory in leasing agreements.

● Recommendation 2.9

o There should be a duty of honesty and good faith imposed on parties during negotiations for the lease.

● Recommendation 2.10

o Where a lease renewal for a specified subsequent lease period is provided for in a lease, a maximum increase in all rent components upon renewal must be provided for in the lease.

● Recommendation 2.11

o Security deposits are to be limited to a maximum of 1 month’s base rent per year of tenure of the lease, subject to a maximum of 3 months’ base rent.

● Recommendation 2.12

o FTFIC proposes that area alteration clauses in leases mandatorily provide that both landlords and tenants are permitted to require that a survey be conducted during the tenure of the lease to confirm the leased area under a lease, and that:

(a) where the actual leased area is at least 1% less than the leased area being paid for by the tenant under a lease, the landlord is required to adjust the monthly base rent and related fees downwards proportionately and refund all excess base rent amounts already paid by the tenant; and

(b) the landlord is only entitled to make an upwards proportionate adjustment to the monthly base rent and related fees only where the actual leased area is at least 1% more than the leased area being paid for by the tenant under a lease.

The actual leased area must be determined by a duly registered surveyor. The landlord shall bear the cost of the survey, except where the survey is requested by the tenant and there is no variance to the leased area found by the survey.

● Recommendation 2.13

o FTFIC proposes that provisions purporting to exclude landlords from excluding their liability for any of their actions or omissions relating to building maintenance are made unenforceable, and where tenants are required to incur any rectification costs for building maintenance due to the actions or inactions of the landlord, such costs are to be reimbursed to the tenant.

● Recommendation 2.14

o FTFIC proposes that retail rental rates should follow a prescribed formula of a combination of: (i) a base rent (calculated using prescribed objective metrics of a landlord’s actual cost for the premises), and (ii) a GTO component allowed to be negotiated between the parties.

PART C – FAIR TENANCY COMMISSION

● FTFIC has also considered the issue of enforcement of the provisions of the Fair Tenancy Legislation. FTFIC has taken into account a tenant’s usually limited resources in seeking enforcement of its legal rights and proposed 2 key recommendations in this Part to address this limitation.

● Recommendation 3.1

o A Fair Tenancy Commission be set up, with the Competition and Consumer Commission of Singapore as the ombudsman in the enforcement of the obligations under the proposed Fair Tenancy Bill.

● Recommendation 3.2

o Legislation should provide for mediation as the primary mode of resolution of retail tenancy disputes, and only failing which the court or other adjudicatory process can be utilised.

Response to “Property consultants point to snags in fair tenancy framework recommendations” Part 2

This is a continuation of Part 1: Response to “Property consultants point to snag in fair tenancy framework recommendations”.

I want to allay Ms. Christine Li’s concern that the fair tenancy framework recommendations may not allow landlords to respond swiftly to structural changes such as the rise of e-commerce. The FTFIC’s recommendations are designed precisely to make sure property managers, in her words, keep pace with the changes.

Amazon, the company often credited or blamed (depending on how you see it) for the brick-and-mortar retail apocalypse, is 25 years old. E-commerce has risen, rise, rose, rosed-ed. While the F&B sector in Singapore has quickly adapted to food deliveries, buy-online-pick-up-in-store, what has the landlord done? They have quickly charged turnover rent on the online sales of food prepared in their shop premises.

There are four guiding principles of the FTFIC’s recommendations. The first one is incentivising value creation. Charging turnover rent on tenants’ online sales (in addition to fixed rent) that are not generated by the property is precisely the kind of predatory rent-seeking behaviour we are trying to discourage. Instead the property managers’ attention and efforts should be directed and rewarded for creating value in the face of such headwinds.

What does create value?

I don’t know. I bet it involves a lot of trial and error. Like how F&B took risks and figured out how to execute food deliveries and buy-online-pick-up-in-store. I sincerely wish their rewards correspond with the risks they took.

In the US, as stores begin to reopen after the lockdown, curb-side pickup and store fulfilment are becoming more widespread. As retailers, we know for a fact that it’s a lot more profitable for us if customers pick up their purchases rather than us offering free delivery to send them their purchases.

Have property managers perhaps thought of constructing something that’s the equivalent of a curb-side? It’s probably like a drop-off point that most properties already have. Other than a loading bay for trucks, is there a parking facility for Grab/Deliveroo drivers to come in and out of the property faster and cheaper? Could the property manager create a locker system in a designated area for all their tenants to use? The tenants’ customers may then use the locker system to pick up their purchases without even stepping into the shop, hence freeing the sales associate to serve other customers.

I don’t know what works. But I do know that just taking more rents from us without doing shit doesn’t work.

Response to “Property consultants point to snags in fair tenancy framework recommendations” Part 1

In a BT article by Mindy Tan headlined “Property consultants point to snags in fair tenancy framework recommendations”, Christine Li from Cushman & Wakefield expressed her concern that making the (pre)termination of the retail leases unenforceable, we could be going against the principle of free market and that it is somewhat restrictive.

She added: “It doesn’t allow landlords to respond swiftly to structural changes such as the rise of e-commerce; this could become a stumbling block if landlords are not able to re-position the retail assets in time to keep pace with the changes.”

We frequently forget that at present, most tenancy agreements do not include a pre-termination clause. You may wonder how then do landlords or even tenants initiate a premature termination of lease?

For landlords, their army of lawyers had cleverly added a provision generally known as Landlord’s Right to Deal with the Premises and/or the Building. It allows them to pre-terminate a lease without compensation under various circumstances, such as “in the event the Landlord determines in its absolute discretion that…there is any change in the Landlord’s trade mix policy.” Such a broad provision ensures that almost every single time, a landlord is able to pre-terminate without compensation. I’m curious to find out if Ms. Li can name one scenario which she felt that a landlord should be obligated to compensate a tenant for pre-termination?

Can Tenant pre-terminate its lease then? Absolutely. The landlord will remind the tenant that there is no pre-termination clause and hence a pre-termination is considered a breach of contract. The tenant is obligated to compensate the landlord for the pre-termination. Back in 2018, I had to compensate my landlord $35,188.59 to end one of my leases 11 months earlier. The monthly rent for the kiosk was $3,053 and it was a three-year lease.

I totally agree with Ms. Li that if landlord is unable to pre-terminate its lease, it is somewhat restrictive. Nowhere in the recommendations by the FTFIC did it say that a landlord cannot pre-terminate. It can. Just that, like in the case of a tenant’s pre-termination, it will be considered a breach of contract and the landlord compensates the tenant for the breach of contract. Welcome to our world!

