The Singapore Law Gazette

To Be Mutually Agreed or Not to Be Mutually Agreed

Pitfalls of Lease Renewal Clauses

A recent case in the High Court has provided new insights into the law concerning lease renewals. This article discusses how to approach reviewing lease agreements, with focus on drafting lease renewal clauses and with reference to some of the fundamental principles undergirding contractual interpretation in Singapore. It concludes by examining some practical nuances specific to drafting lease renewal clauses.

Introduction and Summary

The precise language of a lease renewal clause can mean the difference between years of onerous and binding contractual obligations, and no obligations at all. It is therefore no wonder that disputes over lease renewal clauses are regularly brought before the High Court.

However, the recent case of Hoon Kee Meng v Dash Living¹Hoon Kee Meng and another v Dash Living Pte Ltd and another matter (2024) SGHC 27 (Hoon Kee Meng) provides us an opportunity to discuss the subtler parts of negotiating renewal clauses.

Here are some key takeaways for practitioners:

1. Ensure that lease agreements accurately and clearly reflect the intentions of the parties. If a party intends for a renewal clause to be non-binding, this should be explicitly stated in the text of the agreement.
   1. Ensure templates and precedents are applied prudently.
      1. Unused or inaccurate terms from template and/or prior agreements that are used outside their original context may lend themselves to unfavourable interpretations. Clauses incorporating binding letters of offer may be interpreted to extend to non-binding letters of intent.
      2. Do not assume a clause always does what it says on the tin; always specify the situations where an effect occurs. A “Subject to Contract” clause typically means that the agreement is non-binding and that parties will subsequently need to enter into a binding contract.²Bumi Armada Offshore Holdings Ltd and Another v Tozzi Srl (formerly known as Tozzi Industries SpA) (2019) 1 SLR 10, at (21) However, in Hoon Kee Meng,³No.1 At (7) and (39) the language used in the “Subject to Contract” clause had not specified that the letter of intent was voided when a subsequent tenancy agreement was executed. If the parties intended for the letter of intent to have no further effect, this should be clearly set out.
2. Leases should always be reviewed together with any ancillary documents, even if they appear to be non-binding. Ancillary documents such as letters of intent, letters of offer, and memorandums of understanding can affect the lease review by: 1) forming part of the relevant context in contractual interpretation; 2) being read into the terms of the lease; and 3) having free-standing legal effect. This case demonstrates all three.⁴At (27), (36), and (39) Lawyers should pay attention to both the language in the main contract and the ancillary documents, and confirm with client that any representation and warranty relied upon has been duly incorporated in the binding contract to be entered into.In addition, whenever two or more documents comprise an agreement, parties should specify that the terms of one of the documents prevail in the event of any inconsistency. This helps to reduce the commercial uncertainties that may arise when executing multiple documents.

Let us turn to the facts of the case:

Background

The parties to this dispute are the landlord and tenant of a boutique hotel in Little India.

Around November 2021, the parties signed a letter of intent (LOI) that contained the following option to renew and subject to contract clauses:

“2. Option to Renew: The Tenant shall have the option to renew […] for a further term of 24 months, by giving [notice].” [Bold in original]

“15. Subject to Contract: The lease of the Property is subject to a Tenancy Agreement. The Landlord and Tenant shall sign the Tenancy Agreement with terms and conditions agreed by both parties within [a time limit, the deposit is refunded and] this Letter of Intent shall be treated as null and void […]. In the event the Tenant fails to execute the Tenancy Agreement [after the parties agree on the terms and conditions] this Letter of Intent shall be treated as null and void […]”

Subsequently in December 2021, the parties entered into a tenancy agreement that contained the following renewal clause:

“There shall be right of renewal [subject to notice] and the renewed rent shall be capped at ten percent (10%) above current Rent.“

Separately, there was a “whole of agreement” clause in the tenancy agreement:

“The covenants, provisions, terms and agreements herein and in the letter of offer […] cover and comprise the whole of the agreement between the Parties…” [Emphasis added in bold]

Around April 2023, the parties discussed renewal of the tenancy. The landlord proposed a monthly rent of S$76,000, based on an offer from a third party. The tenant disagreed, as the current rent was S$45,000, and the renewal clause capped the rent increase at 10% (or S$49,500). The landlord argued that the renewal clause in the tenancy was uncertain and non-binding as it did not specify the renewal term, and therefore a new rate and term of rental had to be negotiated. The tenant proceeded to send an email claiming to exercise their right to renew, whilst the landlord effectively denied the tenant’s entitlement to renew the tenancy on those terms. The parties then each filed applications for the recognition or denial of the renewal lease, respectively.

Decision and Commentary

The Court held that the renewal clause was effective, and that the tenant had validly exercised its right to renew, granting the tenant a 24-month tenancy at a monthly rent of S$49,000.

