Commercial Lease Disputes in Singapore
The normal practice for businesses operating in Singapore is to lease a commercial space to conduct business as it is much more cost-effective. Inevitably, there will be situations where disputes arise, and hence this article will focus on addressing the common issues arising from a commercial leasing dispute. You may also wish to find out more about private leasing disputes.
Contents of a Commercial Lease Agreement
The lease agreement between a landlord (i.e. the owner of the commercial space) and the tenant (i.e. the business) is usually a result of negotiations between the parties that are in accordance with the prevailing laws of the jurisdiction. This means that a lease agreement is primarily contractual in nature and there is no cohesive statute to guide the parties regarding the contents that should or may be included in their lease agreement.
There are several common terms and conditions that landlords and tenants commonly adhere to in Singapore in their commercial lease agreements. They are:
- Lease duration
- Deposits and other fees payable
- Utility and other maintenance
- Office renovation work
- Illegal employment
Lease agreements will explicitly state the duration of the lease. It should be noted that the duration of a lease agreement in Singapore depends on the size of the commercial space to be leased. Generally, the duration of a lease agreement for a fairly large commercial space is between 5 to 6 years. However, if the commercial space is relatively small, then the lease agreement is usually between 2 to 3 years.
Towards the end of the lease, most landlords will offer the tenants the option to renew for a further term at the market price prevalent at the time of renewal. Generally, the option to renew for a further term is for a duration that is similar to the lease that is about to end, and for a rental amount that was either agreed on beforehand or at the prevailing market rate at the time of renewal.
Lease agreements in Singapore will also state the amount of rent or Gross Rent (GR) that is payable by the tenant to the landlord. The GR is usually paid on a monthly basis. It is derived from: the base rent which is calculated per square foot of the floor area, Goods and Service Tax (GST) of 7% (if the landlord is a GST-registered company), and service charges.
The term “service charges” refers to payment to the landlord for general services provided by the landlord, such as building maintenance, building repairs, and security. The amount payable by the tenant for the service charges is usually specified in the lease agreement. The agreement will usually stipulate that the amount can change during the duration of the lease, allowing the landlord to recover any increase of the service charges from the tenant.
Deposits and Other Fees Payable
The tenant has to make a refundable security deposit that is usually equivalent to three months worth of GR. When the lease expires, the tenant’s security deposit is refunded without interest but the refund is subject to the tenant’s due performance of the terms and condition in the lease agreement.
This means that the landlord reserves the right under the lease agreement to deduct the costs and expenses properly payable by the tenant on account of any breach of the stated terms and conditions by the tenant.
Utility and Maintenance
Under a lease agreement, the tenant is usually responsible for all general electricity and telecommunication bills that are to be paid by direct account to the relevant service providers. However, matters such as proper maintenance and ensuring the cleanliness of the exterior premises and common areas are to be done by the landlord. The tenants are only responsible for the proper maintenance and cleanliness of all interior commercial spaces that have been leased..
Generally, landlords will include terms and conditions that prohibit the tenant to sub-let the commercial space either in full or in part unless written consent has been given.
Tenants are generally expected to maintain a public liability insurance policy against allegations of personal injury, death or property damage or any form of loss arising out of any and all operations of the tenant in the premises throughout the duration of the lease.
Office Renovation Work
When a tenant intends to customise the commercial space to his taste and preferences, he may only do so pursuant to the terms and conditions that have been stipulated by the landlord with regard to all fitting-out works at the premises. This is because a commercial space in Singapore generally comes with certain standard fittings, standard fire sprinkler and protection systems, air-conditioning distribution ducts, basic lighting, and basic window fittings. Accordingly, any modifications to the existing fittings must be carried out with the landlord’s approval. This is because the tenant is usually required to return the commercial space back to the landlord in its original form at the end of the lease.
It is widely understood that Singapore businesses are highly dependent on migrant workers in the conduct of their daily business. These workers must comply with the relevant statutory regulations and be equipped with the correct permits before they can be employed.
Given the circumstances, the commercial lease agreement should have a provision that prohibits the the illegal employment of workers and this means that the landlord excuses himself from all liability should the tenant be found to be illegally employing workers during the conduct of his business.
Common Issue 1: Breach of Lease Agreement
A breach of the lease agreement arises whenever there is a failure to perform (adhere to) a term and condition that is found in the lease agreement. The following are the most common examples.
Breach of utility and maintenance clause
In a commercial lease agreement, it is generally understood that the landlord will agree to ensure proper maintenance cleanliness of the exterior of the premises and common areas. This should be stipulated in the lease agreement.
A breach by the landlord of such a term arises when:
- The common areas are not kept clean, which means that the environment is in a unhygienic state and not presentable to customers of the tenants;
- The common corridors where people and goods pass along are neither kept clear of obstruction nor in good condition, posing a fire and safety hazard; and
- There is failure to ensure routine and adequate maintenance of the escalators or other safety equipment such as fire extinguishers, which may result in or exacerbates injuries in the course of day-to-day running of the businesses in the premises.
This list is not exhaustive but where there are causes for concern in the common areas, the tenants should quickly notify the landlord to rectify them. More importantly, it is the contractual duty of the landlord to do so and consequently, the fault will almost always lie with the landlord.
Breach of sub-lease clause
It is not uncommon for tenants that have leased a commercial space to then lease out a small portion of their commercial space to another business or several other businesses.
The landlord should include a term stipulating that their consent should be sought before the commercial space is sub-let in part or in whole.
Where there is evidence that the tenant had sub-let any portion of the commercial space to another business, the landlord may decide to terminate the lease agreement and also make claims for compensation.
Another common breach of agreement is the illegal hiring of workers by tenants. This means that the worker did not have the proper documentation and permits or had been barred from entering and working in Singapore. The landlord should include a term barring the tenant from illegally employing workers so as to protect himself from civil liabilities and criminal proceedings.
If the tenant illegally employs workers,, it will count as a breach of the lease agreement. This will commonly result in the forfeiture of the tenant’s security deposit with the landlord and a termination of the lease agreement.
Termination of lease agreement
In any commercial lease agreement, there will be a termination clause. Often, parties whose lease agreements have been terminated argue that the termination was invalid.
Where there is evidence to show that there was a breach of a term in the lease agreement, such as the tenant sub-letting the commercial space to another business without the consent of the landlord, the landlord’s termination of the lease agreement is valid.
However, where there is questionable or no evidence to show that there was a breach of the lease agreement, then a termination of the lease agreement would not be valid. For example, the tenant may claim that the landlord failed to maintain the common areas to a reasonable standard. However, it may well be that the tenant’s claim is frivolous and without merit.
Common Issue 2: Increase in Rental
Disputes with regard to rental increases arise when the tenant perceives the rental increases to be unreasonable or in excess of the market value.
Thus, any commercial lease agreement should explicitly state that any changes to the amount of rent payable to the landlord should reflect the market value, which means that the tenant and landlord may use the services of independent valuers or a bidding process to determine the new rental amount.
Do note that this article only covers common commercial leasing disputes, and many other issues may arise as a result of these disputes.
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