Introduction

Singapore experienced an increase in the rental of residential properties by both locals and foreigners in recent years. This phenomenon is perhaps predominantly attributable to the Covid pandemic. Singapore residents who are living abroad may have rented out their existing apartment in Singapore while overseas. When they return back to Singapore during the pandemic, they are inclined to repossess their homes that were previously rented out for their own stay. In turn, the lessees would have to look for another place to rent.

It may also be due to the trend where an increasing number of young professionals are moving out of family residences and leasing their own space to work from home, given the default remote working arrangement at present. In addition, the shortage of workers and materials caused by the virus may have caused delay in the construction of both private and public housing. As such, some may choose to rent an apartment while waiting for their apartments to be completed.

With the hot rental streak which is likely to continue for the next couple of years, one may find himself in a situation where they wish to extend their stay in the rental apartment. In this article, we will examine the option for renewal, a common clause to include in a tenancy agreement to extend the term of stay, and when such a term can be enforced by a party.

Option to Renew

In most tenancy agreements, there is a section which grants the tenant the option to renew the lease for a further fixed period. An apparent advantage of having such a clause is that it allows both parties to seamlessly transition into a renewal contract without any changes to the original tenancy agreement. However, that is not always necessarily the case.

• Case Study #1

The facts of [1993] 1 SLR(R) 744 are as below.

The landlord had leased to the tenant the premises for a period of three years. The lease contained a clause on the option for renewal, which reads as follow: –

And the landlord hereby agrees with the tenant as follows:

… provided always that the landlord does not intend to sell or dispose of [the premises] the landlord shall on the written request of the tenant made not less than three (3) months before the expiration of the term hereby created and if there shall not at the time of such request be any existing breach or non-observance of any of the covenants on the part of the tenant hereinbefore contained grant the tenant (at the tenant’s costs and expenses to execute a renewed tenancy and counterpart thereof) an extension of two (2) years from the expiration of the term hereby created subject only to the right of the landlord to review the rental payable and upon such terms and conditions as may be agreed by the parties hereto with the exception of the present provision for renewal.

The landlord later refused to let the defendant exercise the option to renew on the basis that he intended to sell the premises. However, the tenant refused to vacate the premises upon expiry of the original tenancy term. The landlord contended that the clause was void for uncertainty and took out an application for possession of the premises and damages.

It was eventually held that the option for renewal was void for uncertainty and thus was unenforceable.

In this case, the judge noted that there was no uncertainty about the concept of an intention to sell. He noted that it was not necessary for the landlord to show that a contract of sale had been concluded. Instead, the landlord merely needed to point to an act revealing an intention to sell (e.g. the appointment of a real estate agent, advertisement of the premises for sale or the passing of a board resolution authorising the sale).

The uncertainty lies in the final part of the clause (as highlighted above). The provision that the rent for the renewed period that was subject to the landlord’s review was consistent with a range of different meanings. There was thus an uncertainty of concept at the heart of this provision. Further, the part of the clause which provided that the renewed tenancy was to be on such terms and conditions as may be agreed to between the parties added to its uncertain nature. The phrase “to be agreed” was the classic phrase employed when parties did not want to be contractually bound. In the circumstances, the option for renewal was thus held void for uncertainty.

• Case Study #2

The material portions of the clause in the case of [2017] 2 SLR 627 is reproduced here:

The Lessee shall be entitled to six (6) consecutive options to renew its lease hereunder, (each such renewal period shall hereinafter be called “option period”), on the following terms and conditions: –

(a)     Option period: The option period for each of the first five consecutive options to renew shall be for a period of ten years each; the option period for the final sixth option shall be for a period commencing from the expiry of the lease term then in force and ending on the 30th day of March 2072.

…

(c)     Prevailing market rental value: Upon receipt of the Lessee’s notice referred to in the preceding sub-clause (b), the parties shall endeavour to agree on the prevailing market rental value of the Demised Premises (excluding service charge and disregarding the value of all fixtures and fittings installed by the Lessee) for purpose of determining the rent (the “renewal rent”) for the relevant option period, if by three months before commencement of the relevant option period, the parties have not reached agreement on the renewal rent, the Lessor shall appoint a licensed valuer to determine the prevailing market rental value. The licensed valuer may be nominated by agreement between the Lessor and the Lessee or in the absence of agreement, nominated by the President for the time being of the Singapore Institute of Surveyors and Valuers (or its successor institute) on the application of the Lessor. If the said President is not available or is unable to make such nomination at the time of application, the nomination may be made by the Vice President or next senior officer of the said Institute then available and able to make such nomination. All costs and expenses of and in connection with the appointment of the licensed valuer shall be borne by the Lessor and the Lessee in equal shares. The licensed valuer shall act as an expert and not as an arbitrator and his decision shall be conclusive and binding on the parties.

(d)     Renewal rent: The prevailing market rental value of the Demised Premises thus agreed or determined by the licensed valuer shall be the renewal rent for the relevant option period.