Grounds: Contractual Interpretation

The Court found that the renewal clause did provide for a term of 24 months. Tan Siong Thye SJ applied the well-established principles of contractual interpretation in Singapore⁵At (19):

1. The starting point is that the Court looks to the text that the parties have used.⁶Lucky Realty Co Pte Ltd v HSBC Trustee (Singapore) Ltd (2016) 1 SLR 1069 at (2)
2. The Court may have regard to the relevant context as long as the relevant contextual points are clear, obvious and known to both parties.⁷Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd (2008) 3 SLR(R) 1029 at (125), (128) and (129)
3. The Court has regard to the relevant context because it then places itself in “the best possible position to ascertain the parties’ objective intentions by interpreting the expressions used by the parties in the [contract] in their proper context.”⁸Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal (2013) 4 SLR 193 at (72)
4. In general, the meaning ascribed to the terms of the contract must be one which the expressions used by the parties can reasonably bear.⁹Yap Son On v Ding Pei Zhen (2017) 1 SLR 219 at (31)

The Court interpreted the renewal clause in favour of the tenant for three reasons:

1. The renewal clause presupposes that the renewal tenancy is for a fixed period. If it was subject to negotiation and agreement, it will always be open to the landlord to reject any proposal by the tenant in order to avoid the rental cap in the renewal clause. Therefore, the Court found¹⁰No 1. At (22) that this could not have been the objective intention of the tenant when the tenancy was agreed to.Compare this with the counterfactual position in Radha Properties v Lim Poh Suan.¹¹Radha Properties Pte Ltd v Lim Poh Suan and others (2023) 4 SLR 728 In that case, the lease agreement had explicitly provided for the renewal rent “to be mutually agreed upon.” The Court there held that the parties had intended to mutually agree on the renewal rent, failing which they would go their separate ways. In practice, this meant that the renewal clause was de facto non-binding.

   What this dichotomy means for practitioners is simple: If the parties intend for the renewal clause to be non-binding, or if a key term of the renewal should be negotiable, it should be stated clearly in the contract.

2. Secondly, the Court found¹²No 1. At (24) that because the parties had negotiated the rental cap while cognizant of the fixed renewal term in the LOI, this suggests the clause in the lease should have a fixed term like in the LOI. The Court thereafter¹³At (31) rejected the landlord’s argument that the omission should render the clause uncertain and unenforceable. When faced with an unclear term, “the Court is not to simply disregard it and condemn it as being unenforceable. Instead, an attempt at interpretation must be undertaken.”¹⁴Ibid In sum, the Court regarded the omission of an expressly stated renewal term not as an intentional and express omission, but as an omission that was not objectively intended by both parties. This gave rise to an uncertainty that was resolved through contractual interpretation.In practice, we should err on the side of caution in the approach we take to protect our client’s interests. Ideally, parties should clearly state their intentions explicitly in the contract, especially if it concerns the omission or negation of a clause that had been previously agreed to. If the lease agreement was intended to differ from the LOI, this should be clearly stated. Mere omissions, without more, are insufficient in negating previously agreed positions. In this case, to achieve the landlord’s aims, the parties should have instead stated that the term of the renewal lease was subject to mutual agreement.

3. Thirdly, the parties had intended a renewal term of 24 months, in the context of the signed LOI. The Court found¹⁵At (25) that in signing the LOI, the landlord had accepted its terms, even if it had only meant to sign the LOI to trigger the timeline for the preparation of the tenancy agreement. The Court acknowledged that there was a “Subject to Contract” clause in the LOI (more on that below) but from a contractual interpretation perspective, the Court can still consider the LOI as part of the relevant context to ascertain the objective intention of the parties in the tenancy agreement.This reflects the reality that lease agreements should be reviewed together with any ancillary documents, even if prima facie they appear/intend to be non-binding (like the LOI in this case), because they provide relevant context that would influence the contractual interpretation of the lease agreement. In practice, letters of offer often provide that the template lease agreement enclosed in the letter of offer is binding once the letter of offer is accepted by the tenant. Therefore, the template lease agreement should be reviewed by lawyers acting for the tenant concurrently with the review of the letter of offer. This would have the added benefit of avoiding the effect of a previously signed LOI influencing the presently negotiated lease agreement, as was the case here.

On this ground, the Court found that the parties intended for the renewed tenancy to be for a period of 24 months. The Court also noted that the option to renew was not negated by the tenancy agreement stating that the “Option to renew” was “Nil” and the “Renewal Conditions” was “NA”.

Alternative Grounds: Unilateral Mistake

In the alternative, the Court found that unilateral mistake rectification should apply to the renewal clause. The requirements for unilateral mistake rectification were present:

1. The landlord (non-mistaken party) had known that the tenant intended to have a term of 24 months, and thus had actual knowledge of the tenant’s mistaken intentions and of the mistake (based on the LOI).
2. The landlord had deliberately omitted to bring the mistake to the tenant’s attention.
3. The landlord would derive a benefit because the mistake would effectively grant it the ability to avoid the 10% rent cap.

On this alternative ground, the Court accepted that unilateral mistake rectification should apply to the renewal clause, to the effect that the renewal was for a fixed term of 24 months.

Obiter: Ancillary Documents

The Court found that the LOI had legal effect, such that the renewal lease had a fixed term of 24 months.