FTFIC acknowledges that the inability to pre-terminate is restrictive not just for the landlord but for the tenant as well. That’s how Recommendation 2.6 came about. “FTFIC proposes that pre-termination of a retail shop lease by a tenant must always be permitted, provided that such a right of pre-termination can only be exercised in compliance with the following conditions:

(a) the right of pre-termination may only be exercised after the first year of the retail shop lease;

(b) at least 6 months’ prior written notice must be provided to the landlord; and

(c) the tenant must pay compensation to the landlord in the sum of 3 months’ worth of base rent under the retail shop lease. The termination notice period may be shortened by a lump sum payment by the tenant to the landlord of the amount of base rent that would have been payable by the tenant for the shortened notice period.

Unfair Terms and Fees Relating to Renovation/Maintenance of Premises

An unfair term in a tenancy agreement, put simply, is one that creates an imbalance between a landlord and a tenant, to the tenant’s detriment. For example, the most common would be how tenants have to bear the legal costs for the drafting of the lease agreement even though the lawyers are working on behalf of the landlords and the terms are leaning towards the landlords’ favour. Or that the tenants have to pay the full stamp duty fees even though the agreement is between two parties.

For too long, tenancy agreements have blatantly ignored the tenants as an equal partner and entity with rights in the relationship. Tenants have been treated unfairly, unjustly and dishonourably, all in the guise of free market operations.

In this article, we discuss some of the unfair terms and fees relating to renovation/ maintenance of premises and strongly urge attention to and reconsideration of these often neglected areas in a tenancy agreement.

Often, tenants just bite the bullet thinking renovations is a one-off expense. The repercussions last, as many realised on hindsight. And landlords do not hesitate to further add on to the misery with additional burdens, as will be described later.

Case One:

Rachel* was ending her Food & Beverage business in a mall that was going to get a major overhaul and thus all businesses had to cease and leave. She will lose everything because in her agreement, landlords can engage in redevelopment or refurbishment works that disrupt the regular business of tenants and tenants are not entitled to claim compensation from landlords. This clause protects the landlord one-sidedly and many tenants can only earnestly hope that such will not happen to them. Unfortunately, Rachel struck jackpot. She did not have a choice.

The least she hoped was to get some cash back from her furnishings which she spent close to $100K for two years ago. She had a beautiful custom made marble counter top that she wanted to sell off to another owner who can appreciate and have a real usage for it.

“I’m hoping to get $2K for it as I paid $7K and it has been barely 2 years and still as good as new. Beautiful colour, lovely veins, no scratches— a piece of art!” she told viewers enthusiastically, confident that something as worthy would surely find itself an owner. Little did she know, until the contractor who was helping her dismantle her furnishing told her, that it would never have been possible to sell at $2K. “Because $2K is the price for a new piece! Who are you kidding?”

Rachel went on to dig her quotation from two years back and showed the contractor who affirmed that the works quoted were all a good 50-60% above market rates. Had Rachel knew back then, would things be any different though? Not much. It was the stipulated contractor that she had to work with, assigned by the landlord. She did not have a choice.

Case Two:

Daniel* runs several stalls in various major foodcourts, namely, KOUFU, NTUC Foodfare, Kopitiam and Food Junction and he realizes, after years of business, that “renovation” is a very convenient term used to collect money and then more money, just like that.

“When we rent new stalls, in the midst of the agreement, or when we renew our contracts (basically it could be anytime), the foodcourt management would collect a $10K-$40K renovation fees. But after so many years, I know there are no planned future works. They never come. We just have to pay our way to the better locations”.

The crux of the problem here is, the “renovation fee” can be imposed by landlord at whim. There is no accountability to how the fee will be used. More than that, these are sometimes NOT in the tenancy agreement upfront but imposed mid-way. If he wants to keep the business he worked so hard to build up or not lose his security deposits, he has to pay.

Thus, while the landlord does not have the right to increase the rent during the period of the agreement, the landlord does otherwise have the power to impose additional costs on the tenant under the lease.

Additional costs may be imposed through a number of clauses which give landlords the right to claim expenditure reasonably and properly incurred in respect of the building or premises. Daniel had to pay or risked chased away. He did not have a choice.

Daniel also had to use the assigned contractors for renovations and maintenance works. There are also all sorts of fees collected to ensure compliance to standards. For example, a Video Serial Interface installation fee of $1,000 and a Kitchen Design Fee of $1,000.

For regular repairs, Daniel also had a list of assigned contractors to contact. Fortunately, “the local managers have some heart and will sometime close one eye and ask me fix it myself. Or else the rates will be exorbitant, even for small fixes”. This applies even for reinstatement works at the end of an agreement. He did not have a choice.

More than just rental, stalls at food courts also have to pay a multitude of other kinds of fees, all at exorbitant and hard to qualify rates. For example, at one of the food courts, Daniel has to pay:

  1. Advertising and Promotion Fee — 0.3% of Monthly Gross Sales
  2. Monthly Maintenance and Cleaning Fee $7,000
  3. Coin-Changing Fee $50
  4. Point of Sale System Rental Fee $220

For Daniel, it worked out to be $11,500 (and to add to it, a high G.T.O rental), $7, 000 and another
$2K-$3K worth of other fees depending on his sales. For a mere stall in a foodcourt, Daniel’s upfront costs to the management landlord is already more than $20, 000. He did not have a choice.

For Utilities like gas, electricity, water, sewerage and telecommunications, there are often hefty deposits and “designated suppliers” which charge higher than usual rates. One would think such bulk purchase by all the tenants of the foodcourt would equate to cheaper, more favourable rates but unfortunately this is not the case. For example, Daniel had to use gas suppliers who charge $11-$16 per metric ton when SP Gas is only about $8 per metic ton. These costs increased his monthly costs by great amounts. He did not have a choice.

If Daniel’s stall is unable to achieve monthly sales of minimally $45K each month for three months, it would be a breach of agreement. If Daniel’s stall cannot get an A grade in its SFA inspection, it would be a breach of agreement. On top of that, the operator can terminate agreement with no reason with just one month’s notice. These are all terms that lean in favour of a landlord. It gave the landlord the space, power and control to evict tenants who are not bringing in the G.T.O sales target they want or those who are not in the landlords’ favour, for whatever reasons. Daniel had to do all he can to appease by paying and paying. He did not have a choice.

Case Three:

In the case of Eddie*, he realised just how much additional expenses there can be relating to renovations, as landlords try all means and ways to protect themselves and their premises at
tenant’s full expense. The biggest irony would be how there would always to be terms that help the landlord to be absolved of all liability even when the landlord is at fault or is negligent. Nor is there any limit on the extent, duration, or frequency of such inconvenience or damage to the tenants.

More than just renovation costs, there are many other associated costs that add to the burden.
Landlord would require insurance coverage like 3 rd Party Public Liability covering not just contractor and tenant but themselves too, as well as Contractor’s All Risks insurance for the fitting out period.

Such insurance costs are often at the tenant’s expense. Other than fitting out deposits, tenants also have to pay administration fees for the approval of designs, professional fees to get certified for safety and electrical turn on ranging from LEW to PE to QP. There are usually many drawing submissions and layers for approval that will delay renovations as well. All these just add to the already hefty renovation costs. He did not have a choice.

