Further to the COVID-19 (Temporary Measures) Act of 2020 ("COVID-19 Act"), authorities in Singapore have urgently published important details on how to access and seek rental relief where one is unable to meet contractual obligations due to COVID-19. Here we present a simple step-by-step guide on how to approach rental relief discussions for both tenants and landlords of non-residential (i.e. commercial) property. We also provide our thoughts on the relief application system.
Any party that is unable to perform an obligation under a "scheduled contact" covered by the COVID-19 Act can utilise the act to seek relief from the other party.
This article focuses on the corporate and industrial real estate market because non-residential leases and licenses of real estate are one of the "scheduled contracts" in the COVID-19 Act.
For the purpose of putting the COVID-19 Act and relief measures in a real world context, we approach the analysis from the perspective of a tenant seeking rental relief from its landlord.
Readers are directed to note that notwithstanding this article focusing on rental relief, it is just as applicable to applications for relief from other lease obligations due to COVID-19, such as the obligation to reinstate premises, relief from service charges under the lease and so forth.
Details on how to access relief from contractual obligations of leases has been published by the Singapore government on 20 April 2020, and are comprehensively set out in the COVID-19 (Temporary Measures) (Temporary Relief for Inability to Perform Contracts) Regulations 2020 ("Regulations").
Rental relief only applies to non-residential real estate (i.e. commercial and office buildings, retail and shopping malls, industrial property and other non-residential facilities).
The COVID-19 Act applies to obligations and rental payments due on or after 1 February 2020, and for leases that were entered into before 25 March 2020. New leases entered into after 25 March 2020 come outside the COVID-19 Act. Whether new leases should come under the COVID-19 Act or its reach broadened to include more types of contracts or time periods before 1 February 2020 is a matter for parliament to decide.
The COVID-19 Act bars landlords from exercising rights of re-entry or forfeiting the lease (section 5(3)(m) of the COVID-19 Act) even if tenants have breached lease obligations, provided that tenants have first given notice.
Effectively this means that landlords cannot evict tenants if such a tenant has first given notice to the landlord under section 9 of the COVID-19 Act ("Section 9 Notice").
Since landlords cannot evict tenants once notice is given, tenants can avail themselves of the COVID-19 Act to seek relief from contractual obligations or negotiate rental conditions. Such relief may cover monetary, financial, operational or other commitments that tenants will normally be bound to observe under the lease.
Presently, we expect most commercial tenants will seek rental relief rather than pre-terminate leases. However, if the economic situation deteriorates further, we expect to see a spike in pre-terminations or early exits as businesses simply shut down.
The COVID-19 Act does not immediately deal with this issue, which means that landlords and tenants will still need to negotiate an exit. However, we believe that the spirit of the COVID-19 Act (and a host of grants and financial support measures associated with the government’s comprehensive COVID-19 stimulus) is to encourage landlords and tenants alike to communicate in good faith and to work through solutions to keep businesses alive. The hope is that temporary rental relief and suspension of lease covenants would be sufficient to overcome present liquidity issues. We do not wish to fathom the economic fallout from lease terminations en-masse and the impact not just on landlords but also Singapore's REIT market.
This article sets out an approach on how tenants may issue a Section 9 Notice, and the process for independent assessment - here are the steps:
The COVID-19 Act provides a legal basis for tenants who are facing depressed customer takings, financial liquidity and other constraints (e.g. manpower / staffing issues / suspension of essential business) caused to a material extent by COVID-19 to approach their landlords to seek temporary relief from rent or other lease obligations.
Landlords should be aware that tenants have the power to formally issue a Section 9 Notice (see below), and therefore instead enter into good faith discussions with the tenant to resolve issues before they escalate.
The Ministry of Law recommends that "parties first discuss, understand each other’s positions, and try to reach a compromise which parties can do, taking into account the framework" set out in the COVID-19 Act.
Ideally, parties should resolve the situation and, for good order and evidentiary purposes, record the resolution in a binding agreement if it can be resolved at this Step 1.
If discussions between landlords and tenants do not work out, the party seeking to avoid an obligation (i.e. the tenant who is not able to pay rent, not able to effect regular maintenance, or not able to reinstate in time or facing other constraints due to COVID-19) can take the next step of issuing a Section 9 Notice under the COVID-19 Act to the landlord.
The Section 9 Notice must be made based on the prescribed format set out in the official "Form 1", which can be obtained from the Ministry of Law's website.
The Section 9 Notice must then be served on the following (where applicable):
Form 1 requires the party seeking relief to set out in the form:
For example, in order to seek rental relief, the "nature of the obligation the contracting party was unable to perform" should be the rental payment obligation.
Of course the inability to perform must be tied to COVID-19, for example, "Due to COVID-19 and the social distancing measures, customer footfall has fallen. We are also now closed due to the circuit breaker and have no revenue at all." Please note, in the interest of fairness, supporting documents may be required, and, should be provided if available.
