02 April 2020 - Article
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In the wake of the disruption to daily lives caused by the COVID-19 outbreak in Singapore, restaurateurs and retailers have faced the brunt of consumers, customers and tourists avoiding crowded public places, eating out or visiting their physical shops. Losses are mounting due to the major impact of the disruption, and many businesses have called on their landlords for help in cushioning the impact of the ongoing pandemic. This article briefly explores the legal obligations between landlords and tenants in the context of the disruptions caused by COVID-19.
The Landlord’s Helping Hand
On 13 February 2020, the Restaurant Association of Singapore wrote to 24 major landlords including CapitaLand, Frasers and Mapletree, requesting for rental rebates of up to 50% for the months of February, March and April, on behalf of its 450 members, operating close to 4,000 outlets. It was estimated that takings plunged by as much as 80% following the outbreak, with around 200,000 food and beverage jobs at risk.
The Singapore Retailers Association also revealed similar statistics and called on landlords to assist in relieving rent repayment pressure from their retail tenants through measures such as rent waivers, rent rebates and allowing their tenants shorter hours of operation. Across the causeway, various Malaysian retail associations have similarly appealed to landlords and owners to give rental rebates of between 30% and 50% for the next six months to assist retailers in riding out the effects of the COVID-19 outbreak.
Jewel Changi Airport was amongst the first to respond, reaching out to its tenants with a 50% rebate for rent payable for the months of February and March 2020. Major landlord CapitaLand also announced “wide-ranging” support measures for their retail tenants, comprising approximately 3,500 stores across its portfolio of shopping malls, which include a S$10 million marketing assistance programme and the flexibility to operate shorter hours. These moves follow Hong Kong’s biggest landlords such as Sun Hung Kai Properties, Lan Kwai Fong Group, and New World Development – all of whom have offered similar rental concessions to their tenants.
As other tenants continue to hold the line, a key question has come to the forefront: in the face of a public health emergency, what is the legal obligation on the landlord to answer their tenants’ call for help?
Rights under the tenancy agreement amid a public health emergency
As a starting point, the legal obligations and rights of the parties between landlord and tenant are set out in the tenancy agreement between parties.
In general, unless the tenancy agreement provides otherwise, there is prima facie no duty on the landlord to offer any concessions, such as rental rebates or waivers in the event of a pandemic outbreak, and the tenant continues to be bound by its obligations to promptly pay rent under the tenancy agreement.
Most commercial tenancy forms do not provide upfront concessions on the tenant, nor do they set out the obligations of a landlord in situations like a disease outbreak or identify the party to bear the costs of compliance with any governmental regulations.
If the landlord is not obliged to help, what then are the avenues available to an affected tenant in the event of a pandemic?
Enforceability of force majeure provisions
Most tenancy agreements contain a force majeure provision, addressing circumstances where unexpected external events prevent a contract party from discharging their duties. In such circumstances, the affected party may be entitled to relief, including a suspension of contractual obligations; exclusion from certain liabilities for non-performance or delay; and even termination of the contract in limited situations.
There is no universally accepted definition of “force majeure” and it is for the parties to agree on the scope and definition of events that would constitute force majeure under the relevant contract. Examples of such events could include terrorist attacks, war, natural disasters, strikes and also epidemics.
A tenant relying on a force majeure clause would usually have to prove the following:
(i) that a specific event referred to in the clause has occurred and that said tenant was prevented from or delayed in performing its obligations under the contract as a result of the event;
(ii) such non-performance was due to unforeseen and external circumstances beyond the tenant’s control; and
(iii) there were no reasonable steps that the tenant could have taken to avoid or mitigate the event or its effects.
The effect of exercising a force majeure clause in the context of tenancy agreements may include a suspension of rent or part thereof, or of the right to terminate the tenancy agreement in extreme events.
However, the existence of the clause does not automatically entitle a party to invoke relief in all situations as of right. Force majeure clauses are usually narrowly drafted to include specified events. Whether or not an event such as the current COVID-19 pandemic amounts to a force majeure event is a matter for interpretation that requires specific legal advice, and will be heavily dependent on the facts of each individual case and the drafting of its force majeure clause.
