The bane of redevelopment break clauses in office leases. What can tenants do to deal with them?

One of the most contentious and increasingly common clauses in modern commercial property leases in Singapore, is the landlord’s right to pre-terminate the lease, in the event they decide to redevelop the building. This clause has crept into the majority of leases over the last 3-5 years, so much so that even brand new buildings seem to have them in their leases. Such clauses are a major bone of contention for tenants in lease negotiations and it is essential that tenants are prepared.

For many, the rationale of redeveloping a relatively new office building doesn’t make sense, but institutions these days insist on keeping their options open. Say for instance the owner wanted to sell their building to a developer who wishes the convert the building into a hotel or for residential use – age is not an issue. This is just one possible scenario, but there have been no examples of this in Singapore for newer buildings.

Tower Fifteen at 15 Hoe Chiang Road, Tanjong Pagar is one example where a building was decanted of all tenants by the owner The Fragrance Group to make way for a conversion, but that building is over 27 years old. In Q4 2019 all remaining tenants were served eviction notices to leave by end of Q1 2020 after The Fragrance Group secured planning permission to convert the entire building into a hotel.

How do tenants deal with these clauses? The risk can be huge because the landlord will not be removing such clauses. The vast majority of office space is leased in bare shell condition and fitting out costs can be substantial, ranging from $75 to $150+ per sq ft. A tenant could be staring down the barrel of a multi-million dollar loss, if evicted after just a few years of fitting out a brand new unit.

The answer is not simple. One should take into account the likelihood of the building being redeveloped. For example, consider the age of the building, the occupancy rate of the building and the upside for any owner to redevelop e.g. has there been any substantial increase in plot ratio recently. The latter applies particularly to many buildings in Tanjong Pagar with the Southern Corridor Incentive changing such ratios bringing buildings such as Fuji Xerox Towers and 78 Shenton Way into ‘play’.

In some cases, where the landlord definitely has no plans for redevelopment in the foreseeable future, an agreement can be reached by way of an addendum/side letter, stipulating the clause will not be invoked within the first term of the lease. For 5 year leases this is reasonable; for a 3 year lease, this could still be tricky. The clause itself however will not be taken out of the lease, whatever the side agreement.

Some tenants see this as a golden opportunity to secure office space at a ‘knock down rate’ because many prospective tenants will be put off by such risk. However, they still need to mitigate those risks themselves. The answer is both simple and difficult at the same time. The simple way to mitigate those risks is to take over a fully fitted unit, where the previous tenant has already vacated. There is usually no takeover fee for the fixtures and fittings because the earlier occupier is long gone and furniture is always re-useable.

The difficulty is that finding such fitted units is not easy. 78 Shenton Way is probably one of the best examples of a building with a question mark over its future redevelopment, yet it still managed to lease out a significant number of units. Guess what – nearly all of them were already fitted.

The watch word to all tenants is be ready for such clauses, as they are in so many leases, and to use a professional agent such as Corporate Locations to help you navigate around these difficult terms and conditions.

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