Another example of inability to perform, "Due to COVID-19, we are not able to deploy the contractors in time to reinstate the premises and yield up the premises on time due to manpower constraints arising from the rampant spread of COVID-19 in the construction worker dormitories where the contracted workers reside”, or, "Due to COVID-19, and the spread of the virus particularly amongst the construction worker population, and the designation of their dormitories as isolation areas, we are not able to complete our fitting out in time for the target lease commencement date without incurring excessive charges which we are unable to meet in light of our financial constraints also due to COVID-19, additionally there is no need to rush to open as the circuit breaker measures has resulted in low customer traffic”. Again, tenants should not be opportunistic and try to take advantage of the situation, and should have on hand all necessary supporting documents. The COVID-19 Act makes clear that the inability to perform must be to a material extent caused by COVID-19, and this section of Form 1 must express as such.
The proposal is very important, as here is where the rental relief (or other relief) sought should be set out. Form 1 sets out an example: “We cannot pay the full rental, but should have enough savings to pay 50% of rental from March 2020 to August 2020. We would also like to request the landlord to grant us a rent reduction of 20% from March 2020 to December 2020, to reduce the arrears that will accumulate. This will help us temporarily with our cashflow.” Tenants should therefore consider their financial position and articulate a solution clearly and succinctly here. Set out a workable solution in the circumstances. Landlords are directed to consider that the economic impact of the COVID-19 situation is evolving, and the severity is yet to be determined although it could be great and prolonged, therefore tenants may not be agreeable to only short-term relief. Parties should look towards a longer horizon with a view towards weathering the storm together.
The Section 9 Notice must be sent electronically via the special system set up by the government for COVID-19 relief application purposes, using SingPass or CorpPass. At first instance, the Section 9 Notice must be sent out using this specific system first and foremost ("Electronic System"). The Electronic System can be accessed here.
Under the Regulations, if Section 9 Notice cannot be sent to the landlord at first instance via the prescribed Electronic System, the tenant can then send it to the landlord at the landlord's last known email address. If both notification via the Electronic System and email does not work, the Tenant can serve via instant messaging platforms (e.g. Whatsapp), and social networking sites (e.g. Facebook). If all else fails, prepaid registered post will suffice.
After a tenant issues the Section 9 Notice to the landlord and a compromise still cannot be sought, either the landlord or the tenant can apply to an independent third party Accessor to make a determination under the COVID-19 Act as to the form of relief ("Assessor's Determination").
It is likely that a tenant who feels that it has a good and reasonable position would look to push for an Assessor's Determination. Similarly, a landlord who finds that the tenant is making unreasonable demands which overstates the tenant's financial inability or is not reasonably related to COVID-19 would be the one to escalate to an Assessor.
The application for Assessor's Determination must be accompanied by:
Such an application for Assessor's Determination is currently free, and must be made via the Electronic System.
Once the assessment process has commenced, there are further timelines and steps as part of a quasi-judicial process. More details can be found here.
It is a "judicial" process in the sense that there is an independent party (i.e. the "Assessor") that makes an assessment of each party's position.
However this is not part of Singapore’s court or common law legal system, and the outcome of applications for determination are final. There is no appeals process against an Assessor’s determination, except to:
If there are pending court or arbitral proceeding on the same issue, a party may seek to stay or dismiss those proceedings under the COVID-19 Act by lodging the Section 9 Notice with the court or arbitral tribunal.
Similarly, if there are pending court or arbitral proceedings in relation to a Section 9 Notice, and such notice has been lodged with the court or arbitral tribunal, the Accessor's Determination should also be then lodged with the court or arbitral tribunal within two working days of it being given by the Accessor.
The approach promulgated by the Singapore government with the COVID-19 Act is a unique and model response to the economic fallout of COVID-19. This is because, rather than relying on existing institutions, a new regulatory system has been set up for non-residential leases and other "scheduled contracts" to avoid the harshest effects of a win-lose traditional dispute resolution process. In fact, this has been expressly set up as a process outside the court and arbitral system.
In a situation such as COVID-19, there is not much incentive for landlords to kick tenants out where demand is already low and evictions could potentially trigger a widespread domino effect on the wider economy if a large number of tenants (particularly SMEs and mom-and-pop businesses) lose their storefronts.
Here, it is for tenants to propose solutions to the landlord, in terms of what relief is sought. If landlord and tenant cannot agree, a neutral party in the form of the Assessor can step in. This could therefore be described as a form of directed contract renegotiation or mediation.
The Ministry of Law website provides a telling quote from the Minister of Law:
“You’re looking at economic devastation. Businesses destroyed, people’s lives ruined, and in such a situation, you don’t talk contract. You talk equity, you talk justice, you talk about what is the right thing to do.” - Minister for Law, K Shanmugam SC, Interview with CNBC, 7 April 2020
This quote points to the nature of the Assessor's approach being one that is grounded in equity and an "ordinary person’s" sense of fair play and justice.
From a project financing and corporate structuring perspective, what is "fair" in landlord-tenant situations should also arguably take into consideration each party’s financial strength to weather recessions and relative ability of each party to access bridge capital and financing at the group and not just project or operational company level.
Whether an Assessor's approach is really fair or just remains to be seen as the system is very new and has only been put in place by the Regulations on 20 April 2020. Moreover, the Assessor's Determination is not appealable, or reviewable. Therefore there is much pressure on Assessors to make fair determinations that live up truly to the Minister of Law's statement.
This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please note that the information in this article is accurate as of 24 April 2020. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.