COVID-19 DISCHARGE BY FRUSTRATION
OF A LEASE OR LICENSE OF NON-MOVABLE PROPERTY
The current moratorium enacted under COVID-19 (Temporary Measures) Act 2020 is ending on 19 October 2020. As the date draws near, many tenants are reaching out to Singapore Tenants United For Fairness (SGTUFF) for advice.
These tenants represent businesses of all shapes and sizes. Some were already struggling before COVID-19 and they have so far been kept barely afloat by their dwindling retained earnings, government’s wage support and rental support and the soon-to-end moratorium. Others were running profitable businesses before COVID-19 and, at present, the viability of their businesses are threatened by the pandemic.
As we find ourselves caught in unprecedented times, many tenants and landlords alike are at our wit’s end trying to come to a resolution on the issue of rent abatement and pre-termination of leases. We are unsure if we can call force majeure, frustration or material adverse change on our lease and license agreements.
In the absence of clarity, many tenants we spoke to plan to simply “run away”, that is, abandon their lease premises, after the moratorium is lifted. This presents a stressful situation for both the abandoned landlord and the runaway tenant.
A contract will be automatically discharged upon the occurrence of a frustrating event, that is, an unforeseen event which occurs through no fault of either contracting party, rendering the contractual obligations of parties impossible to perform or radically/fundamentally different from what had been agreed in the contract.
Under Singapore law, force majeure may not be relied upon unless there is a force majeure clause in the contract. Frustration, on the other hand, may still be relied upon even if the contract does not contain such a clause.
We may look at the varying degrees of radical change to determine the contracts that may be deemed to be discharged by frustration.
Supervening illegality. Where circumstances have arisen so as to render the performance of a contract illegal. This is because there cannot be a default in not doing what the law forbids. These relate to activities that have since been prohibited under the Infectious Diseases Act and the introduction of safe-distancing measures under the COVID-19 (Temporary Measures) (Control Order) Regulations 2020.
Cases involving supervening illegality include:
- A large-scale event such as a business conference or a concert that is cancelled;
- A pub, nightclub or karaoke that is prohibited to open until Phase 3 of Circuit Breaker; and
- A dine-in restaurant where only take-outs were permitted during Phase 1 of Circuit Breaker.
Supervening impossibility. Where performance has become impossible due to a change in circumstances or the discovery of preexisting circumstances. The impossibility may relate to the agreed method of performance, the availability of agreed subject matter or source of supply, or the fulfilment of a commonly held purpose of the contracting parties. We argue that, in some cases, COVID-19 and the resulting travel bans as well as safe distancing measures at the workplace led to an almost complete destruction of the target market for goods renders performance so radically different that it is no longer the same contract.
Cases involving supervening impossibility include:
- A gift shop at a tourist attraction;
- A restaurant at a tourist attraction;
- A restaurant in the Central Business District or Business Parks; and
- A cafe in an office building.
Supervening impracticability. Where performance can be done but only at an excessive and unreasonable cost, that is, commercial impracticability. While impossibility is an objective condition, impracticability is a subjective condition for a court to determine.
Using U.S. courts as a reference, the test for impracticability is:
- There must be an occurrence of a condition, the non-occurrence of which is a basic assumption of the contract;
- The occurrence must make performance extremely expensive or difficult; and
- This difficulty was not anticipated by the parties to the contract.
We argue that the occurrence of COVID-19 meets the test for impracticability. Since impracticability is subjective, we recommend the following criterion to assess if it is a case involving supervening impracticability:
- The tenant-occupier suffered at least a 50% decrease in gross turnover at the outlet for the months of 1 March to 30 October 2020, compared to 1 March to 30 October 2019. If the tenant-occupier was not operational as of 30 October 2019, we recommend comparing the average monthly gross turnover from 1 January to 28 February 2020 to the average monthly gross turnover from 1 March to 30 October 2020.
We further recommend that online sales fulfilled at the outlet be omitted from the computation of gross turnover. We consider generating online sales through third-party platforms and marketplaces to make up for sales at a retail premise that the tenant-occupier paid a premium for to be an “excessive and unreasonable cost”.
