Govt urged to set up fair tenancy commission to tackle unfair, allegedly ‘cartel-like’ conduct by big landlords

SINGAPORE — A committee set up to tackle the power imbalance between big landlords and tenants, made worse by the Covid-19 crisis, on Thursday (May 21) recommended that the Government set up a “Fair Tenancy Commission”. The committee’s chair had said that some institutional landlords unfairly behaved in a “cartel-like” manner.

A 64-page position paper which includes 15 recommendations of the Fair Tenancy Framework Industry Committee (FTFIC) was handed to the Ministry of Law and the Ministry of Trade and Industry on Thursday.

Under the recommendations, the competition and consumer watchdog, the Competition and Consumer Commission of Singapore, is proposed to serve as the ombudsman overseeing the fair tenancy commission.

In a statement, FTFIC said: “The advent of Covid-19 culminated in landlords taking advantage of the lack of legislation to avoid passing on government tax rebates that were given with the intent for these rebates to be passed on in full to tenants as a form of rental rebates.”

Mr Kurt Wee, a leading Singapore business figure who is president of the Association of Small and Medium Enterprises (Asme), among other roles, chairs the committee.

He said that “unfair rental situations have plagued tenant operators for years”. Asme is one of five bodies represented on the committee, which was set up in April.

In the statement on Thursday, Mr Wee said that as far back as February 2014, he had “bemoaned the cartel-like behaviour of institutional landlords” in the way they treat tenants, in a newspaper article. A cartel is a group of market participants whose members allegedly collude with one another to achieve a favourable financial outcome.

A common example of an institutional landlord is a real estate investment trust (Reit), which is an entity listed on the Singapore Exchange. Reits buy shopping malls, for example, and pay investors returns based on the income they receive — generated in large part by the rents paid by tenants.

One way that Reits may seek to get a better return is to extract more rent from tenants. As with many listed entities, some executives may be offered financial incentives to improve the financial performance of the Reit, which, in turn, may lead to a higher trading price for the Reit, which makes investors happy.

In 2015, the Singapore Business Federation (SBF) set up a body to design guidelines to address the issue, but Mr Wee noted that only one landlord, Jurong Town Corporation, had endorsed the “fair tenancy framework”.

Thursday’s 15 recommendations include making it mandatory to include an “adverse circumstances clause” in leasing agreements to address scenarios such as Covid-19 or a flood, for example, and standardising the way retail rental rates are calculated.

One major grouse previously reported by TODAY is that it is common for the monthly rent to be a base rent plus 0.5 to 1.5 per cent of total gross sales, or 7 to 15 per cent of total gross sales, whichever is higher. Gross sales is the figure before running costs are taken out. This means landlords get more money in the good times, but are covered during the bad times.

The committee called for the base rent to be calculated using objective metrics of a landlord’s actual cost for running the premises, and for the component dictated by gross sales to be negotiable.

Mr Wee said: "What moral right does the landlord have to say whichever is higher? Why not whichever is lower in that case?"

“It is the hope that this proposal will seed the ground for a fairer tenancy ecosystem, which, at this point, remains heavily weighted against tenants,” he added.

The four other organisations represented on the committee are: The SBF’s SME Committee, the Restaurant Association of Singapore (RAS), the Singapore Retail Association, and the Singapore Tenants United for Fairness, which represents nearly 700 tenants. The latter was formed in February after the Covid-19 outbreak began taking a significant toll on the economy.

Pointing out that tenants are a “major stakeholder”, with small businesses employing about two-thirds of workers here, Mr Ho Meng Kit, SBF’s chief executive officer, added: “When the going was good, everybody’s pie was larger, these issues were more manageable.

“But with a crisis and a shrunken pie, everyone is scrambling for the bits that are remaining, and the weaker players get the crumbs. I think this is not fair, neither is it good business.”

He also said SBF would have preferred a fair and sustained outcome without legislation as rules and laws can be “prescriptive” and “blunt”, but the weak support among landlords for its 2015 guidelines has compelled it to push for legislation for “greater effectiveness and enforcement”. The latter is “a very Singaporean way”, he noted.

Mr Andrew Kwan, the committee's co-chairman and RAS vice president, said this is a "requisite response" to turn an "otherwise impossible relationship into an endearing and enduring partnership between landlords and tenants".

"So please... shoot not the albatross, that will bring us both safely back to shore,” he said, in reference to an 18th century English poem which describes a sailor who shoots an albatross, which otherwise would have guided the vessel safely to shore. The albatross is then placed around the man’s neck in recognition of the unhelpfulness of his act of shooting it.

RECOMMENDATIONS

Legislation to address these matters, such as setting up the proposed fair tenancy commission, would “promote a more efficient and effective free market dynamic for this business sector”, the committee said.

While landlords play an important function by generating a healthy and stable rate of returns for investors, it said: “The sustainability of such trust frameworks also relies on an operating framework that ensures the long-term sustainability of the operating tenants.”

However, the imbalance of power had resulted in “aggressive financial engineering” that goes against the grain of tenants’ sustainability and incentive to value creation, it added.

The committee noted that similar legislation in Australia has not crippled market co-operation between landlords and tenants. Instead, it had conditioned stakeholders to “automatically adopt a collaborative effort” during its Covid-19 crisis.

Various industry bodies Down Under had agreed on a common code of conduct to govern behaviour of landlords and tenants at the onset of Covid-19, before the Australian government passed national laws on the same issues, it noted.

Among the committee’s other recommendations:

• The lease contract should not include a provision preventing or restricting the tenant from carrying on business outside the retail shopping centre

• The landlord shall not be allowed to charge a mark-up of advertising and promotion charges that is greater than 3 per cent of what is charged by a third party for the service

• A tenant should be allowed to end his lease ahead of the expiry of the lease term after the first year by paying compensation of three months of base rent

• The landlord should not be allowed to end a tenant’s lease in the first year of leasing. During termination, the landlord must pay the tenant a compensation to cover the tenant’s set-up costs such as design fees, and installing and removing of furniture and fixtures

• Make unenforceable provisions allowing the landlord to terminate lease on grounds that the tenant has failed to achieve a particular level of sales or turnover

FAIR TENANCY COMMISSION COULD MEDIATE

The proposed fair tenancy commission’s scope would be to provide guidance on disputes, regulate matters between landlords and tenants, and undertake the periodic review and revision of the proposed fair tenancy legislation, it added. It could also act as an arbiter should adverse conditions arise so as to place additional conditions on tenancy contracts.

This recommendation takes into account a tenant’s “usually limited resources in seeking enforcement of its legal rights”, it said, adding that the legislation should provide for meditation as the primary mode of resolution of retail tenancy disputes before heading to court or utilising other adjudicatory processes.

The fair tenancy commission will also oversee the creation and generation of market rental data, which should be made transparent to tenants, it said, pointing out that there is “substantial information asymmetry” at the moment.

It recommends two levels of rental data to be made available:

1. A public rental information database that is updated monthly

2. Mall-level productivity and performance data that landlords can provide, just as they require monthly sales data from tenants

“This will facilitate better and informed decision-making by parties and militates against any possible abuse of market power by the landlords,” it said.