Second Reading Speech by Minister for Law, Mr K Shanmugam, on the COVID-19 (Temporary Measures) (Amendment) Bill
05 Jun 2020 Posted in Parliamentary speeches and responses
- Mr Speaker, I beg to move, “That the Bill be now read a second time”.
- This Bill comes before Parliament in the midst of very serious challenges faced by us, which Ministers and MPs have spoken about a number of times.
- In my speech, I will:
a. Explain why we need this intervention;
b. Explain the principles behind the Bill; and
c. Set out the key features of the Bill.
- Just under two months ago, I moved an urgent Bill in this House – the COVID-19 (Temporary Measures) Bill, which I will refer to as “COVID 1”.
- COVID 1 was in itself a major intervention.
- In my speech then, I explained why intervention was needed. The economic shock was unprecedented in magnitude (in terms of the impact), and the speed at which this impact was felt.
- I also set out the principles for such intervention. The starting point is always that the sanctity of contract is fundamental. It’s a key aspect of the rule of law, and we do not lightly intervene.
- But sanctity of contract cannot be an absolute.
- I said that intervention is needed when the core interests of our people are at stake, and there is a need to safeguard the fundamental integrity of the economic structure for common good.
- Such intervention has to be reasonable and of generally limited duration.
- In COVID 1, we put in what I called a “legal circuit breaker”. It provided a framework to hold in abeyance the strict enforcement of certain legal rights for a period of time. The objective was to give businesses some cash flow relief, and breathing space to make adjustments.
- For example, if a business tenant is unable to pay rent during the relief period because of COVID-19, the landlord cannot evict the tenant during the relief period. The moratorium runs until 19 October 2020.
- At the time, I emphasised that COVID 1 only deferred contractual obligations. I also explained to this House that the Bill gave businesses breathing space.
- It also gave the Government some time to take in feedback, assess the evolving situation, conduct a deeper analysis, and decide whether more substantive interventions were needed.
(II) Why we are now going further
- For the past two months, we have done precisely that. We monitored feedback, assessed the situation and thought carefully about what else needed to be done.
- And we have decided to intervene in a more substantive way to deal with the issue of rent, and also intervene in some other areas. I will explain why.
- Two months ago, the circuit breaker began. For many – including the businesses most affected by those measures – April now feels like a lifetime away.
- Globally, we were looking then at 1.2 million infections and 67,000 people dead.
- As of 1 June, we are looking at more than 6 million infections and more than 370,000 people dead.
- Various restrictions had already been put in place by then, but the circuit breaker caused a substantial increase in the restrictions.
- What is the situation today? DPM and other Ministers have explained in considerable detail.
- I will just recap two key points.
a. The economic situation and outlook have deteriorated substantially. The Ministry of Trade and Industry is now forecasting a contraction of the economy between 4% to 7%.
b. There is a lot of uncertainty. We are taking a cautious approach in the lifting of the circuit breaker measures.
- Many industries are affected. And for some, the impact has been near catastrophic.
- The latest data from the Department of Statistics, some just released today:
a. F&B sales declined by 23.7% in March 2020. In April 2020, it declined by 53%, on a year-on-year basis.
b. Retail sale (if you exclude supermarkets, hypermarkets and convenience stalls) declined by 13.3% in March 2020, and in April 2020, by nearly 61%.
- These numbers do not even show the full impact of the circuit breaker, because the data for May 2020 is not out yet. We can obviously expect the numbers to be very weak.
- Revenue has fallen but meanwhile fixed costs continue. For many businesses in the F&B and retail sector, two significant components of costs are manpower and rent.
- As regards manpower, the Government, through the various Budgets, provided the Jobs Support Scheme (JSS), waived the Foreign Worker Levy and put in a number of other schemes to help, together with partners like NTUC.
- This Bill seeks to deal with the rental obligations, amongst other things.
- Many landlords have taken a helpful approach and a long-term view. They have shared the burden with their tenants.
- Nevertheless, we received a lot of feedback from struggling SMEs, that they need more time to recover. Many can’t open until Phase 2, and even then only partially.
- Landlords’ concessions have been uneven. Many landlords have rendered substantive assistance, but several others have not.
- The point is that accumulated arrears should be handled fairly.
- One piece of feedback we received was from a tenant who is a mother of two young children. She started a company two years ago, providing enrichment lessons to children. She leased some space for the business as a sub-tenant. She renewed her lease for one year, just before COVID-19 hit. All revenue that came in went back to support the business, including payment of rent, salaries for trainers and other operational costs.
