New Code of Conduct for Retail Premises in Singapore

Unfair tenancy practices came under the limelight last year, with many tenants expressing their frustration against landlords who refused to lower rents or even pass down rental rebates and waivers during the peak of the COVID-19 pandemic in 2020 when business and revenues were down.

In recognition of these circumstances, the Fair Tenancy Pro Term Committee (the “Committee”) was established in June 2020 by the Singapore Business Federation (“SBF”) to address issues between landlords and tenants in the food and beverage, retail and lifestyle sectors. The Committee also sought to establish industry standards for tenancy practices, in order to better support collaborations between landlords and tenants.

The Committee introduced a Code of Conduct (“CoC”) for the Leasing of Retail Premises in Singapore on 26 March 2021. The CoC will apply to all qualifying retail premises, and introduces changes to the following six major tenancy issues in Singapore: rent structure, early termination of leases, exclusivity clauses, sale audits, public liability insurance, and electricity charges.

Qualifying retail premises that the CoC will apply to include:

• Premises that are held under a lease or sub-lease agreement entered into on or after 1 June 2021 with a tenure of more than one year; and
• Premises that are permitted to be used by the Urban Redevelopment Authority and other relevant authorities for the following purposes:
  • Shop
  • Medical, dental or aesthetic clinics
  • Pet shop and pet boarding
  • Commercial school
  • Sports and recreation or place of entertainment
  • Food and beverage

The CoC is the latest attempt by the SBF to put a stop to unfair leasing practices by creating a more balanced playing field between landlords and tenants in Singapore, and is anticipated to be a step up from the Fair Tenancy Framework which was launched in 2015. Unlike the Fair Tenancy Framework which was voluntary, the CoC is set to be converted into legislation in the coming months.

In the meantime, from 1 June 2021, all government landlords and several major retail landlords from the private sector have begun abiding by the CoC. These landlords include the Housing Board and JTC Corporation, as well as CapitaLand, City Developments, Frasers Property Retail, Mercatus Co-operative, UOL Group and SPH Reit. The CoC will also be adopted for all new leases signed after 1 June 2020 between GuocoLand and its tenants.

To ensure compliance with the CoC, a Fair Tenancy Industry Committee (“FTIC”) comprising landlords, tenants and neutral parties such as academics was formed on 3 May 2021. The FTIC will deal with disputes over compliance with the CoC during lease negotiations, monitor issues of non-compliance, and update the CoC as may be necessary.

We highlight some of the important changes introduced in the CoC below.

Rent Structure

Retail tenancies are commonly based on a “mixed or whichever is higher” formula, which generally comprises of 2 components: (1) a fixed rental based on the floor area of the premises, and (2) a variable rental based on a percentage of the tenant’s revenue. The “mixed” formula refers to rent based on the sum of (1) and (2). The “whichever is higher” formula refers to rent based on (1), unless (2) turns out to be higher than (1), in which case the rent is (2). Such “mixed or whichever is higher” formula will generally not be allowed under the CoC, which stipulates that rents must now be based on a single rental computation.

Rent structures based on a “mixed or whichever is higher” formula will only be allowed if both the landlord and tenant agree to the same, and declare their agreement to the FTIC within 14 days of signing the lease. However this is ‘exceptional’ as per the CoC.

The CoC is aimed at ensuring that both landlords and tenants adopt a consensual approach to negotiate in good faith, and that parties observe accepted or reasonable commercial standards of fair dealing. As such, in the event that a landlord demands that its tenants agree to a “mixed or whichever is higher” formula during lease negotiations, the tenants may refer the matter to the FTIC. Even so, it remains to be seen whether large landlords will nevertheless be able to demand a “mixed or whichever is higher” formula, because the CoC guidelines on this issue are not mandatory.

Early Termination of Leases

The CoC allows tenants to terminate their leases early under exceptional conditions, such as if their business principal is insolvent, or if they lose distributorship or franchise rights through no fault of their own. However, to have these rights of early termination, tenants must ensure that they demand for such rights to be contained in their lease agreements. Otherwise, tenants will not be accorded these protections.