Force majeure clauses also require the party seeking relief to prove that a prescribed event could not have reasonably been mitigated by preventive action on its part. This means that force majeure may only be invoked when the event referred to has prevented or delayed performance of the contract and not simply because that event exists; caused economic hardship; or made performance of the contract inconvenient or commercially unfeasible.
Contractually, a procedure would usually be set out as to how the clause may be invoked (e.g. written notice to be provided by the affected party to the other). This must be properly followed as recent case law suggests that the failure to do so can impact subsequent legal claims.
Frustration of purpose
In the absence of a force majeure clause, another question to ask is then whether the external event was reasonably foreseeable. If the external event was not reasonably foreseeable, then the next question is whether it fundamentally changes the contractual obligation to become radically different from what was agreed in the contract. In such an event, the doctrine of frustration would apply, and the contract is said to be frustrated and is automatically brought to an end.
In the present circumstances of the pandemic, it may be possible for tenants to seek to rely on the doctrine of frustration if it can be demonstrated that the outbreak of COVID-19 frustrates the purpose of the contract. If successful, the tenancy agreement can be set aside in its entirety since the contractual obligations have been rendered impossible to perform and/or its underlying purpose is radically different.
However, it must be noted that this is a matter to be determined by the courts, which will look at the specific set of facts of each case. In addition to the costs involved in commencing or defending legal proceedings, the threshold to prove frustration is usually very high. Similar to force majeure, the fact that a contract that merely has become more difficult or expensive to perform is usually insufficient to give rise to frustration.
To cite a parallel example in Hong Kong, during the 2003 SARS epidemic, in the case of Li Ching Wing v Xuan Yi Xiong  1 HKLRD 754, the applicant tenant argued that the tenancy agreement was frustrated due to an isolation order, by the authorities against the premises, making it uninhabitable for 10 days. However, considering the circumstances, the courts held that 10 days out of a 24-month lease (which the tenant was 13 months into) was an insignificant duration. The courts also expressed the view that even though the outbreak of SARS could arguably be considered an unforeseeable event, such event did not go as far as to radically alter the fundamental rights and obligations arising from the tenancy agreement.
A collaborative approach
As can be seen, there may be limited contractual recourse for the tenant to seek concessions under their leases. Quite apart from relying on the parties’ respective legal positions in contract or at law, however, we have seen a willingness of landlords and tenants to adopt a collaborative approach when handling unforeseen crises, which is heartening to say the least.
Looking beyond the confines of legal contracts and keeping in mind the commercial realities and practical issues, parties may wish to consider the following during these trying times:
(i) Communication – the starting point should always be an open dialogue for negotiation, whether for rent reductions, downsizing the rented premises or a partial surrender of the lease. The landlord loses out if the tenant’s business fails, and the landlord has to enforce the lease terms against a tenant that cannot pay the compensation. Effective communication allows the parties to find a win-win outcome.
(ii) Replacement tenants – subject to the provisions of the contract and the landlord’s consent, allowing the tenant the flexibility to sublet or assign its rights under the tenancy agreement may enable the tenant to right-size its operation, consolidate its business or assign the whole of its interest to another willing company. Similarly, finding a replacement tenant can help mitigate losses, save costs and agent fees and promote business continuity for both landlord and tenant.
(iii) Grace period – landlords can consider making concessions (as they seem to have presently) and exercise leniency with their tenants, giving them breathing space to perform their obligations along a workable timeline during the period of difficulty. This recognises the reality that the enforcement and termination of a tenancy in a down market is a lose-lose situation for both landlord and tenant. This is especially so as it comes at the risk of losing a tenant that had hitherto been compliant throughout the term of the lease and replacing it with an unfamiliar party.
In conclusion, in a global pandemic such as the current COVID-19 outbreak, there is limited contractual recourse on the tenant to seeking concessions under their leases to enable their businesses to survive.
That said, all parties are stakeholders in the business ecosystem they share and it is prudent for both the landlord and the tenant to work together to get through these trying times, as the cost and uncertainty associated with terminating a tenancy and procuring a new tenant may be higher. It is thus heartening to note that the commercial landlords in Singapore recognise this business reality, and the fact that both landlord and tenant are aligned in the fight against COVID-19.
Click here to read more insights on how we can weather the coronavirus outbreak with you.