3 June, 2015
Introduction
The Fair Tenancy Framework (“the Framework”) is a new initiative recently introduced by the Singapore Business Federation to establish a set of clear leasingguidelines and negotiation principles for small businesses looking to rent non-residential premises. The guidelines were developed based on the feedback and studies on the impact of rental overheads on business operating costs.
This article reviews the main features of the Framework and evaluates its usefulness in promoting fairer lease agreements.
Main Features Of Fair Tenancy Framework
The Framework is intended to fill a gap in Singapore where leasing practices operate on a free market principle and there are currently inadequate laws or industry standards protecting small businesses in their lease agreements. For example, retail tenants do not have recourse under the Unfair Contract Terms Act (“UCTA”) as it does not cover any contract which creates or transfers an interest in land.
In contrast, several countries such as Australia, Korea and the United Kingdom have legislated tenancy acts to protect tenants and small retailers.
The Framework is d eveloped on the principle of fairness for all contracting parties, which encapsulates the following:
- Transparency: Parties should be given all the necessary information to avoid potential misunderstanding and disputes;
- Timeliness: Parties should be given adequate time to make informed decisions and/or take alternative measures;
- Not one-sided: One party should not take advantage of the other party knowing that he is not in a position to protect his own interest; and
- Conscionable conduct: A party’s conduct should be done in good conscience i.e. not unfair, harsh, or oppressive and beyond hard commercial bargaining.
The main features of the Framework are to:
- help tenants and landlords understand the major terms and conditions of
- the lease agreement including their roles and responsibilities;
- provide a checklist covering three main areas: negotiations, financial and contractual;
- highlight the common concerns, perspectives and rights of tenants;
- provide a sample lease agreement;
- provide rental data transparency by giving access to credible market information on rental rates. In turn, tenants can make comparisons and use the information as a basis for negotiation over rates quoted by landlords; and
- provide an automatic medium for non-contentious dispute resolution in the form of mediation.
Usefulness Of Fair Tenancy Framework
The usefulness of the Framework lie in three areas: understanding of key lease terms, enforceability of the Framework and dispute resolution mechanism.
1. Understanding Of Key Lease Terms
In Singapore, tenants tend to be small businesses which lack the financial resources to hire legal counsel to review their lease agreements. Hence, landlords are in a dominant position to dictate terms to prospective tenants. Taking the example of a store in a large shopping mall, the tenant looking to renew his lease where he has built up his customer base can be arm-twisted by the landlord to pay a higher rental fee, or face the threat of a refusal to renew the lease.
Part B of the Framework contains a Business Leasing Guide 2015 (“Guide”) and a Basic Reference Lease Agreement (“Agreement”). The Guide is meant to help small businesses to have a better understanding of the implications of typical terms and conditions in a lease agreement, whilst the Agreement covers various aspects of fair lease terms and conditions for tenants and landlords.
An important lease term is use restrictions (see item 1.4 of the Guide), which governs the permitted use of the premises by the authorities and/or the landlord. For retail malls, an example of a use restriction is the landlord’s trade mix policy to ensure that the mall remains attractive to customers. An Australian article noted that if the lease agreement specifies the business the tenant engages in, the tenant may suffer from an inability to change the scope of his business. Conversely, a landlord might suffer if a tenant who has some bargaining power insists on an exclusivity provision to protect its business from competition from similar businesses.1
It is not uncommon for a landlord to try to insert a “demolition clause” or “break clause” in the lease agreement, which will allow the landlord to terminate the agreement if, for example, the tenant’s clientele does not fit the landlord’s trade mix policy. Such premature termination of the lease will inconvenience or cause hardship to the tenant.
