Negotiating the rent under an “option to renew” clause is common. However, what happens when such negotiations extend beyond the contractual time period to exercise the option? The recent High Court case of AREIF (Singapore I) Pte Ltd v NTUC Fairprice Co- operative Ltd  SGHC 28 (AREIF v NTUC) is a salutary warning to those seeking to negotiate rent beyond the prescribed time period for renewing a lease.
FACTS OF THE CASE
- AREIF, the landlord, leased its premises at TripleOne Somerset (the Premises) to NTUC for a term of four years from 1 April 2010 to 31 March 2014. The lease contained a standard option to renew (the Clause) which provided as follows.
- NTUC could make a written request to renew the lease between 6 to 9 months before the expiry of the lease
- AREIF “shall grant” to NTUC a new lease “subject to the following conditions” (listed in sub-clauses (a)(i) to (vii)), which included:
- The rent payable for the new lease shall not exceed S$87.84 per square metre per month (psm) of the floor area; and
The new lease must be signed by NTUC not later than 4 months (i.e. 30 November 2013, the 30 Nov Deadline) before the expiration of the current lease.
NTUC made a written request to AREIF to renew the lease on 29 July 2013 (approximately 8 months before the expiry of the lease) and parties entered into discussions as to the rent payable under the new lease. AREIF began by proposing the maximum amount i.e. S$87.84 psm. NTUC resisted, and a series of counter-proposals and counter-counter-proposals ensued. NTUC made an offer of $59.20 psm on 28 November 2013, and AREIF responded on 29 November 2013 (one day before the 30 Nov Deadline) that they would consider the offer and respond to NTUC. No new lease was signed by the 30 Nov Deadline; and AREIF responded after the 30 Nov Deadline that its management was still considering NTUC’s last offer.
Unbeknownst to NTUC, AREIF had begun negotiations with Cold Storage Singapore (1983) Pte Ltd (Cold Storage) on 6 November to lease the Premises. This culminated in AREIF’s letter of offer to Cold Storage for the lease of the Premises at S$83.31 psm and Cold Storage’s acceptance of the offer on 28 December 2013.
On 6 February 2014, AREIF informed NTUC that it considered NTUC’s option to renew to have lapsed, and reminded NTUC to reinstate the Premises and deliver vacant possession to AREIF by 31 March 2014. It was then that NTUC offered the maximum rent of S$87.84 psm. However, AREIF did not accept this and parties commenced proceedings against each other.
NTUC argued that it validly exercised its option to renew the lease by issuing the written request on 29 July 2013; and that the conditions set out in sub-clause (a) were the parameters for the terms of the lease that AREIF was obliged to grant. NTUC further argued that AREIF waived the 30 Nov Deadline requirement for a new lease to be entered into by the parties. AREIF took the contrary position that all the conditions in the sub-clause had to be satisfied in order for AREIF to be required to grant NTUC a new lease. Since the parties did not agree on rent andno new lease had been signed by the 30 Nov Deadline, AREIF took the position that NTUC’s option was not validly exercised.
The High Court held, agreeing with AREIF, that the “option to renew” had lapsed. The judge gave significant weight to the phrase “subject to the following conditions”, and held that AREIF’s obligation to grant a new lease only arose if all the conditions in sub-clause (a) were satisfied. He held that NTUC bargained only for a contractual right to a new lease at a rent no higher than the maximum i.e. S$87.84 psm. Thus, even if AREIF refused to negotiate or agree upon rent, NTUC could still have triggered the option by offering to pay the maximum rent.
The judge also held that the Clause did not impose any obligations on AREIF to bring about the fulfilment of the conditions in sub-clause (a) and did not prevent AREIF from acting in a manner that would frustrate their fulfilment. More specifically, AREIF had no obligation to do the following:
- Remind NTUC in advance of the 30 Nov Deadline;
- Facilitate negotiations so that the 30 Nov Deadline could be met;
- Issue an ultimatum to NTUC before the 30 Nov Deadline;
- Take steps to put NTUC on notice that it intended to rely on the 30 Nov Deadline;
- Keep NTUC informed of the commencement or status of AREIF’s negotiations with Cold Storage; or
- Negotiate rent in good faith.
The Court elaborated that Singapore law does not recognise a general duty of good faith implied into contracts. Thus, parties are allowed to act in their own self-interest, subject to limits imposed by general law. If parties wish for themselves to act in good faith in coming into an agreement, this had to be expressly written into the contract. In any event, the judge found in this particular case that that AREIF had negotiated on rent in good faith.
The judge considered that AREIF owed NTUC three obligations under the “option to renew”:
- An obligation not to put it out of its power, on or before the 30 Nov Deadline, to grant NTUC a new lease.
- An obligation to negotiate rent; and
- An obligation to present a new lease contract once rent is agreed.
He concluded that AREIF did not breach any of these obligations.
Finally, the Judge rejected NTUC’s argument that AREIF had waived the deadline by continuing to negotiate with NTUC. The judge held that a party could only be said to have waived its contractual right when it made an unequivocal representation, by words or conduct, to its counterparty. Thus, neither the fact that AREIF did not give NTUC a draft lease agreement on the 30 Nov Deadline, nor the fact that AREIF negotiated with NTUC past the 30 Nov Deadline was fatal. In order for NTUC’s argument to succeed, it needed to have obtained AREIF’s assurance before the 30 Nov Deadline that AREIF would not be relying on the deadline.
It is common for “option to renew” clauses to stipulate that they must be exercised by a certain date. Depending on the contractual language, an indication of an interest to renew the option alone by the date is insufficient. By the contractual exercise date, a tenant seeking to renew the option must have an agreement on the terms of the option – ie. the new rent for the period.
If the parties require more time to negotiate the terms of rent, express approval of an extension of the deadline or a waiver of the deadline should be provided by the landlord.
If no agreement can be obtained on the rent or the extension, the tenant should make the stipulated maximum rent offer. The alternative would be to forgo the option to renew.