Where tenants terminate their leases early under such exceptional conditions, the tenant must be able to give at least 6 months’ prior notice or pay 6 months’ gross rent in lieu of such notice period to the landlord. Additionally, the tenant must also compensate the landlord with a sum equivalent to the security deposit and reinstate the premises. This payment of 6 months’ gross rent in lieu of a tenant’s early termination can be harsh to the said tenant. Thus, it is recommended that parties negotiate to include a clause in the lease which provides that should the landlord be able to get a new tenant in less than 6 months, then the previous tenant need only pay the loss of rent for the intervening period, including any difference in the old and new rent prices.

In addition, the CoC also provides that on the occurrence of either of the exceptional conditions, the tenant may request the landlord to assign the lease to a replacement tenant, instead of exercising its right to terminate its lease early. Although this is subject to the landlord’s approval, the CoC specifically states that such approval is not to be unreasonably withheld. However, it appears likely that landlords can reasonably refuse a new tenant suggested by the existing tenant if the proposed new tenant is in a different line of business or less prestigious because that could affect the branding of the landlord’s property. Existing tenants therefore cannot expect that this clause will enable them to avoid paying compensation so long as they can find a new tenant.

Pursuant to the CoC, landlords can only terminate leases early for substantial redevelopment, asset enhancement or reconfiguration works that would require the premises to be vacated. Similarly, the landlords must give at least six months’ prior notice to its tenants, except where such redevelopment works are to comply with the authorities’ requirements and the time given to do so is less than six months. Here, the landlord will have to compensate the tenant based on how much the tenant spent to fit out and upgrade the premises subject to depreciation. However, this does not apply to a tenancy renewal term, unless further renovation works were carried out in the renewal term.

Landlords will also not be able to terminate leases early where the tenant fails to meet specific sales targets set by the landlord.

The CoC makes clear that landlords can no longer terminate leases early purely to change the tenant mix. However, they can terminate leases early for the purposes of “substantial redevelopment, asset enhancement or reconfiguration works” to even just “part of the building” where the existing tenant is located. It remains to be seen how this will be interpreted in the event of a dispute, such as where a landlord actually just wants to change the tenant mix and undertakes only superficial “asset enhancement” or “reconfiguration” works so as to comply with the CoC.

Nevertheless, limits on a landlord’s power to terminate early and obligations to pay fair compensation for such early termination are important, and the inclusion of the abovementioned CoC guidelines are a welcome move. This is especially so given previous situations where landlords of malls were able to terminate leases when a new and more prestigious tenant wished to lease the largest prime spot in the mall, thereby causing huge financial losses to the existing tenant.

Exclusivity Clauses

 The CoC provides that exclusivity clauses (such as provisions which prevent or restrict a tenant from opening a branch or franchise within a certain radius of the current shop, or provisions which prevent or restrict a landlord from leasing premises with a similar trade or business in the same building where the tenant’s shop is) generally cannot be included in lease agreements.

Such exclusivity clauses can only be included if both the landlord and tenant agree to the same and declare their agreement to the FTIC within 14 days of signing the lease. Again, in the event that a landlord demands that its tenants agree to such exclusivity clauses, the tenants may refer the matter to the FTIC, although it similarly remains to be seen whether large landlords will nevertheless be able to demand the inclusion of such exclusivity clauses because the CoC guidelines on this issue are not mandatory.

Sales Audits

Where a rent structure comprises a component based on the tenant’s gross sales or gross turnover, under the CoC, landlords can now only require such tenants to conduct annual sales audits. If the tenant’s point-of-sales (“POS”) system is integrated to the landlord’s, then both the landlord and the tenant are to share the costs of such sales audits on an equal basis (i.e. 50:50).