This point was noted in Corwin Holdings Pte Ltd v Bhamah Ramdas (trading as Lady Fair Beauty Centre) [2009] 3 SLR(R) 35 (“Corwin Holdings”), where the landlord tried to terminate the tenant’s lease of a shop unit prematurely by exercising a “demolition clause” on the ground that the landlord required the unit for renovation or that the tenant’s clientele did not fit the landlord’s trade mix policy. The first ground failed as the landlord did not have a bona fide intention to renovate the unit, whilst the landlord could not rely on the second ground which was raised as an afterthought.
The Guide suggests that in a fair agreement, “[t]he tenant could pre-list its productswidely for flexibility and/or establish with the landlord some pre-conditions for waivers, as business trends can change during the course of a lease term”. Also, clauses should be inserted in the agreement “to guide reasonable action on the part of the landlord when these provisions are activated”.
2. Enforceability Of The Framework
As the Framework is not legally binding on landlords and tenants and is intended to be voluntary, it is possible for the stronger party (usually the landlord) to simply ignore the Framework and insist on enforcing its own terms. Although this is a significant limitation, the Framework is, as noted by the Minister of State for Trade and Industry Teo Ser Luck, a “first step towards fairer leasing practices”.2
Also, broad principles such as the requirement of “conscionable conduct” may be difficult to apply in practice, in the absence of an authoritative adjudicator such as a court of law. As stated above, the Framework defines “conscionable conduct” as“not unfair, harsh, or oppressive and beyond hard commercial bargaining”. What goes beyond hard commercial bargaining is not always easy to ascertain.
If a landlord makes it a condition for granting a new lease that the tenant must abandon certain ongoing claims against the landlord, is this condition merely a hard bargain or an unconscionable one? In 2003, this issue came before the High Court of Australia, which considered whether the landlord’s conduct was “unconscionable” under a consumer statute that had incorporated the common law notion of “unconscionability” as a business standard for Australian companies.3 The majority judges held that such a condition was merely a result of the landlord of a shopping centre taking advantage of its superior bargaining condition without any unconscionable conduct and it was the retail tenants’ commercial choice whether to abandon the claims. On the other hand, the sole dissenting judge observed that the landlord’s conduct was unconscionable as it had effectively deprived the retail tenants, who were in an extremely vulnerable position, of their legal rights.
3. Dispute Resolution Mechanism
One of the key benefits of the Framework is to provide a platform for dispute resolution through mediation. The model clause in the Agreement provides:
“All disputes, controversies, or differences arising out of or in connection with this agreement shall first be submitted to the Singapore Mediation Centre for resolution by mediation in accordance with the Mediation Procedure for the time being in force. The parties agree to participate in the mediation in good faith and undertake to abide by the terms of any settlement reached.”
However, parties who wish to vindicate their rights may not find mediation appropriate, as the mediation process is more likely to lead to a compromise. For instance, the tenant in Corwin Holdings was found to have been entirely blameless and was awarded SGD 4k in costs. In a mediation setting, such an outcome is unlikely to be reached as a tenant who wishes to preserve his business relationship with the landlord may end up settling for less than what he actually deserves.
Conclusion
By better equipping tenants and landlords for the negotiation process, setting out the implications of typical lease terms as well as increasing the transparency of rental information, the Framework is a step in the right direction towards fairer leasing agreements. But they should also be mindful of the limitations of the Framework and seek legal advice where appropriate to ensure that their rights are preserved.
End Notes:
1 Neil Crosby, Sandi Murdoch and Eileen Webb, “Landlords and Tenants Behaving Badly? The Application of Unconscionable and Unfair Conduct to Commercial Leases in Australia and the United Kingdom” (2007) 33(2) University of Western Australia Law Review 207.
2 “SBF launches fair tenancy framework”, TODAY (21 January 2015).
3 ACCC v C G Berbatis Holdings Pty Ltd (2003) 197 ALR 153
For further information, please contact:
Sandra Han, Partner, RHTLaw Taylor Wessing
sandra.han@rhtlawtaylorwessing.com
Chen Yiyang, RHTLaw Taylor Wessing
yiyang.chen@rhtlawtaylorwessing.com