(e)     Rent review: The rent for each option period shall be subject to review every five years, each rent review period shall commence five years after commencement of each option period, and the provisions of clause 2(c)(i), (ii), (iii) and (iv) of this Lease shall apply mutatis mutandis. The provisions of clause 2(c)(v) of this Lease shall not apply for purpose of this sub-clause (e).

To put it simply, the agreement provided the tenant six consecutive options to renew the lease at the prevailing market rate for a period of 10 years each after the initial 20-year term. The agreement made specific provisions such the appointment of a licensed valuer in determining the prevailing rate if parties are unable to agree on the rent. Under the agreement, the landlord is obliged to renew the lease for the option period if the tenant has fulfilled its obligations provided in the agreement.

The tenant opted to renew the lease and valuation was conducted. However, the parties disagreed on the method used by the valuer. The landlord sought to value the rent using a new configuration (which yields a higher rent) while the tenant argued that the rent must be determined in accordance with the existing configuration. The landlord then contended that the agreement did not provide for any specific configuration for the valuer to rely on in determining the market rental value.

It was eventually held that the term “prevailing market rental value” in this case should be based on the existing configuration as proposed by the tenant. Among other things, the judge noted that from a practical perspective, it would have made little sense for the parties to have directed valuers to unilaterally decide the configuration for the purpose of valuation. Since there could be a substantial difference in the valuation depending on the choice of configuration, allowing a valuer to make his own unilateral determination could have led to substantial variations in the valuations and caused further disputes. It would also have yielded a tremendous degree of uncertainty, especially in this case where the agreement could potentially span up to 80 years.

As such, although an option to renew with the term “prevailing market rental value” may be voidable for uncertainty in some cases, this case demonstrates that the court may take into consideration all the relevant objective evidence and the intention of the parties at the time they entered into the contract to ascertain the term. The court noted that in this case, the configuration could not have been contemplated by the parties or within the scope of their intentions when they entered into a lease of such length and nature. Based on the facts, the court took into consideration the parties’ conduct and negotiations prior to signing the agreement and concluded that the application of a new configuration that would yield the “highest and best use” of the premises for the purposes of valuation is entirely inconsistent with the parties’ contractual expectations as it would seriously take away the tenant’s contractual freedom to determine the configuration of the premises and thus held that there is certainty that the prevailing rate should be based on the existing configuration and not the new one as proposed by the Landlord.

• Case Study #3

The clause in the case of [1991] 1 SLR(R) 467 stated as follows:

The landlord shall at the written request of the tenant, made not less than six (6) months before the expiration of the term hereby created and if there shall not at the time of such request be any existing breach or non-observance of any of the covenants on the part of the tenant herein contained and at the tenant’s expense grant to the tenant a further term of the demised premises the lease for which must be signed by the tenant at a date not less than two (2) weeks before the expiration of the term hereby created. The renewed term be for a period of three (3) years commencing from the date immediately following the expiration of the term hereby created, at a revised rent to be determined by the landlord and upon terms and conditions as shall be imposed by the landlord. Provided always that within two (2) weeks of the receipt of the landlord’s notification of the revised rent, terms and conditions, the tenant shall in writing inform the landlord whether the revised rent, terms and conditions are acceptable or otherwise. In the event that the revised rent, terms and conditions are not acceptable to the tenant and/or if the tenant shall fail to sign the lease for the renewed term by the date stipulated above then this option shall lapse and the landlord shall be free of all obligations whatsoever to grant to the tenant any further term.

The tenant requested for an extension of lease in accordance with the above clause. The landlord then notified the tenant that an extension would be given at a revised rent, which was double of the previous rent. The tenant then rejected the notification on the grounds that the revised rent was unconscionable and far in excess of the market rate and brought the matter to court to determine whether it was implied that the revised rent determined by the landlord was to be a fair and reasonable one.

It was eventually held that the landlord was not obliged to fix the revised rent at a fair and reasonable sum. The clause for option to purchase was not simply an option to have the rent fixed for an existing term, it was an “agreement to agree to a new lease at a rent to be agreed between the parties”. The principle is if there is no agreement on what is to be agreed (i.e. if the parties reached an impasse), then there is no obligation on either party to either grant or accept a new lease. Further, nowhere in the lease was it stipulated that the revised rent should be the market rent or any other reasonable rent or a rent to be determined by an independent third party. On that basis, it would suggest that the more ambiguous the clause is, the less obligatory it becomes.

Conclusion

The practical significance is that these cases are a reminder about the importance of understanding one’s rights and duties pursuant to an option to renew. Ideally, the contract should reflect a mutually agreed, negotiated position, taking into account the parties’ considerations. Ambiguity in the terms and conditions of a tenancy agreement, which are often the cause of dispute between tenants and landlords, may hinder and warp a person’s understanding of their rights and obligations as either a tenant or a landlord. To reduce the likelihood of disputes, one should always seek professional assistance when it comes to negotiating or drafting any rental agreement at the outset so that parties are clear to what to expect from each other. In the meantime, should you have any queries, please do not hesitate to contact us.