What is the Code of Conduct for Leasing of Retail Premises and Its Significance for Landlords and Tenants?
The Code of Conduct for Leasing of Retail Premises (the “Code”) was first introduced in March 2021. It sets out leasing and negotiating principles that aim to ensure, as much as possible, a level playing field for both landlords and tenants when negotiating qualifying retail leases. More importantly, the Code acts as a helpful reference in providing greater clarity on industry norms for key terms in retail lease agreements.
The Code seeks to:
- Serve as a set of mandatory guidelines to provide guidance to landlords and tenants of qualifying retail premises to enable fair and balanced lease negotiations,
- Provide landlords and tenants of qualifying retail premises with a governance framework to ensure compliance with the Code, and
- Provide an accessible dispute resolution framework for both landlords and tenants.
Compliance with the Code is supervised by the Fair Tenancy Industry Committee (FTIC) which acts as the custodian of the Code. The FTIC comprises key representatives from Singapore’s landlord and tenant communities, as well as industry experts. This committee was first set up as the Fair Tenancy Pro Tem Committee in June 2020 with the aim of strengthening collaboration and increasing the vibrancy and competitiveness of Singapore’s retail, food and beverage and lifestyle sectors. This committee was later set up as the Fair Tenancy Industry Committee (FTIC) in May 2021 to act as the custodian of the Code, as well as maintaining and overseeing the aim as set out above.
Mandatory Compliance with the Code of Conduct for Leasing of Retail Premises in 2024
Since its introduction, all government landlords and 9 major private-sector landlords had already voluntarily adopted the Code. A public consultation was then conducted from July 2022 to August 2022 to seek feedback on proposed legislation to mandate compliance with the Code.
A Lease Agreements for Retail Premises Bill (the “Bill”) which will now make compliance with the Code mandatory was tabled in Parliament on 4 July 2023 and passed on 3 August 2023. The Bill will take effect in early February 2024, covering all new leases, extensions or renewals. All lease agreements for the qualifying retail lease will have to comply with the leasing principles set out in the Code, the version of which is applicable at that point in time.
Which Retail Leases/Premises Does the Code of Conduct Apply to?
The Code will apply to all retail leases with tenures of at least one year (“qualifying retail lease”). Retail premises like eateries, tuition centres, gyms and businesses in shopping malls will also fall within its purview since these are used primarily for the sale of goods by way of retail or the supply of services.
What are the Key Aspects of the Code of Conduct for Leasing of Retail Premises in Singapore?
The Code is divided into 4 main sections as follows:
1) Conduct and spirit of negotiations
Landlords and tenants must adopt a consensual approach to negotiate in good faith, which includes acting honestly and fairly, having regard to the legitimate interests of the other party, and observing accepted or reasonable commercial standards of fair dealing. Obtaining unfair profits or taking unfair advantage of the other party is not allowed.
An example might be a huge development taking advantage of its better bargaining position vis-à-vis that of a tenant who might not be aware of the lease rates offered to other tenants of similar size. In compliance with the Code, the landlord cannot take advantage of the tenant’s ignorance relating to lease rates.
Landlords will be responsible for ensuring that their lease agreements are consistent with the leasing principles set out in the Code. Further, no legal or administrative fees shall be payable by the tenant to the landlord if the landlord’s standard lease template is adopted. If the tenant requests to amend the landlord’s standard lease template to address any deviation from the Code, then the legal or administrative costs should be borne by the landlord.
2) Leasing principles for key tenancy terms
There will be a total of 11 key tenancy terms such as exclusivity, pre-termination by landlords due to the landlord’s redevelopment works, sales performance, and pre-termination by tenants.
In consideration of the imbalance in bargaining power between landlords and tenants, especially big market players, these leasing principles will ensure that landlords cannot:
- Use rental formulas that change during the lease (Clause 11.1, unless both parties agree to deviate).
- Mark up electricity rates (Clause 2.5.4).
- Require a security deposit exceeding 3 months of rent if the tenanted floor area is below 5,000 square feet and the lease term is 3 years or less (Clause 8, unless both parties agree to deviate).
In addition, landlords cannot include clauses to make tenants pay for unspecified costs or to restrict tenants from opening another business within a certain radius (except by mutual agreement). Leases cannot be unilaterally terminated on the basis of unfulfilled sales targets or can only be unilaterally terminated early for redevelopment works only if certain conditions are fulfilled, like providing a 6-month notice period.
Some clauses can be deviated from by mutual agreement, for example, clauses on exclusivity or unilateral termination if sales targets are not met. Both parties may also agree to a rental formula which changes during the lease. If both parties wish for such deviations, a declaration must be submitted to the Fair Tenancy Industry Committee within 14 days of the signing of the lease.
3) Data transparency
Landlords must share sales data metrics by trade category (i.e. total monthly sales, total floor area) on a one-on-one basis before the signing of the lease agreement and to existing tenants on a bi-annual basis if they collect sales data from tenants as part of the Gross Turnover rent structure.
This aspect is consistent with the aim to ensure a level playing field for both landlords and tenants. Landlords can no longer hoard, from tenants, crucial information which may affect negotiations.
4) Dispute resolution and enforcement of the Code of Conduct
Parties can report non-compliant practices to the FTIC. The FTIC will then collate and monitor the reported cases. The FTIC will periodically review and modify the Code, with the minister’s approval, monitor and promote compliance by landlords and tenants with the Code, and review and maintain a register of permitted deviations.
All lease agreements issued must also be accompanied by a checklist of clauses within the Code. The sample checklist can be downloaded here. All clauses which deviate from the Code must be flagged by the landlord for the tenant’s attention. For clauses where the Code allows for deviation, a joint declaration of deviation shall be filed with FTIC within 14 days of signing of the lease agreement.
The Code also provides an affordable and expedient dispute resolution mechanism, i.e. mediation before the Singapore Mediation Centre (SMC). Mediation is confidential, aims to help parties resolve disputes in a non-confrontational manner, and is generally more expedient than court proceedings, i.e. some cases can be resolved within 1 working day. Cost-wise, either party can also choose to attend mediation in their own capacity as lawyers are not required.
Either party may escalate the matter to SMC, and both parties must then approach SMC. If a settlement agreement via mediation is reached, this is a binding contract and can be recorded as an order of court if wished.
As mediation is a party-led process, if parties cannot agree, an adjudicator may be brought in to decide on the dispute. The adjudicator can order the parties to vary the lease agreement or pay compensation for their non-compliant conduct, which will be enforceable as a court order.
The Code seeks to provide clarity and expediency in the form of standard form lease agreements whilst also protecting the interests of small-scaled tenants.
The government has also emphasised and clarified that free market principles still apply, and that the government will only intervene when necessary. We see this exemplified in the form of allowed deviations for certain clauses.
Landlords and tenants should familiarise themselves with the principles set out in the Code and keep themselves abreast of all changes to the Code.