This covers (i) contracts entered into before 25 March 2020; or (ii) entered into before 25 March 2020 but expired and renewed either automatically or in exercise of a right of renewal in the contract.
In case law, when the doctrine of frustration is successfully invoked, it operates to discharge the contract in its entirety. Accordingly, obligations that have accrued prior to the frustrating event would continue to be due, whereas future obligations arising after that event would be discharged.
In contrast, some force majeure clauses may provide for temporary relief with the option of termination in the event of prolonged force majeure.
Other than the doctrine of frustration, which often gives rise to an all-or-nothing outcome, we may also refer to the Frustrated Contracts Act (Cap. 115) (FCA) in Singapore.
The effect of the FCA is to apportion the losses that arise once a contract has been discharged by frustration. The features of FCA are:
- The FCA permits the recovery of all sums paid prior to the frustration of the contract;
- All sums payable in accordance with the frustrated contract shall cease to be payable;
- The court may allow the payee to either retain or recover money for expenses incurred before the frustrating event, if the court considers it just to do so, having regard to all the circumstances of the case; and
- The FCA allows a party who has conferred a valuable non-monetary benefit on the other contracting party by virtue of his or her partial performance of the contract, to be awarded compensation by the court. The amount of compensation must not exceed the amount of the valuable benefit, and it will be determined by what the court considers just, having regard to all the circumstances of the case.
Overall, FCA aims to place parties in the position as if there were no loss and no gain, save for reasonable costs incurred in good faith towards achieving the contractual objective prior to the occurrence of the frustrating event.
However the FCA does not determine when a contract is frustrated; this remains governed by common law.
Here are our recommendations:
- The date of “occurrence” of COVID-19 be ascertained as at 13 March 2020. This is the day when the Ministry of Health issued the first advisory entitled “Additional Precautionary Measures to Prevent Further Importation and Spread of COVID-19 Cases”. The actual time of “occurrence” of the frustrating event is highly material to the calculation of payments;
- For a lease or license frustrated by supervening illegality and supervening impossibility, the lease or license is deemed terminated as at 13 March 2020. All base rents, interests, A&P fees, late fees and security deposits shall be refunded to the tenant. The landlord may retain or recover the service charge/maintenance fee as “reasonable costs” of fulfilling the contract partially, that is, the space is still physically occupied by the tenant since 13 March 2020, even though they are unable to operate their business. The tenant shall reinstate the premise at the tenant’s cost.
- For a lease or license that meets the qualifying criterion (50% drop in same-store sales) and is frustrated by supervening impracticability, the lease or license is deemed terminated as at 13 March 2020. 50% base rent, 50% interests, late fees and security deposit shall be refunded to the tenant. The landlord may retain or recover 50% base rent, 50% interests, A&P fees and service charges/maintenance fees as “reasonable costs” of fulfilling the contract partially. The tenant shall reinstate the premise at the tenant’s cost.
- Similar to a provision found commonly in a force majeure clause, both the landlord and the tenant may agree on a temporary relief with the option of termination until the non-occurrence of the frustrating event.
- For a lease or license frustrated by supervening illegality and supervening impossibility, the landlord and tenant may agree mutually to “wait out” the pandemic. During this period, the tenant shall continue to pay the landlord the monthly maintenance fee.
- For businesses that are highly dependent on tourists, the non-occurrence of the frustrating event may be defined as the last day travel ban to Singapore is lifted by our top 5 visiting countries, that is, China, Indonesia, India, Malaysia and Australia;
- For businesses that are highly dependent on office crowd, the non-occurrence of the frustrating event may be defined as the day safe-distancing measures at the workplace are lifted by the Ministry of Manpower.
- For a lease or license frustrated by supervening impracticability, the landlord and tenant may agree mutually to “wait out” the pandemic. During this period, the tenant shall continue to pay the landlord the landlord A&P fees, service charge/maintenance fee, turnover rent and 50% of the base rent.
- For businesses whose gross turnover, excluding online sales, have dropped 50% or more at the outlet, the non-occurrence of the frustrating event may be defined as the last day of three consecutive months when same-store sales recover 65% or more, excluding online sales.