To help businesses affected by these measures, the Singapore government has introduced property tax reductions for landlords and rental waivers for its tenants
The global outbreak of the novel coronavirus (COVID-19) is the most critical problem facing the world now.
The Singapore government has acted swiftly to reduce the risks of local transmission. At the time of publication of this Alert, all bars and entertainment venues such as nightclubs, cinemas and games centres have been prohibited from operating. In addition, all gatherings involving more than 10 persons have been prohibited. Food and beverage, retail, and health and fitness businesses have been allowed to continue their operations (but with further precautionary measures)―for now. It is certain that these regulations will, and must, be tightened if the health crisis continues on its current trajectory.
To help businesses affected by these measures, the Singapore government has introduced property tax reductions for landlords and rental waivers for its tenants. However, landlords in the private sector have not been as quick to pass these savings on to their tenants.
On 1 April 2020, the Singapore government announced that it will introduce a bill to suspend enforcement actions by commercial landlords against tenants who are unable to pay their rent as a result of COVID-19, for up to six months. However, this is just a deferral, and not a waiver, of the tenant’s obligation to pay rent. It appears that rental payments will continue to accrue for these tenants and will still have to be paid after the suspension period is over.
It remains to be seen when, and to what extent, the Singapore government will step in to force landlords to reduce rents. In the meantime, tenants whose businesses are affected by COVID-19 may wish to terminate or vary the terms of their tenancies in order to avoid their debts from accruing. This Alert examines the options available for tenants to end or change commercial leases, along with practical recommendations.
Impact of COVID-19
The most important step for any tenant is to review its tenancy agreement (which would have been difficult for a tenant to negotiate against the large landlords at the outset) to understand the full impact of COVID-19 on their businesses.
Commercial tenancy agreements for large malls typically require the tenant to be open for trade or business every day of the term, and impose liquidated damages for failure to do so. Other obligations include maintaining an illuminated display, keeping the premises secure and paying for insurance.
These obligations continue to run even if the tenant cannot carry on business as usual, although the landlords may not enforce them with the ongoing pandemic, coupled with consistent pleas for rental rebates from the Restaurant Association of Singapore (RAS), the Singapore Retailers Association and an informal group called Singapore Tenants United for Fairness.
Some, but not all, tenancy contracts contain a “force majeure” clause. This is a common name for a clause that excuses the tenant from strict performance of its obligations, when some supervening event prevents or delays performance.
The effect of a force majeure clause depends on the words in the clause, which will vary from agreement to agreement. The key aspects of the clause are as follows:
- Scope: Most clauses will list specific situations that can trigger the clause, such as fire, war, supervening laws and regulations, or a pandemic (usually by reference to the World Health Organization).
Other contracts may not list specific examples, but use terms like “act of god” or “force majeure event”. These terms are usually interpreted to mean supervening events that are both unforeseeable and unavoidable.
- Effect: Some clauses come into effect if the supervening event prevents, hinders or delays performance. However, if there is no such allowance, then the supervening event must make performance impossible or illegal.
- Consequences: The clause may provide for termination of the agreement at the option of one party. More typically, a clause may entitle one party to suspend performance or extend deadlines for performance while the supervening event continues.
The Singapore courts will interpret a force majeure clause strictly. This means that the tenant must satisfy the courts that the words in the clause are broad enough to cover the tenant’s specific situation. In addition, the tenant must show that it has taken all possible steps to avoid the event or the impact of its consequences.
In Singapore, large landlords often hold a much stronger bargaining position when negotiating a lease with tenants. As such, many commercial tenancy agreements do not contain force majeure clauses that would be helpful to a tenant in a COVID-19 situation.
From experience, most tenancy agreements only provide for termination of the lease where the property has been destroyed by fire or other natural causes. It is uncommon for a tenancy agreement to provide for the waiver, deferment or suspension of monthly rental in the event of a force majeure event. In fact, certain tenancy agreements expressly exclude the payment of monthly rent from the protections of a force majeure clause.
In the absence of a force majeure clause, the tenant must then consider whether it can seek to argue the termination of the lease on the basis of frustration.
Frustration occurs when, due to an unforeseen event which is not the fault of either party, the obligations under the lease are radically different from those the parties contemplated at the point of signing and can no longer be performed.
