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.