“Whole of Agreement” clause: Firstly, the Court found that the LOI had been incorporated into the renewal clause as a result of a “Whole of Agreement” clause, which typically sets out what documents comprise the whole of the agreement between the parties in respect of the lease. This clause incorporated into the lease a “letter of offer addressed to the Tenant (and accepted by the Tenant).”¹⁶At (9) and (32) The Court, in applying two separate tests (i.e., (1) a contextual approach to contractual interpretation¹⁷At (32); and (2) Section 97 of the Evidence Act 1893¹⁸At (33)), reached the conclusion that the “letter of offer” must refer to the “Letter of Intent” in the absence of an actual letter of offer in this case. This meant that the 24-month term for the renewal lease was incorporated into the tenancy agreement.

“Subject to Contract” clause: Secondly, the Court found that the LOI had independent legal effect, notwithstanding the “Subject to Contract” clause. The Court rejected that it is bound to find that there is no contract imposing obligations due to the mere presence of a “Subject to Contract” clause. “All relevant and admissible features of the arrangement have to be taken into account.”¹⁹No.2 At (22) It went on to find that the “Subject to Contract” clause was silent on what would happen if a subsequent contract was entered into, and was null and void only where no subsequent agreement was reached. The Court held that: 1) the subsequent tenancy agreement does not automatically supersede the LOI; and 2) the clause was silent, or at the very most, not void when a subsequent agreement was executed.²⁰No.1 At (39) The Court therefore found that the LOI could have independent legal effect.

The above again reminds us that prima facie non-binding documents can have a significant impact on the main contract. To this, there are three further points worth highlighting:

1. Firstly, it is the words that grant meaning to the clause, not their headings. As the Court remarked, the mere presence of a “Subject to Contract” clause is not an impediment to finding that the document is a contract imposing legal obligations. In neglecting to specify how the LOI is affected by the subsequent signing of the tenancy agreement, it left open the possibility for the terms contained in the LOI to continue having legal effect. Furthermore, if the main agreement omits mention of a particular term, this case clearly suggests that the agreed position in said ancillary agreement may apply. We should therefore treat the language in such ancillary documents with the same importance as those found in main contracts.
2. Secondly, be clear and careful when drafting documents and applying precedents. The Court’s treatment of the “Whole of Agreement” clause is a clear warning against blindly relying on precedents and templates, and on retaining unused terms. Given that it referred to a document that did not exist under the present facts, and that, as the judge remarked, it “is not well drafted and extremely convoluted,”²¹At (9) it is likely that a precedent had been misapplied into the tenancy agreement. Under different circumstances, the case could have turned on such drafting mistakes. It is prudent for practitioners to remove unused terms, as such terms may be interpreted in a manner that results in unintended consequences.It is also worth highlighting the importance of drafting in a clear and concise manner. The errant “Whole of Agreement” clause had “many separate clauses forming a single composite long sentence.”²²Ibid. A clearer draft would have improved comprehensibility and could have allowed the drafter to spot and correct mistakes.

3. Thirdly, specify the prevailing document to eliminate inconsistencies and uncertainty. For example, state that the terms of the lease agreement shall prevail in the event of any inconsistency between the lease agreement and the letter of offer. This applies not only to multiple documents, but to dual-language agreements and amendment schedules. Across multiple documents, it is possible to create a specific order of precedence.

Other Practical Points

Lastly, consider the following points that may help to reflect the parties’ intentions on whether the option to renew is to be binding:

1. Definitive Terms – it is good practice to have clearly drafted definitive terms, such as the date of the expiry of the renewal option, renewal rent, renewal term, and other terms and conditions:
   1. Rental Cap/Collar
   2. Rent Valuation Mechanism – Often, parties cannot agree on the renewal rent when the time comes to negotiate. Therefore, it is recommended that an agreed mechanism for determining the rent be included in the lease if the parties intend the renewal clause to be binding. As remarked in Radha Properties v Lim Poh Suan,²³No. 10 this could be in the form of “determination by a named expert valuer, a jointly appointed professional valuer, an average of the prevailing market rates provided by each party’s independent professional valuer, or by way of the judicial or arbitral process.”²⁴Ibid at (21)
   3. Premises – Specify if the renewal is valid for the whole or part (or both) of the leased premises.
   4. Bringing across existing terms and conditions or to allow for fresh negotiations – Often, if the original lease has been negotiated extensively, tenants would want the terms of the renewal lease to be on substantially the same terms as the existing agreement, save for changes in the law, and the option to renew.
   5. Landlord’s intention at the time of renewal – The renewal option may be subject to the landlord: 1) having no intention to redevelop/change the permitted use; or 2) having no desire to re-let the premises (as the case may be) at the time of the tenant’s exercise of their option to renew.
2. Breach of contract after renewal option is exercised – Between exercising the renewal option and the expiry of the original lease, parties may breach the terms of the existing lease. The lease should set out clearly the consequences of the breach, including if the renewal is void, and specify if the parties may avoid such consequences by remedying the breach within a specified period.

As drafters, our guiding principle is to express our client’s intentions as clearly as possible, with the goal of minimising risk and uncertainty in the contract. This case is a stark reminder of why, in contract law, some things are not better left unsaid.