On 20 January 2015, the Singapore Business Federation (SBF) published the Fair Tenancy Framework (FTF), which is intended to level the playing field between tenants and landlords in the market for commercial, industrial, retail and F&B leases (Commercial Leases). FTF is particularly useful for small and medium sized enterprises (SMEs) due to their relatively weaker bargaining power as compared to major landlords or REITs.
The FTF is designed as a facilitative document that may be adopted by stakeholders and was formulated by SBF's SME Committee, Rental Practices Working Group, which comprises professionals from the property, retail and legal sectors. It will enhance Singapore's retail landscape by contributing to the existing sources of information available to contracting parties, although it remains crucial to obtain legal guidance when entering into leases as the FTF is not legally binding.
SBF has opted to recommend three-pronged approach to achieve greater fairness, transparency and amenable dispute resolution for landlords and tenants:
- Rental Data Transparency
- Education and Awareness
A. Rental Data Transparency
While being cognisant of confidentiality concerns, SBF is working with Ministry of Trade and Industry, Urban Redevelopment Authority and Jurong Town Corporation to establish a basis for the regular release of meaningful rental data.
The authoritative release of such data will be useful for tenants when negotiating rent as it will provide a benchmark with which to make a commercial assessment on the fair rental value of the premises.
It remains to be seen to what extent landlords will resist this reform on the basis of protecting confidential information relating to their commercial strategy.
B. Education and Awareness
An important component of FTF is the Business Leasing Guide (BLG) and the basic sample Lease Agreement (LA).
The BLG constructively provides short guidance notes and describes key clauses contained in most LAs. Descriptions of these key clauses explain their effect and provide an understanding of industry best practice. For instance, it strikes a fair balance in recommending that tenants obtain public liability insurance to cover any unexpected expenses that might arise under indemnity clauses, whilst stipulating that landlords should be liable for the acts of its employees and agents.
Key clauses explored in the BLG include:
- Rental clauses:
- Gross Rent
- Gross Turnover Rent
- Rental Deposits, including Bank and personal guarantees
- Rent Review
- Service charges, taxes and stamp duty
- Lease term clauses:
- Option to Renew
- Commercial clauses:
- Restriction of Trade within a Radius
- Landlord's Point of Sale (POS) Systems
- Restriction on Subletting
- Consequences of breach
- Dispute resolution clause
The sample LA is a good baseline for tenants to evaluate their own leasing contracts or renewals; however it is important to keep in mind that each contract is a unique individual agreement and the sample might not sufficiently capture the vast range of circumstances that arise given increasing diversity in the local retail, commercial and industrial uses.
Mediation is recommended as the preferred dispute resolution mechanism for issues that may arise in Commercial Leases, and suggests that tenants negotiate for the inclusion of mediation clauses in leases.
SBF should be commended for taking a progressive view on mediation, particularly by not simply defining mediation as a tool to resolve legal conflict. Instead, the FTF contextualises mediation as a sound commercial strategy for landlords and tenants:
"A business that integrates conflict management into their management model, is a business that will be better prepared for disputes, better protected against risk, and have better control over commercial relationships."
The benefits of mediation are particularly significant for SMEs as they reduce cost, take less time and settlement terms have creative potential as it is for the parties to decide how to resolve the dispute.
To that end, SBF is in the process of working enhance strategic ties between trade associations and chambers, and the Singapore Mediation Centre in order to enhance the benefits of mediation in the context of commercial lease disputes.
Potential Influence of FTF
Given that the high rent have oft being cited as the prime reason for stifling business growth, tenants need to rethink their lease strategy in order to extract maximum value while limiting risk and liability. The FTF does play a role in addressing information asymmetries between landlords and tenants by providing an overview of basic benchmarks and industry best practice. In addition, the FTF also highlights the importance of having skilled negotiators and legal counsel to assist in evaluating leases, especially if there are substantial capital commitments or onerous provisions or unfair terms which deviate substantially from the FTF.