Covid-19: Impact on commercial leases in Singapore
8 April 2020
On 7 April 2020, the Covid-19 (Temporary Measures) Act 2020 (“Act”) was enacted. This article examines the impact of the Covid-19 pandemic on commercial leases in Singapore, and includes discussion of the relevant provisions of the Act. These provisions will come into force on a date to be appointed.
1. Current situation in Singapore
The Covid-19 pandemic has had a profound social and economic impact globally, including in Singapore.
Safe distancing measures imposed by the Singapore Government have been stepped up to prevent the further spread of Covid-19 and measures have also been implemented to tighten Singapore’s borders and for the issuance of quarantine and stay home orders.
Covid-19 has had a significant impact on commercial real estate in Singapore as, even before the Singapore Government announced the circuit breaker measures on 3 April 2020, many companies had implemented work-from-home arrangements and non-essential trips to malls were discouraged. With effect from 7 April 2020, as part of the circuit breaker measures, most workplace and retail premises, save for those which provide essential services, have been ordered to close until 4 May 2020.
2. Are tenants entitled to withhold rent and other payments or terminate the lease agreement?
The lease agreement needs to be reviewed to see if there are any relevant provisions that would entitle the tenant to do so. Some relevant provisions include:
(a) Rent suspension
These usually apply only where there is physical damage or destruction to the building.
As such, Covid-19 is unlikely to trigger rent suspension clauses in the lease agreement. However, under the Act, (see paragraph 4 below for details) the tenant will get some temporary relief from rental payments for the prescribed period.
(b) Termination by tenant
Termination rights for the tenant in a lease agreement are not typical, including any termination right due to a pandemic, epidemic or outbreak of infectious disease. The landlord will typically have rights to terminate the lease agreement and re-enter the premises because of the tenant’s default, including non-payment of rent. However, under the Act, the landlord cannot terminate the lease agreement for non-payment of rent during the prescribed period (see paragraph 4 below for details).
(c) Force majeure
A force majeure clause expressly provides for specified events where a party may be excused or discharged from its contractual obligations.
Often, a force majeure clause requires the affected party to have been prevented from performing its obligations under the contract as a result of the event. It is worth highlighting that a force majeure clause typically applies where the affected party is prevented and not merely hindered from performing its obligations. The exact scope and application of the force majeure clause would depend on the wording of the particular clause in question, which may differ from one contract to another. In other words, whether a party affected by the Covid-19 pandemic may rely on a force majeure clause would depend on the specific construction of the clause in question.
Force majeure clauses are not standard in commercial leases in Singapore. Even with a force majeure clause, depending on the construction of the clause, it may not be wide enough to include Covid-19. In the absence of specific clauses, it is highly unlikely that the tenant would be able to withhold payments to the landlord because of the impact of Covid-19 on the tenant.
(d) Frustration
Besides relying on any force majeure clause in the contract, a tenant may argue that the lease agreement can be discharged on the basis that the Covid-19 pandemic is an unforeseen event which the contracting parties did not contemplate at the time they entered into the lease agreement which renders a contractual obligation radically or fundamentally different from what had originally been agreed (this is the legal concept of frustration). In other words, a contract may be frustrated if an unforeseen event renders its performance impossible or illegal or prevents its main purpose from being achieved.
The threshold test for proving frustration is very high. To argue frustration, it must be impossible to perform the contract on the original contract terms, and not simply more difficult or expensive to do so.
3. What if the demised premises have to be closed?
As part of safe distancing measures, the Singapore Government has currently ordered all workplace and retail premises providing non-essential services to close with effect from 7 April 2020 until 4 May 2020 (inclusive). Further, the Singapore Government has also ordered all individuals to stay at home, save for those working in essential services and several other limited exemptions.
If the underlying purpose for which the premises was leased, which was understood and agreed to by both parties at the time of the lease agreement, cannot be achieved, the tenant may attempt to rely on the doctrine of frustration to discharge the lease agreement. Whether the doctrine of frustration is applicable will depend on the parties’ knowledge, expectations and assumptions at the time of the lease agreement, as well as the permitted uses of the property.
If the landlord prevents a tenant from using the premises in order to comply with any orders or directions by the Government, the tenant may try to claim against the landlord for breach of quiet enjoyment. However, if it becomes unlawful for the landlord to allow the demised premises to be opened, that may be a sufficient defence for the landlord.
4. Temporary relief for inability to perform contractual obligations due to Covid-19
The Singapore Government has recognised the impact that the Covid-19 pandemic has had on tenants of commercial leases.
When the relevant provisions take effect, the Act will give relief to tenants for their inability to perform contractual obligations where the inability is to a material extent caused by Covid-19 for a prescribed period not exceeding six months from the commencement of the Act. The prescribed period can be shortened or extended by the Minister for Law more than once. Such relief will be available for certain contracts, including leases of commercial property. If the relevant criteria under the Act are satisfied, landlords will not be able to take any of the following legal actions against their tenants:
(a) court and insolvency proceedings in respect of the tenant’s non-performance of obligations; and
(b) termination of the lease for non-payment of rent.
The measures will only cover relevant contractual obligations that are to be performed on and after 1 February 2020 for lease agreements that were entered into or renewed before 25 March 2020.
It should be noted that the Act does not cancel the tenant’s obligations, and the tenants’ obligations, such as rent payments, will continue to accrue. The Act will only prevent landlords from taking any of the legal actions mentioned above against their tenants.
To ameliorate any potential unfair outcomes that may arise from the proposed measures, the Ministry of Law will be appointing assessors to resolve disputes. Such assessors, who are professionals such as accountants or lawyers, will decide whether the inability of tenants to perform their contractual obligations is due to the Covid-19 pandemic, and will have the power to grant relief that is “just and equitable in the circumstances”. Parties are not allowed to be represented by lawyers in the proceedings before the assessors, whose decisions are final and not appealable.
5. Moving forward
(a) New lease agreements
Generally, parties who are entering into new lease agreements of commercial properties may wish to consider provisions which expressly allocate the risks relating to the Covid-19 pandemic between landlord and tenant.
For example:
- Timelines to obtain any relevant approvals under the lease agreement (for example change of use) should take into account possible delays due to Covid-19.
- Provisions for extensions of time of target dates - this can include extension of fitting out periods and/or deferment of possession dates (for example where the demised premises are closed or the tenant is not able to secure a contractor to carry out fitting out works).
(b) Practical approach
Ultimately, the interests of landlords and tenants are aligned. It may also be difficult for landlords to get replacement tenants during this Covid-19 pandemic period.
Some landlords like mall operators have voluntarily been giving tenants rental rebates to help the tenants and have passed on the property tax rebates provided by the Government. The Act provides that if any landlord receives any remission of property tax in respect of the demised premises given in response to the Covid-19 pandemic, the landlord must pass the benefit of such remission to the tenant. The property tax rebate may be set off against any rent payable by the tenant, but the landlord cannot impose any conditions when passing on the benefit of the property tax rebate to the tenant. These provisions will come into force on a date to be appointed.
Both landlords and tenants should be practical and work together for their mutual benefit during this challenging period, if possible, instead of relying on the strict terms of the lease agreements.
Further information
Allen & Gledhill has a Covid-19 Resource Centre on our website www.allenandgledhill.com that contains knowhow and materials on legal and regulatory aspects of the Covid-19 crisis.
In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at covid19taskforce@allenandgledhill.com.