It is very common nowadays, especially in large malls, for a tenant’s POS system to be mandated by the landlord, giving the landlord near instantaneous details of the tenant’s retail sales. This facilitates the landlord in charging a “mixed or whichever is higher” formula in its rent structure and regularly raising rent on tenants who are doing well. Some of the more sophisticated landlord mandated POS systems can even track if the same credit card was used at two or more retailers in the same mall on any given day. This allows landlords to optimise their mix of tenants because such data would tell them that shoppers that spend at one store, tend to also spend at some other store. These annual sales audits therefore appear to be less of an issue for the large landlords who have sophisticated POS systems that give them full data on tenant sales.

Alternatively, tenants may also submit to their landlord monthly sales information with an upfront monthly undertaking by the tenant’s director or a certified public accountant on the accuracy of the information, as well as an annual statutory declaration by the tenant’s director.

However, if the tenant’s POS is not integrated with the landlord, the tenant must comply with the landlord’s requirements for sales verification as set out in the lease agreement. In this case, if the landlord requires annual sales audits, the tenant must bear the full costs of the said audits.

Public Liability Insurance

Under the CoC, a landlord can only require the tenant to have a public liability insurance coverage limit of up to SGD3 million, or match the coverage limit in the landlord’s public liability insurance policy, whichever is lower.

However, this does not apply to retail premises with a floor area of more than 15,000 square feet.

Electricity Charges

Where the landlord is on the En-Bloc Contestability Scheme (“ECS”), where it buys electricity for the entire premises, the landlord must charge tenants the same rate

it pays to the electricity retailer, without any mark-up or price discrimination. The landlord can also charge its tenants administrative costs, but such costs must be communicated upfront to the tenants. Further, the landlord cannot charge tenants for any infrastructure costs it incurred in order to benefit from the open electricity market.

If the landlord is not on the ECS, landlords must allow their tenants to choose their own open electricity market retailers, so long as the existing physical infrastructure of the building can support it. In this case, tenants will have to bear all costs and expenses in procuring electricity from their choice of electricity retailer.

Conclusion

The introduction of the CoC is a welcome move in Singapore given that other major countries have also published similar codes of conduct or legislation with similar provisions concerning retail tenancies. For example, the United Kingdom introduced a voluntary Code of Practice for commercial property relationships during the COVID-19 pandemic, intended to reinforce and promote good practice between landlords and tenants as they deal with the impacts of COVID-19. Australia also has a mandatory code of conduct for commercial tenancies, which provides a set of good faith leasing principles to be applied to commercial lease renegotiations.

With the CoC, tenants and landlords alike can hopefully look forward to fairer practices in their collaborations in the future. However, although the Singapore Government has indicated that the CoC will be enacted into law, it is still unclear whether all provisions in the CoC will be adopted or whether further changes will be made. Moreover, the CoC currently only applies to leases entered into after 1 June 2021. Regardless, it would be good practice for landlords and tenants alike to incorporate CoC terms in any new lease negotiations now, in the expectation that the CoC will become law shortly.

Further, whilst it remains to be seen whether the CoC will be effective in ensuring that landlords and tenants deal with each other in a fair and reasonable manner, it is nevertheless a good step forward in the protection of tenants and the regulation of the landlord-tenant relationship. A fairer and more transparent landlord-tenant relationship is better for both landlords and tenants as their relationship is symbiotic – they need each other not just to survive, but also to thrive. Ultimately, tenants and landlords must remember that they stand on the same side against online retail and home delivery, which the public are getting ever more accustomed to due to the persistent effects of COVID-19. With the support of the CoC, landlords and tenants need to work together to build a fairer and more transparent relationship to once again attract crowds to their premises so that they can prosper together.

Please do not hesitate to get in touch with Partner Suresh Divyanathan by email [email protected] or telephone (+65 9687 4759).

^{The above content is for general information purposes only.  It is not and does not constitute nor is it intended to provide or replace legal advice, a legal opinion or any information intended to address specific matters relevant to you or concerning individual situations. Should you require specific legal advice, please do not hesitate to contact the Partner listed or your regular contact at the firm. Copyright of Oon & Bazul LLP}