Getting your way out of a Landlord-Tenant Dispute
On 7 April 2020, Parliament passed the COVID-19 (Temporary Measures) Act (the “Act”). The Act introduced measures for certain parties to obtain temporary relief if they are unable to perform their contractual obligations due to COVID-19. On 20 April 2020, Part 2 of the Act, which contains the provisions governing such temporary relief, came into force as well as regulations giving more details on how to serve a notification for relief – see the COVID-19 (Temporary Measures) (Temporary Relief for Inability to Perform Contracts) Regulations).
An affected party can serve a Notification for Relief on the other party or parties to the contract, and those parties would be temporarily unable to undertake certain actions (till October 2020) relating to the enforcement of those obligations i.e. commencing legal action or making a bankruptcy application – see Section 5(3) of the Act.
We should add that this would only apply to certain classes of contracts. In a landlord-tenant context, this would be applicable to leases of non-residential immovable property such as a typical commercial tenancy agreement, but does not include residential leases. (See the Schedule of the Act for more details on what contracts are covered.) If the Notification for Relief is disputed, commercial landlords have an option to have the dispute determined by an Assessor.
Most recently, Parliament announced as part of the Fortitude Budget on 26 May 2020 that a new Bill will be introduced mandating landlords to grant a rental waiver to their SME tenants who have suffered a significant revenue drop in the past few months.
In this article, we suggest several ways that both landlords and tenants can rely on to come to a commercially sensible and feasible solution in order to help both parties to survive the current economic climate.
Perspective of the tenant and landlord
For many tenants, knowing that they have the option of obtaining temporary relief is reassuring. However, tenants in commercial tenancies may be hesitant to exercise this option as the concern is that it may damage their relationship with their corporate landlords. The Act also does not cover tenants of residential properties, who may need temporary relief.
From the landlords’ perspective, they may be hesitant about approaching their tenants about rental arrears for fear that the tenants may proceed to lodge a Notification for Relief. While the Act provides landlords with an option of disputing the notification by bringing matters before an assessor, it is likely that landlords would want to avoid such hassle where possible. It is also crucial to note that parties cannot be represented by lawyers before the assessor and the assessor’s determination is final with no option to appeal.
Practical Solutions for Landlords
At the outset, it will be useful to highlight that tenants do not automatically qualify for temporary relief. The tenant must be “unable to perform an obligation in the contract” and that “inability is to a material extent caused by a COVID-19 event” – see Section 5 of the COVID-19 (Temporary Measures) Act.
Although most businesses are financially affected by the temporary closure of operations and reduced foot traffic as a result of Circuit Breaker measures, and tenants would prefer to not pay rent, this does not mean that the tenant is “unable” to pay rent. The Singapore Parliament has stated that those who have the ability to make rental payments must continue to do so. A tenant who is a multi-national corporation or a financially sound company should not take advantage of the Act to delay the payment of rent.
What happens if the tenant is able to pay, but simply refuses to pay as it anticipates potential cash flow issues and is simply delaying payment?
Until and unless the tenant serves a Notification for Relief, the landlord has the full arsenal of contractually provided remedies to pressure the tenant into paying rent, such as forfeiting any security deposit, re-possessing the premises or commencing legal action.
However, landlords may wish to tread carefully when considering the commencement of legal action. Even if the tenant has not served a Notification for Relief, taking drastic steps may push the tenant to proceed to serve a Notification for Relief (even if it is without merit), so that the landlord is prohibited from taking actions (e.g. terminating the contracting and forced re-entry of the premises) in the interim period.
It may therefore be more effective for a landlord to first understand the tenant’s concerns and to engage with the tenant before proceeding with any threatened legal action.
Set out below are some practical suggestions for landlords when negotiating with a tenant.
Tenant is keen to stay on, but has fears about cash flow issues in future if he makes prompt payment of rent:
(a) Landlords can alert tenants that the amount of rent payable will be reduced after setting off property tax rebates, as it is compulsory under the Act for landlords (with exception of residential landlords) to pass on the benefit of property tax rebates to their tenants – see Section 29 of the Act. With the knowledge that the rent is reduced, some tenants may be more amenable to making payment so that their contractual obligations continue to be fulfilled.
(b) If the tenant’s security deposit has been ear-marked or held in escrow, a landlord can agree with the tenant to set-off a portion of the security deposit held against rental arrears, to help defray any cash flow concerns faced by landlords.
(c) Landlords can also propose offering a temporary rental reduction or temporary rental payment holiday, with the shortfall to be paid later on, by a future date. This means there is no change to the total contract value as a whole, but just a change to the interim dates of payment.
Tenant’s business is badly affected and has no desire to stay on, and is reluctant to pay rent.
(d) If a tenant’s business is doing badly, and has indicated that he has no desire to stay on, it may not be effective for a landlord to threaten legal action or to wait for an Assessor Determination (assuming that the tenant has served a notification of relief), landlords may consider cutting their losses and proposing an early termination of the tenancy agreement. While they may not be able to find a tenant in the short future, this will at least allow the landlord the opportunity to spruce up and begin marketing the premises and implementing reinstatement works in the meantime.
Tenants should think long-term
It is understandable for many tenants to be feeling immense pressure at this time. For SMEs, rent makes up nearly 30% of their business costs and it may seem like forgoing payment of rent in the meantime allows for some breathing space. However, we would caution tenants against viewing the option for temporary relief as a “get out of jail free card” to avoid paying rent.
This is because the Act only provides for a deferral of rental obligations, therefore the obligation to pay rent does not go away and rent will continue to accrue in the meantime, together with interest or late payment penalties if the contract provides for those to accrue in the event of late payment.
It is therefore advisable for tenants who need relief to engage with their landlords now to reach an agreement that meets both parties’ interests. An amendment to the contract that suits both parties will be more beneficial than a deferment under the Act that may cause interest to accrue and result in an inflated amount due at the end of the deferment period.
A New Way Forward
Landlord-tenant disputes hark back to ancient times. COVID-19 placed stress on the economy and on both landlords and tenants. The best way forward is for landlords and tenants alike to be reasonable in negotiating a solution that enables both parties to continue the relationship.
The Notification for Relief and dispute resolution mechanism before an assessor should be a fall-back option to be used only if parties are unable to work things out among themselves and therefore require third-party intervention or mediation. This is echoed by the Ministry of Law which recommends that parties try to reach a compromise before resorting to the Act.
Developments in the coming weeks may again throw a spanner into the works in navigating the landlord-tenant relationship, with the introduction of a new Bill that mandates landlords grant a rental waiver to SME tenants who have suffered a significant revenue drop in the past few months. Landlords and tenants should keep an eye on these developments to understand how this may affect them.
Should you require legal advice or assisting in negotiating the best outcome for yourself, be it as a landlord or tenant, please feel free to get in touch with us at our contact details below.
Jacque Law LLC frequently represents both landlords and tenants in disputes on tenancy agreements, including non-payment of rent. We will work together with you and tailor an approach and strategy to suit your preferred outcome.
If you would like to discuss any of these further, please do get in touch with us.
Jacqueline Chua, Managing Director
+65 6970 0518
Kimberly Chia, Associate
+65 6970 0318
Disclaimer: This article is intended for your general information only and does not constitute legal advice. Before taking any action or omitting to take any action in relation to the matters set out in the article above, you should consult a qualified legal advisor for specific advice for your circumstances. This article may not be reproduced, or transmitted in any form or by any means, in whole or in part, unless with prior written consent.
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