Sometimes, even when the overall renovations do not have to be handled by assigned contractors, landlords do stipulate the kind of style/furnishing/look the shop should have. They would list preferred styles, must-haves items, interior designers (the high-end ones) to use, and design concepts. Shop owners with budget constraints for renovations have limited choices because of hefty renovation deposits paid and they have to comply or else they risked getting it confiscated. They did not have a choice.

For one of Eddie’s outlet, his security deposit was delayed and withheld for many months even after he exited the premise. The landlord cited lack of documentation and was unresponsive. At another mall, his renovation deposit was also held back as landlord said that it was pending clearance from their appointed consultant, even when the outlet is already in operation and the design was given full approval by their operations. The layers of clearances and approvals waste so much time and resources.

At another mall, he was made to do some compulsory maintenance works to the premises and had to close for three whole weeks, without rental waivers. Even up-keeping the premises were fully at the tenants’ costs. He did not have a choice.

Fairness goes a long way Once tenants sign an agreement, they are not in any position to protect their interests. To be fair is to not take advantage of the other party knowing that he is not in a position to protect his own interest. This is something many landlords fail to do.

In fact, they made use of tenants’ weakest spot— the desire to protect and continue one’s painstaking built up business— to continue to exploit. It was all about being oppressive and manipulative. Landlords naturally have a stronger bargaining power being in possession of something all businesses need.

Thus it would be unfair, to begin with, to depend on the principle of “freedom of contract” or free market operations. The weaker party, in need of premises for conducting their business, is more or less subjected to the exploitative terms of the landlord and often equipped with only a superficial understanding of the potential consequences of those terms. It is important to recognise the vulnerability of small businesses in such circumstances and for legislation to ensure a nationally consistent and fair tenant protection framework.

Often, what tenants need are choices. The choice to use the lowest quotation, the choice to use
their cheapest supplier and the choice to not pay for a service they do not need etc. It is even more dark and sinister if the sub-contracts that tenants are forced to use are relatives or even subsidiaries of the landlords or that landlords are obviously in receipt of kickbacks and rebates from the suppliers. Landlords should earn their profits from fair and transparent fees that are agreed upon in the tenancy agreement and not engage in such dishonourable acts of deceit.

While it is natural to seek protection and indemnity against claims and damages, it is not fair that only the landlord can receive such protection. As the weaker party, small businesses need to have certainty and rights as well to ensue continuity. Landlords should not have the right to demand maintenance closures, demand premise upkeep without the appropriate rental waivers and compensation. Nor should they be allowed to demand extra fees of all sorts at their absolute whims and fancies. They definitely should not be allowed to impose sales targets or external standards with the penalty being eviction.

There remains a long way to correcting all these injustices towards tenants but as a rule of thumb, fairness will go a long way. Even further than all else.

And in this current pandemic, we all have a long way to go, together.

Key Recommendations for Retail Leases Bill 2020 by SGTUFF

Introduction

  1. The Singapore Tenants United for Fairness Group (“SGTUFF”) submits our recommendations to the Fair Tenancy Framework Industry Committee (“FTFIC”) to introduce a Retail Leases Bill 2020. The Bill seeks to regulate the lease relationship between landlords and tenants with the intent to protect the position of tenants of retail shop premises.
  1. The Bill is an urgent and necessary next step to address the imbalance power of negotiation between a landlord and a tenant. Cash is the lifeblood of every business. One-sided, onerous clauses in commercial tenancy agreements often result in businesses struggling to generate and retain cash. This makes many businesses susceptible to such shocks as COVID-19.
  1. In 2015, in what then-Minister of State for Trade and Industry Mr Teo Ser Luck called “the first step towards fairer leasing practices”, the Fair Tenancy Framework (“FTF”) developed by the Singapore Business Federation (“SBF”) was launched. The adoption of FTF guidelines is voluntary in nature.
  1. Ms Cynthia Phua chaired the SBF SME Committee Rental Practices Working Group that developed FTF. In an interview with TODAY on 25 March 2020, she said, “The framework has no teeth and that it was intended to be a roundtable for both tenants and landlords to come together to know the issues facing both parties and discuss a way where leasing practices can be fair and equitable.” She added, “Over the last five years, we have been trying to get landlords to come to the table but they refuse. They did not respond to us.”
  1. SGTUFF applauds Ms. Cynthia Phua for having the courage to confront the brutal facts. As Dr. Brene Brown, the researcher who espouses vulnerability said, “Brave leaders are never silent around hard things…Our job is to excavate the unsaid.”
  1. It therefore comes as no surprise that the first public statement by the Reit Association of Singapore (“REITAS”) in the wake of the pandemic came only in April 2020 after MinLaw moves to introduce the COVID-19 (Temporary Measures) Bill to provide temporary relief for inability to perform contractual obligations due to Coronavirus disease 2019 (COVID-19) situation. The nonchalance and self-interested attitude are all too familiar to many tenants. 
  1. This worrying trend goes beyond the REITs. As property managers switch jobs and move around, they spread these unfair practices as best practices. Like the coronavirus, the quick adoption of these attitudes and practices have infected many tenancy agreements, resulting in one-sided, onerous clauses becoming very prevalent.
  1. SGTUFF is of the opinion that the only way to prevent abuse of landlords’ disproportionate power over tenants is through legislation.

Guiding Principles

  1. “Morality cannot be legislated, but behaviours can be regulated. Judicial decrees may not change the heart, but they can restrain the heartless”, said Dr Martin Luther King Jr. His quote is frequently cited by real estate titan Sam Zell, who is a firm believer that “you cannot legislate morality”.
  1. In submitting these key recommendations for legislation, SGTUFF has the following intentions:
  • Uphold the spirit of laissez faire. Refrain from legislating morality. Let the invisible hand do its job. A successful retail leasing Act will unleash the invisible hand and lead to two outcomes: (1) Increased value creation, defined singularly from both the perspective of landlord and tenant as doing more (that is, higher gross turnover) with less (that is, lower operating costs); and (2) Reduction of government assistance (that is, grants, reliefs and bailouts). SGTUFF maintains that what needs to happen is a re-attribution of economic rents to better reflect landlord-tenants’ risks and rewards, not a redistribution of income by the government, which by itself is anti-free market.
  • Restrain the heartless. Fix the conditions that prevent free market from producing optimal outcomes, specifically, (1) a lack of transparent access to information and product prices and (2) undue power for oligopolistic corporations to set prices or control distribution.
  • Address structural changes in retail real estate. Back in 2016, in a TODAY article titled Time to tackle real estate’s structural change, Mr Ku Swee Yong wrote, “The rise of e-commerce, a weak consumer market and changing shopping preferences have sent the retail sector reeling.” High occupancy costs and manpower shortage are symptomatic of the landlord/tenant inability to capitalise on the opportunities brought about by these structural changes. Landlords are fixated on passing costs over to tenants. Tenants are then fixated on squeezing their vendors and employees while relying increasingly on the government for handouts.
  • Future-proof our economy. Singapore needs to act as a fertile biome and create a conducive environment that enables innovations. The Report of the Committee on the Future Economy proposes to develop a vibrant and connected city of opportunity (Strategy 5). SGTUFF believes that pro-business, pro-competition and pro-innovation practices in commercial leasing that enable entrepreneurs and businesses to thrive, not just survive, are vital to making Singapore a city of opportunity. Getting these environmental factors right precedes any government programmes and initiatives in the report.
  1. Fairness and conscionable conduct, as guiding principles, may work well for FTF, designed to be voluntary. For the purpose of legislation, SGTUFF finds reciprocity more applicable as a guiding principle. Reciprocity takes away morality and adds flexibility to ensure that the contract is not one-sided.

