New bill balances bargaining power between tenants and landlord in retail leases

A CBRE expert believes the bill will make SG attractive to new entrants in the market.

Previously, landlords who do not follow the Code of Conduct (CoC) set by the government for retail leases can freely terminate a lease early if they want to carry out enhancement works on their building.

But now that the Lease Agreements for Retail Premises Bill has been passed, landlords will have to provide tenants certain compensation if such a situation occurs.

This is only one of the many things that will change as the new measure obliges all landlords in Singapore to make their lease agreements CoC-compliant.

“As the market practice is for many terms in retail leases to be largely in favour of landlords, many tenants were previously unable to negotiate for more tenant-friendly provisions in retail leases in Singapore,” Chou Ching, co-head of Corporate Real Estate at Rajah and Tann, told the Singapore Business Review.

“The passing of the bill would help to re-calibrate this imbalance in bargaining power that currently exists between landlords and tenants in Singapore as the leasing principles in the Code generally promote a more balanced position for between landlords and tenants in relation to certain selected key provisions typically contained in leases for retail premises,” Chou added.

Joan Chen, head of Retail Services at global commercial real estate services firm CBRE, said the bill also removes any ambiguity in retail leases, adding that the CoC provides for a single rental computation.

“How the CoC works is that landlords have only a single permutation: they have to do base rent plus Gross Turnover rent (GTO). Previously, they had base plus percentage, or whichever is higher,” Chen explained.

“At times, tenants are not able to project their rental costs efficiently because not only is addition rent based on the GTO, they have to account for a ‘whichever is higher’ basis. Removing these additional permutations or calculations will still allow landlords to enjoy upside rents and at the same time, give tenants more certainty in projecting total rent for their leased space," she added.

The CoC also provides a formula for calculating the compensation sum given to tenants should a landlord terminate their lease early due to enhancement works.

Chen said such a  provision will make tenants feel protected.

“In the inevitable case of redevelopment, tenants have the assurance that landlords will offer some compensation for their investment in their shop fit-out,” she added.

Compensation for early termination due to redevelopment was something that tenants needed to negotiate before and in a lot of cases their appeal gets rejected. What the new measure promises to give tenants is a better negotiating platform.

“Tenants get defined leasing terms, it takes away ambiguity. Tenants don’t have to negotiate on like clauses they used to negotiate for like redevelopment clauses, compensation clauses. Now everything is upfront,” Chen said.

Loss for landlords?

Whilst landlords may feel that the measures may have inhibited some of their rights as property owners, Chou underscored that the bill offers benefits for both lessee and lessor.

Amongst the benefits of the bill which both tenants and landlords can enjoy include “greater certainty” when entering lease agreements since it will be “consistent” across the board.

“For tenants operating in different buildings or malls, it would make it easier to have consistent clauses among the different lease agreements,” Chou said.

Through the bill, both landlords and tenants will also have “heightened clarity in the lease negotiation process, as both parties would have the Code as a point of reference on the key lease terms to be negotiated upon.”

It also cuts the time needed on lease negotiations. Chen said since the creation of the CoC, negotiation processes for retail leases have become “much shorter than before.”

More importantly, Chou said the bill provides “for an accessible dispute resolution mechanism in the form of mediation and also provides certain confidentiality provisions during mediation and/or adjudication.”

“The bill makes clear that communication and information shared during mediation and adjudication will generally be confidential, which encourages open communication between the landlord and tenant when there are disputes, and aims to assist parties to come to a resolution in the event of disputes,” Chou said.

However, the partner from Rajah and Tann did not discount some drawbacks for landlords.

For example, landlords will not be allowed to include sales performance clauses, such as pre-termination of the lease agreement if certain sales targets are not met, in their lease agreements. 

The security deposit that landlords can ask from tenants has also been capped to three months worth of gross rent. 

“As the security deposit is a deposit that may be used by the landlord against any breaches committed by the tenant under the lease, certain landlords may take additional comfort in collecting a higher quantum of security deposit perhaps due to the profile of certain tenants. However, landlords will not be able to do so now,” Chou said.

Landlords will also have to prepare to bear additional costs which were used to be borne by tenants like legal or administrative fees for the preparation of the lease agreement.

“It was previously very common for tenants to bear the landlord’s legal fees and expenses. If a landlord’s lease agreement is not Code-compliant and the tenant proposes amendments to be in line with the Code, the landlord will have to bear the tenant’s and its own legal fees associated with the amendments,” Chou said.

Chen, however, reiterated that it’s not all losses for Singapore’s landlords as the bill’s alignment of leasing standards might actually encourage new entrants to the market, especially from overseas.

She noted that most landlords are already complying with the CoC even before the bill. “[The CoC] has already become almost a post COVID norm for us here. Perhaps, only the smaller landlords, like the strata ones, [may be affected],” she said.

“The legislation basically would affect the broader retail strata landlords, perhaps the individual landlords that were not under the purview of CoC because they didn't have clauses that the COC addresses,” she added.

For landlords who have yet to adapt the CoC into their leases, Chou advised them, as well as tenants, to familiarise themselves with the provisions of the code.

“Review [your] existing lease templates in relation to retail premises to ensure that they are in accordance with their obligations under the Code and the new law,” Chou said.