COVID-19 Commercial Lease Issues in Singapore: What to Do

business man worried

If the premises for your Singapore business is rented and your business has been adversely affected by the COVID-19 outbreak, you may be struggling to pay your overheads, especially the rental cost of your premises. What can you do about this?

Managing Rent

Negotiation with landlords

Typically, commercial tenancy agreements do not allow tenants to stop paying rent during the lease period unless the property is damaged to such an extent as to make it substantially unusable. COVID-19 would typically not trigger such a rent suspension provision.

Nevertheless, you should try negotiating partial rental waivers or rebates with your landlord. Although this may seem like a fanciful strategy, some landlords understand that certain kinds of businesses simply don’t have the money right now and there isn’t a queue of other similar small businesses waiting to rent commercial space during this economically volatile period.

Accordingly, many landlords would prefer to try to help their struggling tenants now in the hope that things will pick up in a few months and that these businesses will still be there generating revenue then, rather than having an abandoned unit reducing foot traffic to other units in the property.

Some small businesses have banded together and had their trade associations engage in collective bargaining with the large property development/management companies, seeking rental waivers and/or rebates, and have enjoyed some success doing so.

For example, the Restaurant Association of Singapore and the Singapore Retailers Association have engaged with large landlords such as Capitaland and Mapletree, seeking rental rebates of up to 50% for a few months and businesses in Malaysia are engaging in similar bargaining, with mixed success.

Passing on of property tax rebates

Singapore’s Government has passed the COVID-19 (Temporary Measures) Act (“the Act”) which provides certain types of relief for commercial leases entered into or renewed before 25 March 2020, for any unpaid rent from 1 February 2020 onwards.

One such relief now obliges commercial property landlords to pass on the benefits of certain property tax rebates that the Government has given them to their tenants, either by:

  • Paying the tenant a tax refund they have received; or
  • Reducing the tenant’s rent by an amount equivalent to the reduction in property tax that the landlord has had to pay.

This cash infusion or temporary reduction in rental overheads should help a business with their immediate rental costs. Any failure by a commercial landlord to pass on this benefit to a tenant is now an offence punishable by a fine of up to S$5,000.

Tenants can also make a complaint if their commercial landlord does not comply with these laws.

This can be done by way of application to the Valuation Review Panel, whose responsibility is to resolve any disputes between tenants and commercial landlords in relation to the passing on of this benefit.

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Other relief under the COVID-19 (Temporary Measures) Act

Other new provisions in this Act prevent commercial landlords from:

  • Evicting tenants for failure to pay rent (or failure to observe some other contractual obligation); or
  • Commencing legal action against tenants in court to recover unpaid rent any time in the next 6 months.

This is assuming the tenant can show that the reason it was unable to pay rent was due to COVID-19. So if your business just doesn’t have the money to pay the rent, don’t.

To be clear, this doesn’t excuse your business from paying rental arrears in the future. The rent owed, and any interest chargeable for late payments, will continue to accrue until you pay it. What this provision does is just buy you more time to make that money after the pandemic subsides and eventually pay the rent owed (with any interest).

Pursuant to recent amendments to the Act that will take effect in July, however, late payment interest on those rental arrears that have been owed from 1 February 2020 onwards will be capped to a prescribed rate or amount.

To activate the right to postpone the payment of rent, an eligible tenant needs to serve a notification for relief on its landlord.

Repayment scheme for rental arrears

The recent amendments also provide for a repayment scheme for those rental arrears. To activate the repayment scheme, an eligible tenant must also serve a notice on its landlord. Upon serving the notice, tenants must start payment of the first instalment no later than 1 November 2020.

Under the repayment scheme, tenants can pay for a specified portion of their arrears over an extended period of time (up to 9 months, or the remaining term of the tenancy, whichever is shorter) in equal instalments, with the interest payable on such arrears capped at 3% per annum.

If the tenant fails to make a payment under the statutory repayment scheme, or the tenant terminates the lease or licence, the statutory repayment scheme will be cancelled. The landlord will then be entitled to immediate payment of all the arrears and to take legal action to recover any unpaid rent.

Rental waiver for SMEs

The recent amendments to the Act, which come into effect in late July, also provide further relief for eligible SMEs (i.e. companies with not more than $100 million in annual turnover in 2019) and Non-Profit Organisations (NGOs) who are commercial tenants.

Under the amended law, eligible SMEs will be entitled to a rental waiver of 2 months of their base rental for April and May 2020 (or 1 month, for April 2020, if they are renting an industrial/office property). The costs incurred for this rental waiver will be borne by the government.

On top of that, eligible SMEs who have seen a significant drop of 35% or more in their average monthly revenue from April to May 2020 (as compared to the same months in 2019) as a result of COVID-19 will be entitled to a waiver of an additional 2 months of their base rental for June and July 2020 (or 1 month, for May 2020, if they are renting an industrial/office property).

