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.

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