Our Approach

  1. The FTF outlines a three-pronged initiative:
  • Part A: Rental Data Transparency – Work with the relevant government agencies to develop rental data information for businesses;
  • Part C: A Preferred Dispute Resolution Channel – Facilitates partnerships between trade associations and chambers (TACs) and the Singapore Mediation Centre (SMC) for mediation to serve as a preferred dispute resolution channel to resolve issues between tenants and landlords.
  1. Perhaps SBF is looking to review FTF and/or looking to improve the adoption of FTF. SGTUFF views the Bill as distinct from FTF. The introduction of the Bill, which pertains primarily to retail shop premises, does not render FTF obsolete.
  1. There are also three parts to SGTUFF’s key recommendations:
  • Part A: Mall Turnover Transparency – Make it compulsory for landlords collecting tenants’ turnover information to publish aggregate mall turnover information;
  • Part B: Regulation – Pass a Retail Leases Act to protect the position of tenants of retail shop premises against landlords charging non-core fees and fines and passing costs incurred in the ordinary course of business to tenants. 
  • Part C: A Proactive Industry Watchdog – Bestow power upon Enterprise Singapore to advocate the Act.

SGTUFF looks at the practices in Australia, Hong Kong, U.K. and U.S.A. for precedents and references. Singapore is more similar to Hong Kong, which offers no prescribed form of commercial leases and parties are free to negotiate and agree on the terms of commercial leases. Perhaps what is different between Singapore and Hong Kong is that the Singapore’s commercial leasing market is characterised by many buyers, few sellers whereas Hong Kong commercial leasing market is characterised by many buyers and relatively more sellers compared to Singapore. Hong Kong represents one end of the continuum.

On the other end of the continuum, SGTUFF looks to Australia, whose economic system is still based on capitalism. Many of our key recommendations for regulation takes reference from the South Australia’s Retail and Commercial Leases Act 1995 (“RCLA”), designed to protect small businesses (applicable to leases with annual rents no more than AUD400,000). RCLA represents the other end of the continuum.

SGTUFF considered whether Part B: Regulation should be designed to protect all businesses or simply protect small businesses. The key recommendations are applicable to all businesses in commercial leasing, regardless of business size.

Key Recommendations – Transparent Access to Information

  1. A Confidentiality clause that is common in tenancy agreements is not covered in FTF. Typically, it stipulates, “To keep confidential and shall not at any time disclose or permit to be disclosed to any third party the provisions of this Lease, or any negotiation or discussion relating to this Lease, or any information in respect of, arising from or in connection with this Lease, unless the disclosure is required by law or made with the prior written consent of the Landlord or its agent.”
  1. This is often a tenant’s covenant but not a landlord’s covenant, meaning it imposes unilateral obligations on the tenant and not mutual obligations on both the landlord and the tenant. Given that the tenancy agreement discloses confidential information of both parties, one would imagine that it shall be mutually binding.
  1. Page 22 Basic Reference Lease Agreement for Business Space of FTF has 70 sections. A broad definition of confidentiality with a catch-all clause – “…the provisions of this Lease, or any negotiation or discussion relating to this Lease, or any information in respect of, arising from or in connection with this Lease…” – is unreasonable.
  1. In the U.S., a broad confidentiality clause is viewed as a restrictive covenant, that is, it restricts commercial trade. Restrictive covenants are frowned upon by law or public policy because they hinder free trade and commerce. The restrictions should be sufficiently narrow, otherwise the covenant may be unenforceable or illegal.
  1. Landlords may argue that their tenancy agreement contains many trade secrets, hence the need for a unilateral confidentiality clause. SGTUFF finds this argument weak and indefensible. A trade secret is defined as any practice of a company that is generally not known outside of the company and that practice gives the company an economic advantage over its competitors. Judging by how homogenous tenancy agreements are across landlords, SGTUFF argues that landlords’ practices and processes are already shared rampantly and even systematically among landlords, who are supposedly competitors.
  1. Confidentiality clause also shows up in the correspondences many landlords send to their tenants during this economic crisis. Typically, it stipulates, “Unless disclosure is required by law or permitted by our prior written consent, you shall not disclose to any third party any information relating to, arising from or in connection with the Rent Rebate or the terms and conditions of the Lease contained in this letter, failing which you shall pay us on demand the amount of the Rent Rebate granted.” During a time when business owners are trying to make sense and cope with many emerging issues on a daily basis, such methods of communication are not helpful. In fact, it is undesirable. It erodes trust and destroys our social capital as a nation.
  1. Unfair contracts shrouded in secrecy will not propel our economy into the future; business relationships based on fear will not breed pioneers of the next generation.
  1. SGTUFF argues that owners and unitholders who have their properties managed externally by a third party will benefit from a higher level of transparency. Would they really want to rely on a third party property manager as their only source of information?
  1. We are in agreement that the Confidentiality clause be omitted from the landlord’s covenants, which is the current practice. They should also be omitted from the tenant’s covenants.
  1. SGTUFF proposes that a retail shop lease must not contain a broad Confidentiality clause.
  1. Section 1.6 Point of Sale System of FTF describes, “Typically for retail malls, the landlord would install POS systems at the tenants’ costs, which include monthly servicing and maintenance cost. The POS system collects the shops’ sales data for analysis of customer spending patterns and mall patronage. Some landlords use the data collected to guide their tenants in improving their business.”
  1. The collection of sales data is used to calculate the Gross Turnover Rent (“GTO”), which is increasingly being charged in addition to base rent. Knowledge of the daily or monthly sales data of tenants allows landlords to charge higher and higher rents upon every renewal even when tenants’ sales are falling year on year. What ends up happening is, with every renewal, rent is negotiated closer and closer to the breakeven point of tenants.
  1. SGTUFF proposes that a landlord must not require a tenant to provide to the landlord information about the tenant’s turnover unless the retail shop lease provides for the determination of rent, a component of rent by reference to turnover.
  1. To counter this information asymmetry, SGTUFF takes reference from Part 8 Section 52 of RCLA. It stipulates, “If a retail shop lease requires the lessee to pay an amount in respect of outgoings on account of expenditure incurred in obtaining statistical information, the lease is taken to include provision that the lessor must make information so obtained by the lessee available to the lessor.”
  1. SGTUFF proposes if a retail shop lease requires the tenant to provide information to the landlord about the turnover of the business of the tenant, the landlord must make the following information available to the tenant in a written report on a quarterly basis:
  • Monthly aggregate turnover by Merchandising Category; and
  • Monthly average turnover per square feet of leasable space by Merchandising Category; and
  • Monthly average occupancy cost ratio (rent to sales ratio) by Merchandising Category.