The costs incurred for these 2 additional months of rental waiver will be borne by the landlord.

If landlords do not comply with these laws, the case can be referred to an assessor who will determine whether a rental waiver should be given and if so, how much.

The landlord may also seek an assessment on the grounds of financial hardship if they are unable to provide the additional rental waiver. During the assessment, the assessor will consider whether the landlord’s rental income forms a substantial part of his total income and the annual value of his properties.

If the landlord’s assessment is successful, they will be required to give only half of the additional rental waivers to be provided by the landlords, i.e. 1 month’s waiver of base rental for qualifying commercial properties, and 1/2 a month’s waiver of base rental for industrial and office properties.

The following infographic summarises the additional relief provided under the Act:

(Click on the image to download it in a new tab.)

Terminating Your Commercial Lease

If you still think maintaining your commercial lease obligations is not economically feasible even with the relief referred to above, your only remaining option may be to try to find a way to get out of the tenancy agreement.

This is usually quite difficult for tenants as commercial tenancy agreements typically do not contain a termination provision for tenants. Does COVID-19 change anything?

Via a force majeure clause

If your commercial tenancy agreement has a force majeure clause, you could try invoking this on the basis that the pandemic was an unforeseen event that excuses your obligations under the agreement. However, whether or not this would actually be possible depends entirely on the language of the force majeure clause. In any case, it is also unusual for commercial tenancy agreements to contain force majeure clauses in the first place.

On the basis of frustration

Otherwise, you could try terminating on the basis that the contract has been “frustrated” by the pandemic. This is a legal concept that means that it has become impossible, not merely inconvenient, for the contract to be carried out as the parties intended.

This is quite a high threshold to meet. A lack of consumer demand for your goods or services for example, would not amount to frustration of your commercial tenancy agreement as it remains theoretically possible for you to occupy the property to carry on your business.

However, if:

  • Your business has been deemed non-essential and is therefore required to close its doors to customers under the “circuit breaker” measures; AND
  • Your commercial tenancy agreement specifically sets out the purpose for which the property is being rented (i.e. the carrying on of a specific kind of business) which has now become impossible to carry on because of the new rules; AND
  • Your commercial tenancy agreement also contains requirements that your business maintain certain minimum opening hours which the law now prevents it from doing,

that would constitute a strong argument for the commercial tenancy agreement being frustrated and for your business to be allowed to terminate it.

That said, it is difficult to anticipate how a court in Singapore might evaluate arguments like this in the COVID-19 context. Unfortunately, a Hong Kong court previously found similar arguments unpersuasive during the SARS outbreak there in 2003.

At that time, the Hong Kong Government required a business to close for 10 days and the business tried to terminate its commercial tenancy agreement on the basis that it had been frustrated. The court found that the tenancy agreement was not frustrated as 10 days out of a 24-month long lease just wasn’t a significant enough interruption to warrant terminating the whole agreement.

Hence, whether it would be possible to terminate a commercial tenancy agreement on this basis will depend on all the circumstances, including the knowledge and expectations of the parties prior to executing the agreement, and the permitted use of the property. This is an analysis that should be carried out by a lawyer so you should seek legal advice if you are considering termination.

You may also wish to refer to our article on using force majeure or frustration to escape contracts for more information.

Vacating an Existing Commercial Property and Entering Into a New Commercial Tenancy Agreement

If your commercial tenancy has ended but due to COVID-19, you are unable to vacate the property after the end of the lease and before 19 October 2020, you will not be liable to your landlord for any compensation apart from any sum that the amended Act prescribes.

Currently, no such sum has been prescribed. However, you must have served a notification for relief on your landlord to qualify for such relief.

On the other hand, if you are entering into a new commercial tenancy agreement from 25 March 2020 onwards, you should be aware that the Act will not apply to that agreement. In negotiating the terms of the agreement, you should give some thought to the impact that COVID-19 may have on both parties’ ability to meet their respective contractual obligations.

For example, any requirements that a party obtain certain government approvals by specific deadlines should take into account likely delays in the issuance of those approvals.

Provisions for extensions of time for any deadlines should be included, such as deadlines for fitting out the premises and deferment of dates for taking possession. This is because businesses may encounter difficulty in getting contractors in to carry out work during the “circuit breaker” period including any possible future extensions of it.

Whether you are struggling to pay your business’ rent, considering terminating your commercial tenancy agreement or considering entering into a new one, you should consult a commercial contract lawyer before committing to any one course of action.

The legal landscape is changing quickly as new measures are introduced incrementally to deal with the economic fallout of COVID-19. A lawyer is best placed to help you navigate that quickly changing landscape to advance your business’ best interests.

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