A new code of conduct has been introduced to guide the negotiation of fair retail leases in Singapore. This article will give a brief overview of the code and its implications for retail tenants and landlords. It will cover:
What is the Code of Conduct About?
The objectives of the code are to:
- Enable a fair and balanced position in lease negotiation;
- Develop a governance framework to ensure compliance by landlords and tenants; and
- Introduce an accessible dispute resolution framework for both landlords and tenants.
The code was devised by a “Fair Tenancy Pro Tem Committee” (“the Committee”), which was composed of representatives from the:
- Real Estate Developers’ Association of Singapore (REDAS)
- REIT Association of Singapore (REITAS)
- Fair Tenancy Framework Industry Committee (FTFIC).
The FTFIC was in turn was formed with representation from the:
- Singapore Business Federation SME Committee (SBF SMEC)
- Association of Small & Medium Enterprises (ASME)
- Restaurant Association of Singapore (RAS), Singapore Retailers Association (SRA)
- Singapore Tenants United for Fairness (SGTUFF).
Who Does the Code of Conduct Apply to?
The code is applicable to all qualifying retail premises in Singapore, which:
- Form part of a lease agreement entered into on or after 1 June 2021 with a tenure of more than 1 year
- Are permitted for use by the Urban Redevelopment Authority and other relevant authorities for any of the following:
- Restaurants or cafes
- Karaoke lounges
- Retail shops such as departmental stores, supermarkets and beauty salons
- Commercial schools such as polytechnics, universities and tuition centres.
- Gyms or sports clubs
- Arcades and darts clubs with game machines
These retail premises can be housed in standalone commercial buildings such as shopping centres, office buildings, shop houses, MRT stations, or other types of buildings.
Is the Code of Conduct Legally Binding?
The code is currently not legally binding. However, the members of the Committee have committed to adopt and abide by the code from 1 June 2021, when it comes into effect.
They have also pledged to encourage their stakeholders in the retail, F&B, and lifestyle sectors to adhere to the code. The Committee has recommended to the government that compliance with the code be made mandatory via legislation.
A Fair Tenancy Industry Committee (FTIC) will be formed by 1 June 2021 to serve as the custodian of the code and to monitor industry compliance. Representatives from both the landlord and tenant communities, as well as other independent representatives, will be on the FTIC.
In the event of non-compliance by either landlord or tenant during lease negotiations, the matter can be referred to the FTIC. FTIC will provide advice regarding the code of conduct and keep track of instances of non-compliance.
For individual cases of disputes, both landlords and tenants will also have access to dispute resolution mechanisms through the Singapore Mediation Centre.
Key Highlights of the Code of Conduct
The code is divided into four main sections as follows:
- Part A: Conduct and spirit of negotiations
- Part B: Leasing principles for key tenancy terms
- Part C: Data transparency
- Part D: Dispute resolution and enforcement of code of conduct
Part A: Conduct and spirit of negotiations
Part A enshrines the requirement of acting in good faith when negotiating lease agreements. It also prohibits the inclusion of unfair terms in retail leases.
Part B: Leasing principles for key tenancy terms
Part B sets out how each of 11 key leasing principles should be dealt with in retail leases and provides some sample clauses. Some of the principles are framed as best practice while others are mandatory and must be dealt with in every retail lease.
The 11 key principles are:
- Exclusivity: Advising against the inclusion of clauses that prevent tenants from opening nearby branches or franchises, or landlords from leasing premises to the tenant’s potential competitors
- Costs: Allocating the costs of preparing the lease between the parties, with the prevention of profiteering
- Advertising/promotion and service charges: Authorising landlords to pass such costs onto tenants)
- Pre-termination by landlord for redevelopment: Authorising landlords to pre-terminate leases if they will be carrying out substantial redevelopment to the property, and laying down rules for landlords to follow if doing so
- Sales performance: Advising against the inclusion of clauses allowing a landlord to terminate a lease if a tenant fails to meet a specified sales target
- Material Adverse Changes: Encourages the renegotiation of leases when the tenant is prevented from carrying on business due to circumstances outside of its control
- Pre-termination by tenants: Sets out the circumstances in which a tenant ought to be able to pre-terminate a lease
- Security deposits: Sets out parameters for setting the amount of a security deposit and the circumstances of its payment and retention
- Floor Area Alterations: Advises how to deal with changes to rent resulting from alterations to the floor area of the leased property upon redevelopment
- Building maintenance: Discussing the landlord’s duty to maintain the building and potential consequences if it fails to do so
- Rental structure: Advises against the inclusion of rental computations that are based on the higher of two alternative computations
Part C: Data transparency
Part C sets out guidelines to allow for more transparency in the collection and use of data by tenants and landlords. It advises against the disclosure of tenants’ sales data by landlords and sets out the appropriate parameters of confidentiality clauses.
Part D: Dispute resolution and enforcement of code of conduct
Part D sets out procedures for the resolution of disputes between landlords and tenants and for the enforcement of the code. It requires landlords to provide a checklist to tenants highlighting the extent to which, if any, they have deviated from the code in negotiating or preparing the lease.
Part D also provides a detailed flowchart setting out a multi-stage process for resolving any disputes that arise.
Although compliance with the code is currently voluntary, the code is likely to become mainstreamed across Singapore’s retail environment over the course of the next year. Plans are also in the works for Parliament to introduce legislation based on the code to give it the force of law.
Accordingly, retail landlords and tenants should familiarise themselves with the code now and draw up a list of changes they may need to make to their leasing arrangements in order to ensure compliance with it.
Landlords and tenants should also consider approaching a corporate lawyer to explore how their current leases might be amended to comply with the code, and/or to get a better understanding of how their negotiation posture for future leases can and should be adapted in light of the changing commercial and regulatory landscape that the code will create.