Reciprocity, not Conscionable Conduct, will better guide the Fair Tenancy Framework

A long-overdue review of the Fair Tenancy Framework begins by revisiting its guiding principles of fairness.

The recent tussles over the disbursement of IRAS property tax rebates and the rollout of rent relief packages in light of the COVID-19 downturn has once again brought the disproportionate power landlords have over their tenants into the spotlight.    

The retailers and restaurateurs in Singapore are suffering badly, and for many; the sudden and severe downturn brought on by COVID-19 could be the death knell for their businesses.

We know that cash is the lifeblood of every business. Onerous clauses in commercial tenancy agreements result in retailers and restaurateurs struggling to generate and retain cash for their business. This makes many of them extremely vulnerable to shocks in their business.

More than 5 years ago, I was one of many entrepreneurs and business owners who witnessed the launch of the voluntary Fair Tenancy Framework by the Singapore Business Federation (SBF) in January 2015.

Since then, year after year, my hopes of a pro-business, pro-competition environment in commercial leasing turned more and more into despair. The situation has only gotten worse.

For instance, the introduction of turnover rent as a component of gross rent has created a legitimate reason for landlords to collect tenants’ sales data systematically. Sadly, it is often used against the tenants. It is common to see a landlord asking for higher rents upon lease renewal even as the tenant’s brick-and-mortar sales are falling. With information asymmetry, landlords are able to demand higher rents while generating lesser value. What ends up happening is, with every renewal, rent is negotiated closer and closer to a point where the tenant will be slightly worse off if they do not renew and only slightly better off if they do. Near breakeven, that is.

It begs the question: “Is the landlord’s conduct conscionable?”

Conscionable conduct, as defined in the framework, means “conduct done in good conscience i.e. not unfair, harsh, or oppressive and beyond hard commercial bargaining.

The tenant may argue that the information asymmetry is unfair, hence unconscionable; the landlord may defend their action by saying that their goal is to maximise profits for their shareholders and they simply drive a hard bargain. Both can be right, and both can be wrong. This is a classic case of relativity in which the observers – both landlord and tenant – cannot truly understand a system that they themselves are a part of. This is where the limitation of applying a value judgement like “conscionable conduct” lies.

In such situations, the principle of reciprocity may prove useful.

Reciprocity is defined as one individual selectively providing helpful acts to another individual that will provide benefits in return.

What if we apply reciprocity to the introduction of gross turnover rent and the collection of the tenant’s sales data by the landlord?

In return for the tenant’s daily or monthly sales data, as a quid pro quo, it may be mandatory for a landlord to provide to the tenant the mall’s gross turnover and average occupancy cost (rents collected as a percentage of gross turnover) on a monthly basis.

The mall’s gross turnover will provide a feedback loop to the tenant, indicating if a rise or fall in their store sales is in tandem with the mall’s overall rise or fall in gross turnover. This will help both the landlord and the tenant determine if the store is the problem or if the mall is the problem.

If a tenant has access to the average occupancy cost of different shopping malls, they are able to ascertain the “value for money” of each mall. This will definitely guide their decision around which mall they want to be in and how much they should be paying for rent.

Providing such aggregate data to tenants will heightened the mall managers’ level of accountability. They will be incentivised to provide more and more value to their tenants to justify higher and higher rents.

What if the landlord is unable or unwilling to provide such aggregate data? Then the landlord should content with just collecting a fixed base rent with no gross turnover component. The landlord then does not need to provide the aggregate sales data because the tenant will not need to submit her sales data.

Reciprocity takes away morality and adds in flexibility to ensure that the contract is not one-sided. Ultimately, reciprocity is the approach of a pragmatist.

For years, landowners’ monopolistic powers and unfair practices have existed in many countries, including Singapore. We will be naïve to believe that the playing field will ever be levelled. Hence it is no surprise that a completely voluntary Fair Tenancy Framework will be ineffective in protecting tenants’ rights.

It is often said that insanity is doing the same thing over and over again but expecting different results. Five years ago, then-Minister of State for Trade and Industry Teo Ser Luck called the framework “the first step towards fairer leasing practices”. We are now ready for the second step – an updated fair tenancy framework with some guidelines that are mandatory based on the principle of reciprocity.

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