Commercial Tenancy Agreements – The Latest Code Of Conduct

Costs

The Code covers three aspects of costs – disclosure of costs, legitimacy and justifiability of costs, and what landlords may rightfully charge tenants.

The general rule relating to disclosure is that all costs must be disclosed to tenants before the agreement is signed and/or before they are incurred.

The Code also mandates that all fees charged by landlords must be legitimate and justifiable.

In terms of what landlords may charge tenants, the Code provides guidelines on the following:

• The prohibition against profiteering
• Point-of-Sale systems (“POS”) integration (when POS integration is stipulated in the agreement)
• The apportionment of legal costs for negotiating and preparing the lease agreement

Advertising and Promotion Charge and Service Charge

Some landlords increase service charges and/or advertising and promotion charges during the term of the lease. They follow this up by increasing the overall gross rent payable by the Tenant during the lease term.

The Code stipulates that if landlords increase service charges and/or advertising and promotion charges during the term of the lease, they are not allowed to increase the overall gross rent payable by the Tenant during the lease term.

Floor Area Alterations

According to the new Code:

• Landlords must provide a certificate from a registered surveyor confirming the surveyed area of the premises prior to a handover for new leases.
• Landlords must perform a fresh and new survey when premises have been re-configured after redevelopment or asset enhancement initiative (AEI) work.
• If the surveyed area differs from the floor area specified in the lease, the Code allows for amendment of the rent and security deposit.

Building Maintenance

The new Code makes landlords responsible for loss or damage suffered by tenants if the loss or damage was due to gross negligence or wilful default by landlords who failed to maintain the building where the premises are located.

Exclusivity Clauses

Exclusivity clauses are not allowed in the lease agreements unless both landlords and tenants agree.

Exclusivity clauses are clauses introduced in commercial tenancy agreements which typically prohibit tenants from opening a branch or franchise nearby or prohibit landlords from renting out the premises to the tenants’ competitors.

If landlords and tenants choose to include exclusivity clauses, they must jointly declare the same to the FTIC within 14 days of the signing of the tenancy agreement.

Material Adverse Change

The Code encourages (but does not make it mandatory) landlords and tenants to re-negotiate lease agreements if tenants are prevented, obstructed or hindered from performing their typical business activities at the leased premises due to events beyond their control.

Personal Liability of Tenants’ Personnel

Quite a few lease agreements contain a cover-all guarantee clause stating that tenants’ directors, shareholders, employees or any other persons connected to the tenants are personally liable in cases of default by the tenants.

The Code has put a stop to this practice. These clauses are not allowed.

Failure to Comply with the Code After Lease is Signed

If landlords or tenants do not comply with the Code after lease agreements are 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.

The SMC will then facilitate discussions between the parties within about two 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.

Pre-Termination By Landlords

• Pre-Termination by Landlords Due to Renovation Work

In some cases, landlords pre-terminate leases because of substantial renovations they are planning to undertake during the term of the lease. The right of landlords to do so is sometimes absent from the lease or tenancy agreement, leading to unfairness against tenants and attendant disputes.

The Code now mandates that such rights have to be specifically included as a term in tenancy agreements.

Further, landlords are allowed to pre-terminate the lease only if:

• 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.
• Six months’ prior written notice is given to tenants, unless:
  • the proposed redevelopment is required pursuant to law or requirement of an authority, and
  • the time period given to landlords to comply with makes it exceedingly difficult or impossible for landlords to give the 6-month written notice.

Landlords are not allowed 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.

• Pre-Termination By Landlords Due to Tenants’ Failure to Meet Sales Performance Targets

Sales performance clauses allow landlords to pre-terminate the lease if specified sales targets are not met by tenants.

Sales performance clauses must not be included in a lease unless both Parties agree to include such a clause.

If landlords and tenants choose to include Sales Performance clauses, they must jointly declare the same to the FTIC within 14 days of the signing of the tenancy agreement.