“PREVAILING MARKET RATE TO BE MUTUALLY AGREED UPON”
In Radha Properties Pte. Ltd. v Lim Poh Suan & 2 Ors. [2022] SGHC 139, the General Division of the High Court held that the option clause in a tenancy agreement to renew the lease of a property was not enforceable as the parties had failed to mutually agree on the “prevailing market rate” for the monthly rent for the purpose of renewing the lease.
The Clause. We set out the relevant clause below:
“If the Tenant desires to have a further tenancy of the said Premises for a further period of five (5) years after the expiration of the said term hereby demised and gives to the Landlord three (3) months’ notice in writing to that effect prior to the expiration of the said term hereby demised then (provided that at the date of the exercise of this Option and at the date of the expiration of the term hereby demised there is no subsisting breach by the Tenant of the covenants and conditions herein contained), the Landlord shall grant to the Tenant a tenancy of the said Premises for a further period of five (5) years commencing on the day following the expiration of the term hereby demised upon the same terms and conditions contained herein (but with the exception of this provision for renewal) at a revised monthly rent payable to the prevailing market rate to be mutually agreed upon. [Emphasis added in italics and bold italics]”
(emphasis in original)
The dispute. More than 3 months’ prior to the expiration of the lease, the plaintiff gave written notice of its exercise of the option clause ([5]). The parties could not agree on the “prevailing market rate”, or the method or process for determining the same ([9]).
It bears noting that the plaintiff had engaged Colliers International Consultancy & Valuation (Singapore) Pte Ltd (“Colliers”) to provide an opinion on the prevailing market rate ([6]), though, as the High Court observed, “… Colliers could only, and rightly so, provide a rough estimate or a broad indication of what the prevailing market rent might be… a range of values for the “prevailing market rate” was possible.” ([7]).
The plaintiff then brought this action, seeking an order for specific performance by the landlords (the defendants) of the said option clause and a declaration that the said clause was valid and binding upon the defendants ([1]).
The issue. The issue turned on the interpretation of the phrase “prevailing market rate to be mutually agreed upon” ([11]).
The plaintiff argued that the clause was not void for uncertainty ([12]).
In particular, the plaintiff argued that “… In the absence of any machinery in the Option Clause to determine the prevailing market rate… the court ought to provide the machinery to resolve the dispute as to the prevailing market rate. ….” (at [12]).
Different clause. The Court disagreed. The Court first referred to the case of Masa-Katsu Japanese Restaurant Pte Ltd v Amara Hotel Properties Pte Ltd [1998] 2 SLR(R) 662 (“Masa-Katsu”) ([14] – [16]), where the clause in question read as follows:
“The lessors may at the written request of the lessees made not less than three (3) calendar months before the expiration of this lease hereby created and if there shall not at the time of such request and also at the time of expiry of this lease be any existing breach or non-observance of any of the terms conditions and provisions contained herein and on the part of the lessees to be observed or performed at the expense of the lessees renew the lease for a further period of three (3) years from the expiration of this lease at the prevailing market rental or at the current rental plus 30% whichever is the lower upon the terms and conditions to be agreed. [Emphasis added in italics]”
The Court found that in Masa-Katsu, the option clause was different because the phrase “to be agreed” qualified the words “upon the terms and conditions” and not “prevailing market rental” or “the current rental plus 30% whichever is lower” ([16]).
As such, as found by the court in Masa-Katsu, the rent had been fixed, and the clause was not void for uncertainty.
Next, the Court referred to Brown v Gould [1972] Ch 53 (“Brown v Gould”), where the English court considered the following term (at [17] – [18]):
“… such new lease to be for a further term of 21 years at a rent to be fixed having regard to the market value of the premises at the time of exercising this option taking into account to the advantage of the tenant any increased value of such premises attributable to structural improvements made by the tenant during the currency of this present lease …”
The Court distinguished Brown v Gould as the option clause in question did not contain the phrase “to be mutually agreed” to qualify the rent to be fixed.
As such, “… [s]ince there was no explicit requirement for the rent to be fixed by mutual agreement, in deciding that the court could step in to provide the machinery for fixing the rent, the court did not have to substitute or re-write the bargain between the parties by imposing the judicial process as the new machinery to determine the prevailing market rate for the parties in place of the mutual agreement of the parties.” (at [18]).
The Court found that in the present case, as the parties had “… clearly intended mutual agreement to be their chosen methodology/process for determining “the prevailing market rate” for the monthly rental. Until mutual agreement was reached on what would possibly be one of the most essential elements of the clause (ie, the amount for the revised monthly rental for the further lease), the Option Clause was incomplete and hence, the parties had not intended it to come into existence as yet as a valid and enforceable option exercisable by the plaintiff, although other essential elements had been agreed” (at [19]; our emphasis added).
Imply a term? The Court also found that it was not possible to imply “an alternative machinery of judicial determination” for business efficacy at [22].
The Court stated that there were “other simpler, faster and more efficient machineries available” such as, e.g., “… 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 …” (set out in [21]).
Further, as time was usually of the essence in such situations, the Court held that at [22] it was not “… at all surprised that the parties had chosen and agreed on a fast and easy method to ascertain the quantum for the “prevailing market rate” by way of their mutual agreement. If the “prevailing market rate” was not agreed after negotiations, both parties would simply walk away from the lease renewal and quickly move on.”
The Court also observed that had the phrase “to be mutually agreed upon” been absent, then perhaps the plaintiff’s case would have been more persuasive (at [23]). However, as the said words were present, they had to be interpreted. As such, since the option clause had “unambiguously specified and chosen the “formula” (or the machinery)” for determining the “prevailing market rate”, the Court should not rewrite the clause (at [24]).
Significance. While this decision does not make new law, it is nonetheless an important decision as it deals with a common situation (renewal of leases) and re-iterates the importance of paying close attention to the contractual terms governing the situation.
If your option clause for renewal of a lease specifies that it depends on the parties reaching mutual agreement on the rental for the further lease, and there is no other mechanism specified beyond requiring the parties to reach mutual agreement, you should pay close attention.
This is because your clause may be faced with the same issue as the clause in Radha Properties Pte. Ltd. v Lim Poh Suan & 2 Ors. [2022] SGHC 139: it may be an incomplete option clause that, unless the parties reach agreement on the rental, is void for uncertainty.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.