Tenants that are not required contractually to provide sales data are excluded.

  1. Andrea Daniels and Patricia McDonnell wrote an article titled A Guide to Occupancy Costs that is published by the US National Real Estate Investor. They wrote, “…tenants that are operating in the most productive malls are generally willing to pay more rent for the benefit of being located in top-tier properties with high sales capture rate. As sales per square foot increase, so do operating efficiencies, putting the retailers in a position to tolerate higher rents.”
  1. SGTUFF argues that a shopping centre’s turnover information is a better signal than rent information not only for investors, but also for tenants. It forces property managers to focus on value creation. Systematically passing on more costs to tenants (in the form of rent) while creating little or no value (in the form of gross turnover) will certainly be unsustainable in the long run. The retail apocalypse is real. What is unreal is how many landlords can deliver high yields while their tenants’ brick-and-mortar sales are adversely affected. Landlords are a part of the retail ecosystem. It is time for property managers to take responsibility and tackle the structural changes happening in retail and not simply leech off the tenants’ efforts.
  1. SGTUFF proposes the confidentiality of turnover information as both a Tenant Covenant and a Landlord Covenant.
  1. SGTUFF proposes that if a retail shop lease requires the tenant to provide information to the landlord about the turnover of the business of the tenant, the landlord must not divulge or communicate information provided by the tenant except:
  • with the consent of the tenant; or
  • in a document giving aggregate turnover information about a retail shopping centre in a manner that does not disclose information about the turnover of an individual tenant’s business, or
  • to a court or arbitrator, or for the purposes of a mediation; or
  • in compliance with a requirement made by or under an Act; or
  • to the landlord’s professional advisers (such as legal or financial advisers), or to the proper officer of a financial institution for the purpose in good faith of enabling the landlord to obtain financial accommodation; or
  • in good faith to a prospective purchaser of the retail shop or the building of which it forms part.
  1. SGTUFF proposes that if a retail shop lease requires the landlord to provide information to the tenant about the aggregate turnover, average turnover per square feet of leasable space, and average monthly occupancy costs of the landlord, the tenant must not divulge or communicate information provided by the landlord except:
  • with the consent of the landlord; or
  • to a court or arbitrator, or for the purpose of a mediation; or
  • in compliance with a requirement made by or under an Act; or
  • to the tenant’s professional advisers (such as legal or financial advisors), or to the proper officer of a financial institution for the purpose in good faith of enabling the tenant to obtain financial accommodation; or
  • in good faith to a prospective purchaser or franchisee of the tenant’s business.

Key Recommendations – No Undue Oligopolistic Power

  1. Section 1.3 Restriction of Trade Within a Radius of FTF describes, “The landlord may include a clause that prohibits the tenant from operating a branch or franchise within a certain radius of the leased premises. Nicholas Seng, in his article Restraint of trade covenants in commercial agreements, he concluded by saying, “…some of the cases cited above (Goldsoll, CLASS Medical, Vancouver Malt, Kall-Kwik, Convenience Co. and Harcus Sinclair v Your Lawyers LLP) make clear that the courts will not enforce covenants that do not protect a legitimate proprietary interest or go beyond what is reasonably necessary to protect that interest.
  1. The Restriction of Trade Within a Radius imposed by a landlord is unlikely to be enforceable in court. Yet it continues to be permissible for a landlord to include this covenant in the tenancy agreement. Ms Sandra Booysen, in her article Twenty years (and more) of controlling unfair contract terms in Singapore published by the Singapore Journal of Legal Studies, argues, “Although such exemptions would be struck down if challenged in court, they are insidiously harmful to those who assume, in ignorance, that the terms are binding. Rather than waiting for individual challenges to such terms after an incident, it is preferable for them to be eradicated, and this is more likely to be achieved by the intervention of a proactive industry watchdog.”
  1. Section 59(1) Geographical restrictions of RCLA stipulates, “A retail shop lease must not contain a provision which has the effect of preventing or restricting the lessee from carrying on business outside the retail shopping centre, either during the term of or after the expiry of the lease.
  1. SGTUFF proposes that a retail shop lease must not contain a provision which has the effect of preventing or restricting the tenant from carrying on business outside the retail shopping centre, either during the term of or after the expiry of the lease.
  1. Section 1.5 Total Leasing Cost of FTF describes, “In general, besides rent, there are other leasing costs to be considered. For example, the landlord’s legal fees for the lease agreement and the landlord’s professional consultants’ vetting charges for fitting out works, among others.” The guide adds, “Both parties should agree upfront on all costs to be borne by the tenant.” In Singapore, the leasing costs are typically paid by the tenant. In Hong Kong, the leasing costs are typically shared equally between the landlord and the tenant. Section 14 Lease preparation costs of RCLA regulates lease preparation costs.
  1. There is a worrying trend that in addition to Legal Fees, Stamp Duty and Utilities, tenants have to pay what appears to be landlord’s business expenses, that is, costs incurred in the ordinary course of business. Increasingly, Administrative Fee is charged as a lease preparation cost. This is a fee charged by the landlord for handling the administrative matters relating to the commencement or renewal of a lease. A Design Vetting Fee is charged for the landlord’s design team to look through a tenant’s fit out submissions. To what end is a landlord allowed to pass on to the tenant the costs incurred in the ordinary course of running a leasing business?
  1. SGTUFF proposes that if the tenant is liable to pay an amount to the landlord or other expenses incurred by the landlord in connection with the preparation, stamping and registration of a retail shop lease (preparatory costs), the tenant cannot be required to make the payment until provided with a copy of any account given to the landlord for the expenses.

Preparatory costs include:

  • fees charged by a mortgagee for producing a certificate of title for the land over which a retail shop lease is to be registered or for consenting to the lease;
  • the costs of attendances by a lawyer or registered conveyancer acting for the lessor.

The tenant’s liability for the preparatory costs cannot exceed:

  • the actual amount of the stamp duty payable on the lease and the government fees for registration of the lease; and
  • one-half of the other preparatory costs.

However, this does not limit the recovery of preparatory costs incurred by the landlord from a person who enters into and then withdraws from negotiations with the landlord.

A landlord must not include costs incurred in the ordinary course of business as preparatory costs.

