What happened to the Option To Renew Clause?

Earlier today, an interesting article popped into our Inbox.

It was about Fullerton Waterboat House Tenant going to court, in order to continue staying and operating there.

F&B company Galeno which runs 1919 Waterboat House as well as The Rooftop Bar is seeking High Court order to compel Landlord (Precious Land) to extend their lease and the bar’s license for two more years, based on Option To Renew (OTR) clauses.

Parties in this case

  • Landlord (LL) – Precious Land
  • LL Lawyer – Ivan Ng
  • Tenant (TT) – Galeno
  • TT Lawyer – Nicole Chee and Noel Geno-Oehlers

A quick story break-down

TT lawyer says LL breached agreement by NOT offering Option to Renew, and claimed LL openly marketing to other prospective TTs.

LL lawyer – “will vigorously defend all unfair allegations made”.

Last month, LL sent letter to TT, demanding it vacate premises by 5th Aug, 4pm. Letter indicated a 7-month extension in June based on earlier discussions. Final versions of new agreements were presented to TT earlier last month but TT did not accept. All negotiations terminated after 20th July deadline.

LL also gave notice of “re-entry rights” and “entitlement to double the rents payable”.

What is the Option To Renew?

In almost all Lease (Tenancy Agreements), there is a section which states that the Tenant shall have the Option To Renew the Lease for a further fixed period.

In order to enjoy this Option to Renew, the Tenant must properly fulfill its obligations (e.g. pay rent on time, proper upkeep of property, no disturbance, etc).

From what we understand, the original intention of having such a clause was mainly to allow for easier paperwork and negotiation between LL and TT.

Since majority of the “Terms and Conditions” would have already been ironed out before the first term of Tenancy, an Option To Renew allows both parties to seamlessly transition into a Renewal Contract, without any changes to the original Tenancy Agreement, EXCEPT for lease period and exclusion of this Option To Renew.

Times have changed

As the market conditions changed, LL and TT have different bargaining powers. What we have observed over the years are changes to phrases in “Minor Repairs”, “Diplomatic Clause”, “Option To Renew”, “Security Deposit”, etc.

Option To Renew has become “somewhat” of a negotiating tool, rather than a real benefit offered by the Landlord to the Tenant.

Remember — the Option To Renew is one of the Terms that will be presented in Letter of Intent (proposed by Tenant to Landlord).

This Clause has been modified from a simple format such as;

“The Landlord will on the written request of the Tenant made not less than two (2) calendar months before the expiration of the tenancy hereby created and if there shall not at the time of such request be any existing breach or non┬Čobservance of any of the agreements and stipulations on the part of the Tenant grant to the Tenant a tenancy of the Premises for a further term of one (1) year from the expiration of the tenancy hereby created”

>> to also include phrases such as;

“rental shall be at the current market value which shall be that as agreed to by the parties”

>> and also add on something along the line of

“in the event of failure to reach an agreement as to the market rate, an independent valuer agreed upon by the tenant and landlord will be used to decide this”

With inclusion of such terms for “rent to be re-negotiated”, the OTR clause has proven to be less useful for Tenants. They no longer get to enjoy a confirmed rent value if they wish to continue their stay in the property. This essentially also means a “re-negotiation” of dollar value (the most critical component of any contract).

Very often, we see such negotiations in rent value affect other Clauses in the original Tenancy Agreement, such as minor repairs, diplomatic clause, or even air-con servicing, etc.

Many Tenants are of the opinion that even with such Option To Renew Clauses, they will still enjoy “first right of refusal” for the property they are living in.

Urm … well, yes (sort of), if the new rent and terms can be easily agreed upon and way before end of lease term, and if you encounter nice people.

Otherwise, the Landlord will usually request their Property Agents to commence viewing for new Tenants, and that means more potential competition for the property, which could translate to higher rent, especially for good properties or during low supply periods.

Here is another Case Study related to the use of “Option To Renew” that is worth reading

AREIF (Singapore I) Pte Ltd v NTUC Fairprice Co-operative Ltd [2015] via http://www.singaporelawblog.sg/blog/article/97

The Tenancy Agreement listed out the conditions (steps to be taken and deadlines) which the Tenant (NTUC) needed to undertake to properly renew the Tenancy.

Lastly, please do not think the Tenancy is automatically renewed just because monthly rent payments have been accepted by the Landlord (see link below).

http://www.asiaone.com/business/landlord-wins-non-lease-renewal-case


Here’s a form for you if you are looking to Buy, Sell or Rent a property in Singapore.

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