Code of Conduct for Leasing of Retail Premises

Summary

The Fair Tenancy Pro Tem Committee was formed in June 2020 to address long-standing tenancy issues faced by retail, F&B and lifestyle sectors in Singapore when negotiating commercial leases and when there are issues arising from such leases subsequently. The Committee released their Code of Conduct on 26 March 2021 (the “Code”). The Code will apply to all commercial lease agreements entered into on or after 1 June 2021. The Code’s objective is to provide guidelines which aim to equalise the bargaining power between landlords and tenants. It also introduces a dispute resolution framework to manage and resolve conflicts between landlords and tenants.

The Code is Presently Voluntary

The Code is currently voluntary and (as of May 2021) legislation to enforce compliance has yet to be passed.
However, the members of the Committee, comprising:

• the Real Estate Developers’ Association of Singapore and REIT Association of Singapore, representing the landlord community, and
• the Fair Tenancy Framework Industry Committee (“FTIC”), formed with representation from the Singapore Business Federation SME Committee, the Association of Small & Medium Enterprises, the Restaurant Association of Singapore, the Singapore Retailers Association and Singapore Tenants United for Fairness, representing the tenant community,

have committed to comply with the Code from 1 June 2021.

Qualifying Criteria

In order for the Code to be applicable, the following conditions must be met:

• the relevant lease agreement must have a minimum tenure of one (1) year; and
• the premises must fall under the definition of “Qualified Retail Premises” specified in the Code that are permitted by the Urban Redevelopment Authority (“URA”) to be used for the purpose stipulated in the Code.

The 11 Guiding Principles

The Code introduces eleven (11) leasing principles that a landlord and a tenant (hereinafter, respectively, “Landlord” and “Tenant” and together the “Parties” and each a “Party”) should comply with. We have provided a brief summary of the principles for your ease of reference.

Exclusivity Clauses

Exclusivity clauses are clauses which prevent a Tenant from opening a branch or franchise within a certain radius of the rented premises during or after the lease term, or which prevent or restrict a Landlord from leasing premises in the same building as the rented premises to another, similar, trade or business.

Exclusivity clauses must not be included in the lease agreements, unless both Parties agree.

Where the Parties agree to such a clause, a joint declaration must be made to the FTIC within 14 days after the lease agreement has been signed.

Costs

Generally, there must be upfront disclosure of all costs charged.

The Code sets out the categories of costs which a Landlord may charge its Tenant. No profiteering is allowed, and all fees, such as labour costs to co-ordinate work, must be legitimate and justifiable. Significantly, the Code provides details on costs associated with point-of-sale systems (“POS”) integration (where POS integration is required under the agreement, and the apportionment of legal costs for negotiating and preparing the lease agreement).

Advertising and Promotion Charge and Service Charge

The Landlord is entitled to adjust service charge and advertising and promotion charge during the lease but the overall gross rent payable by the Tenant during the lease term after such an adjustment should not increase.

Pre Termination of the Lease Due to Renovation Work

Where the Landlord requires a right to pre-terminate a lease due to re-development works, the lease agreement must contain a specific provision to grant the Landlord such a right.

Generally, the Landlord is only entitled to pre-terminate the lease agreement when:

• Substantial redevelopment, asset enhancement or reconfiguration works are to be done to the building or the part of the building where the premises are located; and
• Vacant possession of the premises is required to carry out such redevelopment works.

The Landlord is not entitled to pre-terminate a lease agreement purely for purposes of changing the Tenant mix without carrying out any redevelopment work, or if vacant possession of the premises is not required. A minimum of six (6) months’ prior written notice is required, unless:

• the proposed redevelopment is required pursuant to law or requirement of an authority, and
• the time period given to the Landlord to comply is such that the Landlord cannot give the Tenant at least six (6) months’ prior written notice.

Sales Performance Clauses

Sales performance clauses must not be included in a lease (e.g., a clause which allows Landlord to pre-terminate the lease if a specified sales target is not met by the Tenant) unless both Parties agree to include such a clause.

Where the Parties agree to include such a clause, a joint declaration must be made to the FTIC within fourteen (14) days of the signing of the lease agreement.

Material Adverse Change

The Parties are encouraged to re-negotiate the lease agreement in cases where the Tenant is prevented, obstructed or hindered from performing its typical business activity at the leased premises due to events beyond the Tenant’s control.

Pre-Termination by Tenants

The Tenant is only entitled to pre-terminate the lease agreement under two conditions:

• where the business principal of the goods and/or services that the Tenant retails becomes insolvent; or
• where the Tenant loses the distributorship or franchise rights to sell or provide those the goods or services, and where the loss of distributorship or franchise is not due to a breach by the Tenant of the distributorship or franchise agreement.

The code also prescribes the notice period and compensation payable in such a situation.

Security Deposits

The security deposit amount for Qualifying Retail Premises of floor area of up to 5,000 square feet and with a lease term of up to 3 years shall not exceed 3 months’ gross rent.

If the Tenant chooses not to furnish deposit fully in cash, the Tenant must notify the Landlord prior to the signing

of the lease agreement. In such a case, the Landlord must accept up to 50% of the security deposit by way of a non-cash mode of payment, such as a bank guarantee, and the Landlord may prescribe the mode.

The lease agreement cannot have a cover-all guarantee clause stating that the Tenant’s directors, shareholders, employees or any persons are personally liable in cases of default by the Tenant.

Floor Area Alterations

The Landlord must provide a certificate from a registered surveyor confirming the surveyed area of the premises prior to a handover for new leases. The Landlord must do a fresh survey where premises have been re-configured after re-development or asset enhancement initiative (AEI) work. The Code provides for amendment of the rent and security deposit if the surveyed area differs from the floor area specified in the lease.

Building Maintenance

The Landlord is responsible for loss or damage suffered by the Tenant due to gross negligence or wilful default on the Landlord’s part to maintain the building where the premises are located.

Rental Structure

The rental formula must be based on a single rental computation throughout the lease term.
Rental terms with an “either/or” or “whichever is higher” formula are not allowed unless both Parties agree to such terms. In such situations, a joint declaration by the Parties must be made to FTIC within 14 days after the lease agreement has been signed.

Checklist for Landlords

The Landlord must complete the checklist set out in the Code and provide it to the Tenant along with the first draft of the lease agreement. This responsibility falls on the Tenant if the Tenant prepares the first draft.

Dispute Resolution
Non-Compliance During Lease Negotiations

In the event of any non-compliance by the Landlord or the Tenant with the Code during lease negotiations, the affected Party may refer the matter to the FTIC. In case of clauses not covered by the Code, dispute resolution as per applicable laws will be followed.

After the matter has been referred to the FTIC, the FTIC will monitor the incidences. In the event that there have been many reports made against a particular landlord, the FTIC may “name and shame” that landlord. However, it is unlikely that there will be further steps taken as the FTIC does not seem to have the power to adjudicate disputes.

Non-Compliance After Lease Signed

In the event of any non-compliance in the lease agreement by a Party with the Code after the lease agreement is signed, the Party raising a dispute may approach the Singapore Mediation Centre (“SMC”) within 14 days of the signing of the lease agreement to resolve the dispute or disagreement.

The SMC will then facilitate discussions between the Parties within, on average, two (2) weeks. Both Parties are required to attend the SMC’s mediation sessions to resolve the dispute. After the sessions, both Parties will have to comply with the resolutions of the SMC