  1. Section 1.6 Point of Sale System of FTF describes, “Typically for retail malls, the landlord would install POS systems at the tenants’ costs, which include monthly servicing and maintenance cost.” The installation, servicing and maintenance of the POS system are managed by a third party vendor picked by the landlord.
  1. SGTUFF proposes that if the tenant is liable to pay an amount to the landlord or other expenses incurred by the landlord in connection with the installation, servicing and maintenance of a point of sale system for the submission of turnover information, the tenant cannot be required to make the payment until provided with a copy of any account given to the landlord for the expenses.

The tenant’s liability for the point of sale system costs cannot exceed:

  • the actual amount of the fees payable to the service provider; and
  • one-half of the installation, servicing and maintenance costs.
  1. Section 2.1 Gross Rent (Net Rent, Service Charges, A&P Charges, Property Tax and Utility Charges) of FTF describes, “Gross rent typically consists of the base rent, service charge, advertisement and promotion (A&P) fees (applicable for most malls) that are payable by the tenant. FTF cautions, “It is typical for the tenant to bear increases in property tax, service charge and A&P charges during the lease term and the landlord should pre-determine with the tenant the basis and calculation of such increases.”
  1. A typical Revision of Advertising & Promotion Fund (“A&P Fund”) clause stipulates, “The A&P Fund is established for the purpose of payment of the costs and expenses of all advertising and promoting the trade and businesses carried on in the Building and all ancillary activities thereto. The A&P Fund shall increase over and above the aforesaid sum in the event of any increase in the costs of such advertising and promotion services.” 
  1. Often, in the same tenancy agreement, it includes another Promotion Fund clause that stipulates, “The Landlord shall pay the A&P Fee into a fund (the “A&P Fund”) established and maintained by the Landlord. The monies in the Promotion Fund shall belong to the Landlord and shall be disbursed and utilised by the Landlord at any time as the Landlord shall in its absolute discretion deem fit. The Tenant shall not be entitled to raise any objection, requisitions, or demands on any matter in connection with or relating to the A&P Fund and the conduct and maintenance of the A&P Fund. If there is a surplus in the A&P Fund there shall be no refund to the Tenant and such surplus may be utilised by the Landlord in such manner at its discretion as it deems fit. The Tenant shall have no claims whatsoever to the monies standing in the A&P Fund or any part thereof or for the refund of the A&P Fee or part thereof paid to the Landlord.
  1. Allowing a landlord to revise the A&F Fee collected during the lease term while having zero accountability for the fund collected makes it susceptible to abuse. A landlord who is incapable of negotiating a higher rent due to, say, poor reputation of having high occupancy costs, may simply obtain the higher “rent” through raising the A&F Fee after the lease agreement is signed.
  1. To mitigate such abuse, Section 55 Lessor to provide auditor’s report on advertising and promotion expenditure of RCLA stipulates, “A retail shop lease is taken to include provision to the following effect:
  • the lessor must give the lessee a written report that complies with this section and details all expenditure by the lessor in each accounting period of the lessor during the term of the retail shop on account of advertising or promotion costs to which the lessee is required to contribute under the lease;
  • each report is to be given to the lessee within three months after the end of the accounting period to which it relates;
  • the report is to be prepared by a registered company auditor (within the meaning of the Corporations Law) and is to be prepared in accordance with accounting standards (within the meaning of the Corporations Law).
  1. SGTUFF proposes that any revision to the A&P Fee after the lease agreement is signed be prohibited.
  1. Section 2.6 Insurance of FTF describes, “In typical lease agreements, buildings are insured for fire, public liability, building damages, among others by the landlord and recovered via service charge. The tenant, on the other hand, is bound to insure the content of the premises against losses and damages in addition to public liability insurance, among others.
  1. It is now common to see an Insurance clause as under Tenant’s Covenants that stipulates, “At the Tenant’s own cost and expense at all times during the Term to take out and keep in force in the joint names of the Landlord and the Tenant for their respective rights and interest a comprehensive public liability insurance policy to an amount not less $X or in such higher amount as the Landlord may from time to time prescribe, in respect of any one occurrence. The public liability insurance policy must include a cross-indemnity clause and a waiver of subrogation of the insurer’s right against the Landlord, and must not exclude the property in the care and custody of or control of the Tenant.
  1. SGTUFF proposes that the tenant’s liability for insurance that are taken up in the joint names of the landlord and the tenant cannot exceed:
  • the actual amount of the insurance premium; and
  • one-half of the insurance premium.
  1. Section 3.3 Pre-termination of Lease of FTF describes, “Lease durations are typically fixed without pre-termination rights for both the tenant and landlord.” While a tenant does not have pre-termination rights, increasingly, a landlord is able to pre-terminate a lease without liability to the tenant. This is usually not written as a pre-termination clause but as a Landlord’s Right to Deal with the Premises. Typically, the clause stipulates, “Notwithstanding any other provision in this Lease and notwithstanding that the Tenant has given notice to exercise the option to renew and the Landlord has granted the same, the Landlord may at any time without liability to the Tenant, and without prejudice to the Landlord’s rights and remedies against the Tenant three months’ notice in writing in the event the Landlord determines in its absolute discretion that:
  • there is a change in the Landlord’s trade mix policy; or
  • the Building or any part thereof is to be renovated, retrofitted, refurbished, reconfigured and/or altered and the Landlord at its sole discretion determines that it requires possession of the Premises for the purpose of or in connection with the renovation, retrofitting, refurbishment, alteration and/or reconfiguration; or
  • there is to be a change of use for the Building or any part thereof (a) effecting the Premises and/or (b) such that vacant possession of the Premises is required by the Landlord; or
  • the Building is to be demolished or the Landlord requires possession of the Premises for re-development (including but not limited to amalgamation and/or subdivision).
  1. On the other hand, it is common for the landlord to seek pre-termination damages from the tenant that comprise:
  • forfeiture of security deposit, usually 3 months; and
  • unrealised gross rent from the date of early termination to the end of the lease; and
  • estimated unrealised gross turnover rent from the date of early termination to the end of the lease; and
  • full legal fees for the Deed of Surrender; and
  • full agent’s commission (not prorated).
  1. In Hong Kong, a tenant may be forced to leave prior to the date originally agreed if the landlord exercises his right of forfeiture. Many leases include sale and redevelopment clauses which give the landlord a right to terminate the lease by giving a specified number of months’ notice to terminate, if the landlord wants to sell or redevelop the building. Typically, the landlord has to give at least six months’ notice in writing to the tenant.
  1. With the exception of sale and redevelopment, the landlord must comply with Section 58 Restrictions on and Relief against Forfeiture of Leases and Under-leases of the Conveyancing and Property Ordinance (“CPO”) unless the forfeiture arises because of non-payment of rent or insolvency.
  1. Section 58 Restrictions on and Relief against Forfeiture of Leases and Under-leases of the CPO stipulates, “A right of re-entry or forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice –
  • specifying the particular breach complained of; and
  • if the breach is capable of remedy, requiring the lessee to remedy the breach; and
  • specifying the compensation, if any, which the lessor requires in respect of the breach,

and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach.

