9 October 2020
In this article, Sandra Seah and Eef Emmerik of our Singapore corporate real estate team share tips and concerns for tenants and landlords faced with early lease termination situations — particularly given the uptick in such early tenancy cessations due to the COVID-19 situation.
COVID-19 and the dire economic repercussions has led predictably to a drastic fall in occupancy and rents across Singapore; most severely impacting retail and commercial properties.
Unable to ride out the storm, many businesses are closing down to stem further losses. With work from home becoming the norm, many businesses are also relooking at office space requirements and considering downsizing, since at any particular time staff headcount physically in the office will be low.
Yet others are taking a more opportunistic tilt and are taking advantage of the market to relocate or to lock in tenancies at lower rent.
Compensation for Early Exit?
It would be rarity to find corporate leases with any form of “break clause” “termination for convenience”, “early exit” or “pretermination” provisions allowing the tenant to terminate the lease mid-term. Any right to terminate is usually accorded to the landlord, while rarely to the tenant, save for long leases or instances of tenants with strong bargaining power. If a right to terminate is contractually available to a tenant, the tenant may simply serve the requisite notice and leave without paying compensation to the landlord at the end of the notice period.
Most corporate leases do not accord any right of pre-termination to the tenant. In such situations, a tenant who seeks to leave before the end of the term will be in breach of the lease and can be sued for breach of contract. The landlord may claim damages amounting to the rental sum for the balance of the term and will also usually have a contractual right to forfeit the deposit. The landlord will have to observe its duty to mitigate or cut its own losses.
Most cases though, do not proceed to courts and the judiciary. The parties will find it best to negotiate. Tenants should remember that early termination is not often a cost-free endeavour. Landlords will seek fair compensation and a good barometer for such a sum would be the amount of time a landlord might require to re-let the premises to a new tenant. The “amount of time” here is typically influenced by present market conditions as a matter of negotiation between the parties.
The compensation sum is also influenced by whether the premises are returned in a clean reinstated bare state, or whether the landlord needs to expend resources to let to the next potential tenant.
Documenting the Termination
An early exit should always be legally documented to eliminate the risk of lingering liabilities and claims for the tenant. Most lease terminations are formally closed off by way of a Deed of Surrender and Release (Deed). The tenant surrenders the premises, and the landlord releases the tenant from its obligations under the lease.
The objective of the Deed is to formally terminate the lease relationship (which is an interest in land) and to provide a clean break between the parties. The deed should be carefully drafted, to ensure that there are no residual obligations between the parties that are unintended.
All practical and financial issues should be flushed out during negotiations, and the settlement (i.e. compensation sum) duly agreed upon. The Deed will usually minimally document the cessation date, yielding up terms, and, compensation.
Unlawful Terminations and Tenant Abandonment
In our experience, landlords also need to contend with immediate terminations or abandonment in the COVID-era. Due to the bad economic fallout, or where the tenant is particularly cash strapped, it is not uncommon for the tenant to leave without notice or abandon the premises.
Landlords will generally need to seek formal legal advice on repossession of the premises. A tricky issue is whether the landlord can remove the assets on the premises or try to sell them to recoup its losses or to pay for reinstatement.
Landlords should exercise extreme care in the repossession of the premises and in the removal or sale of assets left onsite. Despite any written terms of the lease which may cover such situations, landlords may run the risk of claims from inadvertently taking possession of or selling off equipment or assets that are not owned by the tenant. For instance, assets such as computers or photocopiers are typically on hire purchase. If the tenant is in the industrial sector, trade inputs such as raw materials or feedstock may also have been used as collateral and are actually “charged” to creditors.
Conclusion
In conclusion, COVID-19 is a difficult and challenging time for all, and especially in the corporate real estate market for retail, industrial and office space. Rental figures have been coming down in Singapore in the past months, and some businesses also need to shut down due to the present recession.
Real estate represents a significant cost for tenants, and also a valuable asset for landlords. As such, good real estate management is key to a healthy bottom-line regardless of which side of the fence one sits.
Key takeaways from this article would be to negotiate fair compensation for early termination where there is no right to terminate in the lease agreement. Carefully document the termination, with input from legal professionals. And finally, landlords should approach abandonment by tenants carefully, in case there might be third party interests involved.
For further information, please contact:
Sandra Seah, Partner, Bird & Bird
sandra.seah@twobirds.com
