Six changes to expect with new code of conduct for fair tenancy

A NEW code of conduct for fairer lease negotiations between landlords and retail tenants in Singapore is headed for legislation, with the government to work towards it in the coming months. But in the meantime, major landlords and tenants have committed to adopting the new guidelines by June 1.

Here are six key changes to expect with the new code of conduct:

Rent structure

Rents must now be based on a single rental computation, meaning it cannot have an "either/or, whichever-is-higher" formula. For example, a structure that goes by a fixed rent per square foot or percentage of gross turnover, whichever is higher, is not allowed.

But such rent structures can be allowed if both the landlord and tenant agree to it and declare their agreement to a Fair Tenancy Industry Committee (FTIC) within 14 days of signing the lease.

The FTIC will be formed by June 1 to serve as the custodian of the code and monitor industry compliance.

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Early termination of leases

Tenants can now terminate leases early under exceptional conditions, such as if the retailer's business principal is insolvent, or if the retailer loses distributorship or franchise rights through no fault of the retailer.

However, the tenant must give at least six months' prior notice or pay six months' gross rent in lieu of the notice period to the landlord. The tenant must also compensate the landlord with a sum equivalent to the security deposit, and reinstate the premises.

Meanwhile, landlords can only terminate leases early for substantial redevelopment, asset enhancement or reconfiguration works that would require the premises to be vacated. A tenant's failure to meet specific sales targets set by the landlord will not qualify as a reason.

The landlord must give at least six months' prior notice to the tenant, except in cases where the redevelopment works are to comply with the authorities' requirements and the time given to do so is less than six months.

The landlord will have to compensate the tenant based on how much the tenant spent to fit out and upgrade the premises.

Exclusivity

Such clauses cannot be included in lease agreements. These include provisions which prevent or restrict a tenant from opening a branch or franchise within a certain radius of the current shop, or which prevent or restrict a landlord from leasing premises with a similar trade or business in the same building where the tenant's shop is.

An exclusivity clause can only be included in the lease agreement if both the landlord and the tenant agree to it and declare their agreement to the FTIC within 14 days of signing the lease.

Sales audits

Landlords can now only require tenants to conduct annual sales audits if the rent structure comprises a component based on the tenant's gross sales or gross turnover.

If the tenant's point-of-sales system (POS) is integrated to the landlord's, the landlord and tenant will share the costs of such sales audits on a 50:50 basis.

Instead of conducting a sales audit, tenants can also submit monthly sales information, with an upfront monthly undertaking by the tenant's director or a certified public accountant on the accuracy of the information, as well as an annual statutory declaration by the tenant's director.

If the tenant's POS is not integrated to the landlord's, the tenant must comply with the landlord's requirements for sales verification as set out in the lease agreement. If the landlord requires annual sales audits, the tenant must bear the full costs.

Public liability insurance

The landlord can only require the tenant to have a public liability insurance coverage limit of up to S$3 million, or matching the coverage limit in the landlord's public liability insurance policy, whichever is lower.

This does not apply to retail premises with a floor area of more than 15,000 square feet.

Electricity charges

If the landlord is on the en-bloc contestability scheme (ECS), meaning it buys electricity for the entire premises, it must charge tenants the same rate it pays to the electricity retailer, without any mark-up or price discrimination.

In this case, the landlord can also charge tenants administrative costs, but such costs must be communicated upfront to tenants.

However, the landlord cannot charge tenants for any infrastructure costs it incurred in order to benefit from the open electricity market.

If the landlord is not on the ECS, tenants must be allowed to choose their own open electricity market retailers as long as the existing physical infrastructure of the building can support it.

In this case, tenants will have to bear all costs and expenses incurred in procuring electricity from their choice of electricity retailer.