Where a lessor is proceeding, by action or otherwise, to enforce such a right of re-entry or forfeiture, the lessee may, in the lessor’s action, if any, or in any action brought by himself, apply to the court for relief, and the court may grant or refuse relief, as the court, having regard to the proceedings and conduct of the parties under the foregoing provisions of this section, and to all the other circumstances, thinks fit; and in case of relief may grant it on such terms, if any, as to costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future, as the court, in the circumstances of each case, thinks fit.

A lessor shall be entitled to recover as a debt due to him from a lessee, and in addition to damages (if any), all reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer, or otherwise, in reference to any breach giving rise to a right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this section.

Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture under any covenant, proviso, or stipulation in a lease, or for non-payment of rent, the court may, on application by any person claiming as under-lessee any estate or interest in the property comprised in the lease or any part thereof, either in the lessor’s action (if any) or in any action brought by such person for that purpose, make an order vesting, for the whole term of the lease or any less term, the property comprised in the lease or any part thereof in any person entitled as under-lessee to any estate or interest in such property upon such conditions as to execution of any deed or other document, payment of rent, costs, expenses, damages, compensation, giving security, or otherwise, as the court in the circumstances of each case may think fit, but in no case shall any such under-lessee be entitled to require a lease to be granted to him for any longer term than he had under his original sub-lease.

  1. SGTUFF proposes that a retail shop lease must not contain a provision that permits or otherwise provides for the termination of the lease on the following grounds:
  • there is a change in the Landlord’s trade mix policy; or
  • the Building or any part thereof is to be renovated, retrofitted, refurbished, reconfigured and/or altered; or
  • there is to be a change of use for the Building or any part thereof (a) effecting the Premises and/or (b) such that vacant possession of the Premises is required by the Landlord.
  1. Section 58 Termination for inadequate sales prohibited prevents a landlord from terminating a lease prematurely on the grounds of unsatisfactory sales performance. SGTUFF considers this as a frivolous ground to terminate a lease prematurely. Applying reciprocity, if a landlord is allowed to do so, the same right should be extended to the tenant. In fact, it must be a difficult decision for the tenant as he has already invested in the renovations and will also be obliged to bear the full cost of reinstating the premise.
  1. SGTUFF proposes that a retail shop lease must not contain a provision that permits or otherwise provides for the termination of the lease on the ground that the tenant or the business of the tenant has failed to achieve a particular level of sales or turnover.

Key Recommendations – Industry Watchdog

  1. Ms Booysen, in her article Twenty years (and more) of controlling unfair contract terms in Singapore published by the Singapore Journal of Legal Studies in 2016, discusses the merits of having a proactive industry watchdog. She wrote, “Anecdotal evidence suggests that unfair business practices do exist in Singapore despite the existing framework: for example, some service providers may purport to exclude liability for injury, howsoever caused. Since such a provision is invalid under the UCTA, it is surely an unfair practice that should be reined in by an industry watchdog of its own initiative. Although such exemptions would be struck down if challenged in court, they are insidiously harmful to those who assume, in ignorance, that the terms are binding. Rather than waiting for individual challenges to such terms after an incident, it is preferable for them to be eradicated, and this is more likely to be achieved by the intervention of a proactive industry watchdog. For a flagrant disregard of s2(1) of the UCTA, consideration should also be given to criminal sanctions.
  1. She added, “To date, most interventions by CASE are prompted by a complaint, rather than being initiated by the organisation itself. The Ministry of Trade and Industry (“MTI”) has, however, recently consulted the public on proposed amendments to the CP(FT)A, including the establishment of a new agency to support the enforcement of consumer protection measures. The new agency, the Standards, Productivity and Innovation Board or SPRING, will have greater powers than currently available to CASE/STB to investigate and seek declarations and injunctions against recalcitrant suppliers. There are also plans to make injunctions against such suppliers more effective, for example, by requiring the supplier to publicise the injunction and making it more difficult to avoid the injunctions by opening a new business. As MTI has said, such developments ensure to the benefit not only of consumers but also compliant suppliers who will benefit from greater consumer confidence and fairer competition. Hopefully, the new agency will be on the lookout for unfair practices and intervene without waiting for individual challenges. The proposed amendments should enhance the effectiveness of the CP(FT)A and its ability to promote contractual fairness in Singapore; the review is to be welcomed and its outcome keenly anticipated.
  1. Although Ms Booysen was referring to a consumer watchdog in her article, she painted a vivid picture of what a proactive watchdog may do as compared to a reactive one.
  1. Once the Bill is passed, SGTUFF assumes that the Competition and Consumer Commission of Singapore will administer the Retail Leases Act 2020.
  1. SGTUFF proposes that Enterprise Singapore advocates the Retail Leases Act 2020 and be the first point of contact for landlords and tenants. Enterprise Singapore is well-positioned to fulfil the role of a proactive industry watchdog and initiate interventions.

Fair Tenancy Framework: Pre-termination of Lease

Business Leasing Guide: Section 3.3 Pre-termination of Lease

Description:

Lease durations are typically fixed without pre-termination rights for both the tenant and landlord.

Guide:

Should there be a mutual or unilateral pre-termination rights in the lease, the tenant and landlord should be agreeable with the duration of advance pre-termination notice to vacate the premises and the amount of compensation, if any.

Most Small and Medium Enterprise (SME) business will require a lead time of approximately 6 months to vacate the premise.

What Frequently Happens in Practice:

Increasingly a landlord is able to pre-terminate a lease without liability to the tenant. This is usually not written as a pre-termination clause but as a Landlord’s Right to Deal with the Premises.

Events that are often listed in a tenancy agreement that allow a landlord to pre-terminate a lease without liability include:

  • a change in the Landlord’s trade mix policy; and
  • renovation, refurbishment, alteration and reconfiguration that requires possession of the premise.

The events triggering a pre-termination without liability by the landlord is at the landlord’s “absolute discretion”. What this means is that a landlord may easily terminate a tenant at any time without paying any compensation to the tenant.

Unfortunately there is no provision in the tenancy agreement that will allow a tenant to pre-terminate a lease without liability. The amount of compensation a tenant needs to pay usually comprise the following:

  • forfeiture of security deposit, usually 3 months; and
  • unrealised gross rent from the date of early termination to the end of the lease; and
  • estimated unrealised gross turnover rent from the date of early termination to the end of the lease; and
  • legal fees for the Deed of Surrender; and
  • agent’s commission (even if the agent is a subsidiary of the landlord).

SG TUFF Recommendation:

Fair Tenancy Framework: Stamp Duty

Business Leasing Guide: Section 2.7 Stamp Duty

Description:

Lease agreements are registered for tax purposes and are subject to stamp duty imposed by the tax authority.

Guide:

Stamp duty is typically paid by the tenant based on a tax scale that can be obtained from IRAS’s website.

What Frequently Happens in Practice:

As what is mentioned in the guide, stamp duty is typically 100% paid by the tenant.

