Rental issues

Rental issues
02/03/2004 The Star Articles of Law with Bhag Singh

WHEN a person rents a house he would like to be assured that he is able to continue to stay there for a reasonable period. At the same time, he does not want to be committed indefinitely.

The Landlord who is usually the owner of the premises also does not want to commit himself for an indefinite period for he may need the premises for his own use or he may need to sell the premises at some time.

Though the Landlord willing to rent out the premises for the foreseeable future, he may not want to commit himself to the same rental for the entire period is willing to let out the premises.

Hence it is not uncommon to enter into a tenancy agreement for an initial period of one, two or even three years and a tenancy agreement is accordingly drawn up.

In order to accommodate the possible need of the tenant to stay on and the Landlord’s desire that he should continue to obtain a fair and reasonable rental, an option to renew is often included. This gives a unilateral right to the tenant to renew the tenancy for a further term and an opportunity for the Landlord to have the land rent adjusted.

Such a clause would effectively serve the interest of the tenant in securing an extended term of the tenancy if the extended term were to be the same with an increase or percentage increase stipulated. The tenant’s interest would be well protected even if the mechanism for fixing the rental was provided for.

Unfortunately, many tenancies or even lease agreements do not spell this out If an existing lease or tenancy or agreement is examined many of them will be found to contain an option clause which does not fix the rent but which leaves the issue to be decided later. Thus, a typical option clause may read.

“Upon the expiration of the term hereby stipulated the tenant shall by notice given three months before the expiry of this agreement renew the tenancy for a further term of three years upon the same terms and conditions herein stated except this clause as to rental. The rental for the renewed term shall be mutually agreed upon between the parties.

In some cases it may even be provided that the rental shall be determined by the Landlord. The question that arises is as to whether in such instances the tenant would have a meaningful right of renewal?

Arising out of a clause like this there are two matters that require attention. One is the need for the Tenant to give notice at or before the stipulated time to the Landlord.

If giving of the notice is overlooked, the right to an option is lost unless the landlord agrees to waive this requirement.

The other issue relates to rental for the renewed term. This is where the perceived rights of the tenant may be again lost because either the parties cannot agree to the rental.

An example is the Singapore case of Popular Book Co Pte Ltd vs Sea Sun Furnishing (Pte) Ltd where the renewed term was to be “for a period of three years commencing from the date immediately following the expiration of 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.”

When the earlier term came to an end, the plaintiffs were informed by the defendants’ solicitors that their clients were prepared to renew the lease for a farther term of three years at a rent of S$28,728. The plaintiffs rejected the notification on the ground that the rent was unconscionable and far in excess of the market rate.

An application was made to Court for a decision as to whether in the circumstances the right of the Landlord to revise the rental was subject to such revision being fair and reasonable?

It was contended by the Tenant that there are three types of options for renewal of leases: (1) where there is no formula for quantifying the rent and no machinery to determine it; (2) where there is a stated formula but no effective machinery; and (3) where both the formula and the machinery are provided.

It was argued by the Tenant that the option to renew the lease was of the first type and therefore it was for the Court to provide the formula so that the tenancy and the option clause would not be fustrated The Court however went on to decide that as the rent demanded by the Landlord was not acceptable to the tenant there was no renewal of the tenancy which had therefore come to an end.

A distinction was drawn between the tenancy in this case which was for three years and English cases involving leases where the Court had intervened and provided the formula to exercise its power to either fix a rent or provide a mechanism to do so.

What was involved in the English cases where the Courts were willing to intervene was a rent review in the context of a an existing lease period as against the renewal of a tenancy

It would therefore serve Tenant’s interests to be aware that where either the rental for the renewed term of the tenancy is not preagreed, or a formula or mechanism for its determination is not provided for, the right of the tenant to renew the tenancy where the rental is to be agreed upon or the power to determine the rental is placed in the hands of the landlord may turn out to be illusory.

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