Code of Conduct for Leasing of Retail Premises in Singapore (Part 2)

1. In our previous article, we set out a broad overview of the Code of Conduct for Leasing of Retail Premises (“Code of Conduct”) that was introduced on 1 June 2021, which key objectives are briefly as follows:

(a) To provide guidance to parties to enable a fair and balanced position in lease negotiations; and

(b) To provide a governance framework to ensure compliance by parties and provide an accessible dispute resolution framework for parties.

2. In this regard, the Code of Conduct, which would apply to all qualifying retail premises in Singapore (hereinafter referred to as “QRP”), sets out 11 leasing principles for landlords and tenants.

3. The objective of this article is to elaborate on these 11 leasing principles in detail:

(a) Exclusivity:

Exclusivity clauses (provisions which restrict landlords and tenants from opening branches in the vicinity of QRP) must not be included in lease agreements, unless both parties agree to incorporate such exclusivity clauses.

If parties agree to deviate, both parties must make a joint declaration to the Fair Tenancy Industry Committee (“FITC”) within 14 days after the lease agreement has been signed.

(b) Costs to prepare lease agreement and third party costs:

The general principles on costs are that parties must be transparent, legitimate and justifiable, and there must be no profiteering,

With regard to Point-of-Sales systems (“POS”), each party must pay for its own costs for the regular maintenance of its own POS system. Any costs for integration between landlords’ and tenants’ POS system must be borne by both tenant and landlord on a 50:50 cost sharing basis.

With regard to costs of preparing lease agreements, both landlords and tenants must have the liberty to appoint their own lawyers. Where the landlord is using its standard lease template, the tenant shall not be required to pay any legal fees to the landlord. Where the said standard lease template is not compliant with the Code of Conduct and the tenant requires any amendments to be made to the standard lease template, it shall pay its own legal costs of the landlord, but not if such amendments are for the purpose of bringing the said standard lease template in compliance with the Code of Conduct.

With regard to third party costs, catch-all provisions requiring tenants to pay all third-party costs are not allowed. Any requirement for the tenant to pay third-party costs such as consultant fees must be communicated to the tenant upfront and stated clearly in the lease agreement.

With regard to sales audit fees, a landlord may only require a tenant to conduct sales audits where the rent payable to the landlord comprises a variable component based on the tenant’s gross sales or gross turnover.

With regard to public liability insurance, where the QRP’s floor area is equal to or less than 15,000 square feet, the tenant’s public liability insurance coverage shall not be more than S$3 million or the public liability insurance coverage limit stated in the landlord’s public liability insurance policy, whichever is lower.

With regard to electricity charges, where the landlord is on the En-Bloc Contestability Scheme (“ECS”), the landlord is not required to provide the tenant with a choice of electricity retailer. The landlord must cause the total costs of the supply of electricity to the premises to be passed through to the tenant without any mark-up, although they can charge the tenant reasonable administrative costs. If the landlord is not on ECS, the tenant must be allowed to choose their own electricity retailers and consequently bear all costs and expenses incurred in procuring the electricity from their choice of retailer.

(c) Advertising and promotion and service charges:

Gross rent typically consists of base rent, service charge and advertising and promotion charge.

A landlord is allowed to adjust the service charge advertising and promotion charges during the lease term, as long as the overall gross rent payable does not increase. A landlord is also required to keep proper records and accounts in respect of the advertising and promotion charge and service charge.

(d) Pre-termination by landlord for redevelopment:

Where a landlord seeks to pre-terminate a lease due to redevelopment works, the lease agreement must contain such a provision, in accordance with the Code of Conduct.

Furthermore, the landlord may only effect such pre-termination for substantial redevelopment, asset enhancement or reconfiguration works to the building and requires vacant possession of the premises for such redevelopment.

The notice period must be at least 6 months, and the tenant must be paid a compensation sum calculated in accordance with the requirements set out in the Code of Conduct.

(e) Sales performance:

A landlord is generally disallowed from including clauses that allow a landlord to terminate a lease if a specified sales target is not met by a tenant.

Parties may include such clauses on an exceptional basis but must make a joint declaration to the FITC within 14 days after the lease agreement has been signed by both parties.

(f) Material Adverse Changes:

Landlords and tenants are encouraged to re-negotiate leases where a tenant is unable to perform typical business activity due to unforeseen events.

(g) Pre-termination by tenants:

A tenant may exercise its right to pre-terminate the lease due to the following exceptional conditions: where the business principal of the goods and/or services of the tenant vis-à-vis the premises is insolvent; or the tenant loses the distributorship or franchise rights to sell those goods and/or provide those services (not due to non-performance or breach by tenant of the respective distributorship or franchise agreement).

To exercise such a right, the tenant must give no less than 6 months’ prior notice and pay compensation as set out in the Code of Conduct.

In the alternative to exercising its right of pre-termination, a tenant may also request to assign the lease to a replacement tenant, subject to the landlord’s approval.

(h) Security deposits:

The security deposit for a QRP with a floor area of up to 5,000 square feet and with a lease term of up to 3 years shall not exceed an amount equal to 3 months’ gross rent.

Parties may include deviate on alternative security deposit amounts but must make a joint declaration to the FITC within 14 days after the lease agreement has been signed by both parties.

(i) Floor Area Alterations:

Landlords shall provide a certificate from the registered surveyor confirming the surveyed area of the premises and how the rent and security deposit amounts should be adjusted if the surveyed area deviates from the floor area specified in the lease agreement.

Where the surveyed area is larger than the floor area originally specified in the lease agreement, there shall be an upward adjustment of gross rent and security deposit in accordance with the Code of Conduct.

Where the surveyed area is smaller than the floor area originally specified in the lease agreement, there shall be a downward adjustment of gross rent and security deposit in accordance with the Code of Conduct.

Such adjustments should take place within 2 months from the landlord furnishing the certificate from the registered surveyor to the tenant.

(j) Building maintenance:

The landlord must be responsible for any loss or damage suffered by the tenant due to the gross negligence or wilful default on the part of the landlord to maintain the building where the leased premises are located.

(k) Rental structure:

Requires rental formulae to be based on a single rental computation and not based on the higher of two alternative computations.
On an exceptional basis, if both parties agree to an alternative rental structure that is not based on a single rental computation, such alternative rental structure can be included in the lease agreement. Should parties wish to do so, they have to make a joint declaration to the FITC within 14 days after the lease agreement has been signed by both parties.

4. If you require legal advice on tenancy-related matters, please do not hesitate to contact us at FORTIS LAW CORPORATION.

Written by: Patrick Tan and Yip Jian Yang

Patrick Tan TEP
Founder and CEO
+65 66454500
Patrick.tan@fortislaw.com.sg

Yip Jian Yang
Associate
+65 66454516
Jianyang.yip@fortislaw.com.sg

Leave a comment