The outbreak of COVID-19 and the subsequent regulations that were issued by the Singapore government are clearly events that were not anticipated and cannot be said to be the fault of either party.
Nevertheless, it will be an uphill task for a tenant to persuade the Singapore courts that the lease has been frustrated. The tenant must establish that it has become impossible to perform the lease and not merely more expensive or less profitable.
The tenant would be in a better position to establish frustration if the tenant is operating a business which is prohibited by the COVID-19 regulations―for example, a cinema. However, even in such cases, many tenants have tried and failed, as can be seen from the following cases in the UK and Hong Kong:
- During the 2003 SARS epidemic, a tenant argued that the lease had been frustrated by an isolation order by the Department of Health, which meant that it could not be inhabited for 10 days. The Hong Kong court held that a 10-day period was insigniﬁcant in view of the two-year duration of the lease and therefore did not “signiﬁcantly change the nature of the outstanding contractual rights or obligations” of the parties (Li Ching Wing v Xuan Yi Xiong);
- More recently, European Medicines Agency (EMA), an agency of the EU, sought to frustrate its lease of premises in Canary Wharf, UK, when the UK invoked Article 50, triggering its exit from the EU. EMA argued that since it was required by law to be located in an EU country, it would no longer be able lawfully enjoy the lease. The English judge rejected this argument and held that the UK’s transition to a non-EU member state did not constitute a “frustrating event” since, following Brexit, the EMA would have legal capacity to deal with and sublet premises in a non-EU country and therefore could continue to perform its obligations under the lease.
Based on the above, there is a possibility that the Singapore courts may find that a long-term lease would not be frustrated by a mere closure of malls even for a month. The outcome in each case will be highly dependent on the specific facts of the case.
When a contract is frustrated, it is essentially cancelled. Neither party needs to do anything more for the other. There is no need to pay any sums set out in the contract. If deposits have already been paid, a refund or partial refund may be obtainable.
Negotiations for Suspension, Holiday or Deferment
For the majority of tenants, the most practical route out of the immediate difficulties created by the current crisis, particularly for more established businesses, is to negotiate for a temporary adjustment to the rent payable under the lease.
This can take the form of a full-blown, rent-free period or a temporary reduction. However, most of the large shopping malls are owned by REITs, which are hesitant to reduce rents as they have to take into account the interests of its unitholders. Any significant rental rebates would certainly affect the distribution per unit of these REITs and also further impact on their traded prices, which have already been battered down in recent weeks.
For landlords, there are number of reasons to agree to a reduction in rent during this period, before the Singapore government further intervenes to regulate rent.
If, even after taking into account the deferral provided for in the Singapore government’s proposed bill, a tenant is still unable to pay its accrued rent at the end of the deferral period, the tenant may take the view that it should make plans to cease business completely.
With the latest Singapore government measures, landlords may be unable to commence enforcement actions to recover rental payments until the suspension period is over. There is certainly no guarantee that the tenant would still be solvent (on a cash-flow basis) by the time the landlord enforces the judgment against the tenant. The landlord may then be left with a judgment that has little economic value. The landlords would then still have to do an impairment of these accrued rent at that stage.
In the meantime, if the landlord loses a tenant, there is no guarantee that a replacement tenant can be easily found in this current recessionary economic climate. It may therefore be best for the landlord to work toward a solution where all parties can survive the oncoming storm. The landlords must always remember that even for listed tenants in their malls, such tenants may also not survive based on their cash flow, if the precautionary measures imposed on the malls continue for a protracted period or more stringent measures are imposed.
The doctrines of frustration and force majeure are complex and can carry serious consequences if misapplied. We recommend that tenants and landlords work toward a sensible compromise that would benefit all parties.
However, if no compromise can be reached, we recommend that tenants obtain legal advice immediately on whether the current COVID-19 situation constitutes a force majeure event within the scope and ambit of the relevant clause in the tenancy agreement, or alternatively, a frustrating event given the tenant’s circumstances. There may also be other legal arguments that could be mounted depending on the actual factual scenarios.
For More Information
If you have any questions about this Alert, please contact Leon Yee, Daniel Soo, any of the attorneys in our Singapore office or the attorney is the firm with whom you are in regular contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.