SG TUFF Recommendation:

When a tenant is required to bear 100% of the stamp duty, it sends across a very powerful message: the terms of the tenancy agreement are going to be unconscionably harsh or one-sided, and that it is perfectly acceptable.

We recommend we reinforce the spirit of fairness and reciprocity by changing the conditions of business leasing. It should be made mandatory that both landlord and tenant should each share equally the stamp duty.

Fair Tenancy Framework: Point of Sale System

Business Leasing Guide: Section 1.6 Point of Sale System

Description:

Typically, for retail malls, the landlord would install POS systems at the tenants’ costs, which include monthly servicing and maintenance cost.

The POS system collects the shops’ sales data for analysis of cistomer spending patterns and mall patronage.

Some landlords use the data collected to guide their tenants in improving their businesses.

Guide:

Both parties should agree upfront on all costs to be borne by the tenant.

As the tenant will be revealing confidential business information to the landlord, establishing a non-disclosure agreement will help govern the use of such data collected.

Parties could also consider analysing only key indicators or a bundled sample of sales data to mask the intrinsic details.

Parties could explore other technologies and systems to capture customer spending and patronage.

What Frequently Happens in Practice:

The key concern a tenant has is how a landlord may make use of the tenant’s sales data against the tenant. A non-disclosure agreement will not be very helpful in this case.

What we frequently see in practice is that the landlord is able to better gauge how much more rent a tenant can afford to pay given the sales data. We have seen many cases of landlords asking for higher rents upon renewal even as the sales of the tenant has clearly fallen over the years. This information asymmetry, predictably, will bring the tenant closer and closer to their breakeven sales with every renewal. It is naive to believe that the landlords use the data collected to guide their tenants in improving their business as described in the guide.

Furthermore it has also become a common practice across the industry to require the sales data be audited by an audit firm. The cost of the sales audit is often also 100% borne by the tenant. Increasingly sales audits are required even for short-term rental of event space.

SG TUFF Recommendation:

We see merits in systematically collecting and analysing tenants’ sales data. What we have a problem with is how one-sided it is currently. The tenant pays fully for the cost of submitting and maintaining the sales data to the landlord while the landlord is not obliged to share any aggregate information in return with the tenant.

As with the legal fees and stamp duty, we recommend that it be mandatory that the landlord and the tenant share equally the servicing and maintenance cost of submitting sales data to the landlord as well as the fees for the sales audit. When one party incurs zero implementation cost, that party does not need to exercise prudence or do any cost-benefit analysis. More is always better.

We also recommend that we apply reciprocity to the collection of sales data and make it mandatory for the landlord to share the (1) aggregate gross turnover, (2) average occupancy cost (rents collected/gross turnover) and (3) average sales per square foot of the entire property on a monthly basis with the tenant.

Fair Tenancy Framework: Total Leasing Cost

Business Leasing Guide: Section 1.5 Total Leasing Cost

Description:

In general, besides rent, there are other leasing costs to be considered. For example, the landlord’s legal fees for the lease agreement and the landlord’s professional consultants’ vetting charges for fitting out works, among others.

Guide:

Both parties should agree upfront on all costs to be borne by the tenant.

Where such cost cannot be pre-determined, an estimate and/or maximum cap on such cost could be provided by the landlord to enable the tenant to budget accordingly.

Please use Table A for reference.

What Frequently Happens in Practice:

There is a worrying trend that in addition to Legal Fees, Stamp Duty and Utilities, tenants have to pay what appears to be landlord’s business expenses incurred, that is, costs incurred in the ordinary course of business. An increasingly common fee charged is Administrative Fee, which is the fee charged to handle the administrative matters related to the signing and renewal of a lease. Another is a Design Vetting Fee, not paid to external consultants, but paid by tenants to defray the cost of the landlord’s design team looking through a tenant’s fit out submissions. To what end is a landlord allowed to pass on the ordinary costs of running a leasing business to the tenant?

Almost without exception, the current practice across the industry is that Legal Fees, Stamp Duty and Utilities are 100% borne by the tenant.

SG TUFF Recommendation:

When a tenant is required to bear 100% of the legal fees and 100% of the stamp duty, it sends across a very powerful message: the terms of the tenancy agreement are going to be unconscionably harsh or one-sided, and that it is perfectly acceptable.

We recommend we reinforce the spirit of fairness and reciprocity by changing the conditions of business leasing. It should be made mandatory that both landlord and tenant should each share equally the legal fees and the stamp duty.

A landlord should also be prohibited from passing on their business expenses in the form of administrative fee and design vetting fees to the tenant.

Fair Tenancy Framework: Restriction of Trade Within a Radius

Business Leasing Guide: Section 1.3 Restriction of Trade Within a Radius

Description:

The landlord may include a clause that prohibits the tenant from operating a branch or franchise within a certain radius of the leased premise.

Such geographical restrictions may be imposed by the landlord as part of a lower rent package or if there is a gross turnover rent component. Allowing the tenant to open a branch nearby could cannibalise sales and therefore, potentially reduce collectable rent for the landlord.

Guide:

The radius restriction may impede a tenant’s business from expansion.

Compromises from the landlord could include a reasonable exclusive duration and/or pre-conditions for waivers as opposed to a fixed restriction throughout the entire lease term.

What Frequently Happens in Practice:

The Restriction of Trade Within a Radius covenant imposed by a landlord is unlikely to be enforceable in court. Yet it continues to be permissible for a landlord to include this covenant in the tenancy agreement.

Nicholas Seng, in his article Restraint of Trade Covenants in Commercial Agreements, he concluded by saying “…some of the cases cited above (Goldsoll, CLASS Medical, Vancouver Malt, Kall-Kwik, Convenience Co and Harcus Sinclair v Your Lawyers LLP) make clear that the courts will not enforce covenants that do not protect a legitimate proprietary interest or go beyond what is reasonably necessary to protect that interest. With covenantees bearing the burden of demonstrating that a restraint of trade covenant protects a legitimate proprietary interest and is reasonable between parties, it is crucial for covenantees to be made aware of the reasonable and enforceable limits of such convenants.”

SG TUFF Recommendation:

Sandra Booysen, in her article Twenty Years (and more) of Controlling Unfair Contract Terms in Singapore, published by the Singapore Journal of Legal Studies, argues that “Although such exemptions would be struck down if challenged in court, they are insidiously harmful to those who assume, in ignorance, that the terms are binding. Rather than waiting for individual challenges to such terms after an incident, it is preferable for them to be eradicated, and this is more likely to be achieved by the intervention of a proactive industry watchdog.”

In the absence of “a proactive industry watchdog”, we recommend passing a Fair Tenancy Act to combat unfair practices in business leasing contracts. Much like the Second Schedule of the CP(FT)A, we recommend a Schedule of the Fair Tenancy Act to specify unfair practices. Restriction of Trade Within a Radius shall be listed as an unfair practice.