- But from February 2020, parents began to keep students away. Classes have been suspended since March 2020.
- Her landlord has only offered her a 10% discount in rent for April and May 2020.
- COVID-19 is quite an unforeseeable event, both in magnitude and speed of impact, wiping out the hard work that many people had put into their business. So if some landlords insist on payments that tenants cannot afford, tenants will give up. Landlords will then have to take chances, recover something in the insolvency proceedings, together with other creditors.
- Landlords will then also have to find replacement tenants. In this market, it is not realistic.
- Therefore, it is really in everyone’s interests to take a sensible approach, to ensure everyone comes out of this together, ready to recover.
- If you look at a survey by restaurant booking platform Chope: 81% of the respondents said that they would not be able to operate beyond the next six months, based on the cost and revenue that they had during the circuit breaker period.
- After watching all of this carefully, taking in feedback, looking at the numbers that were coming in, we decided that there was a need for more substantive intervention.
- The challenge that rent poses to small businesses is not a problem unique to Singapore. A number of other countries have seen that, and they have intervened.
- I will give the examples of Australia and Germany.
- In Australia, landlords are required to offer rent waivers and deferrals to SME tenants. And SME tenants are allowed to repay the deferred rent over a period of at least 24 months, interest-free.
- In Germany, landlords are not allowed to terminate a tenancy for non-payment of rent. Arrears with accumulated interest can be repaid before 30 June 2022. That means two years of extension.
(III) Principles underpinning the Bill
- Let me now move, Mr Speaker, to the premises underlying this Bill.
- What was necessary in this situation is a fair sharing of obligations, because of the exceptional times that are before us. The fair sharing has got to be between the Government, the landlords and the tenants.
- On the Government’s part, you see four Budgets amounting to almost $93 billion, including 2 months’ rental assistance for retail, F&B tenants, 1 month for office and industrial tenants, as well as broad salary support and other credit easing facilities.
- So if you look at the rest of the burden, what is a fair sharing of the remainder between landlords and tenants? And the related question is, will the market be able to find an equilibrium that reflects the principle of fairness?
- The answer to these two related questions depends on a number of points.
a. First of all, all Singaporeans, including landlords, have a shared interest in seeing our SMEs do well.
b. Second, in a climate like this, expecting market forces to push towards a fair equilibrium is not realistic.
c. Third, what is the alternative if we do not intervene?
- SMEs play, as I say, a critical role in the Singapore economy. In 2019, the 260,000 SMEs in Singapore contributed to 45% of Singapore’s GDP and 72% of our employment in Singapore. If many of our SMEs, for whom a stable cash flow is fundamental, are unable to survive, the domino effect on the rest of the economy will be very substantial. A lot of jobs will be at stake. Our people will suffer.
- And for landlords, their asset value will be affected by the broader economy. There is a correlation between the growth of property prices, and economic growth.
- If our SMEs do well, the economy is given a boost, property owners will continue to enjoy the stable value of their asset. If viable SMEs go under because of temporary cash flow difficulties, and economy as a whole suffers, the value of property will also suffer.
- So the essential point is that everyone has a substantial stake in the viability of the SMEs.
- My final point is to go back to the eligibility criteria. It covers SMEs renting commercial, industrial or office space for the operation of their business, and those with a turnover of not more than $100 million per annum. And where they had a reduction of more than 35% in turnover - a substantial hit - they will get more help.
(IV) Key features of the Bill
- Let me now take Members through the key features of the Bill.
- The Bill has three key aspects.
- First, landlords will be required to ensure that the benefits of the Government’s assistance are given to the actual intended beneficiaries, i.e. the SME tenants operating in rented premises. This will include licensees.
- Second, landlords themselves will be required to provide a further waiver of up to 2 months’ rent to SME tenants.
- And third, SMEs who qualify for the rental waiver will also be given time to repay some of their remaining rental arrears, and at an interest rate that will be capped.
- As I said earlier, most of these reliefs apply to SME tenants, including sub-tenants and licensees.
- The rental relief framework will also apply to eligible Non-Profit Organisations and eligible tenants of Government properties.
Ensuring that Government assistance reaches the intended beneficiaries
- DPM announced property tax rebates from the Resilience and Unity Budgets.
- Government will be providing approximately 2 months of rental assistance for eligible SME tenants of qualifying commercial properties, and approximately 1 month of rental assistance for eligible SME tenants of other non-residential properties, basically industrial and office properties.
- This will be done through rental waivers granted by landlords.
- Agencies are working out the details, which will give landlords clarity on the relief that they are required to offer, and give tenants clarity on the relief that they will get.
- This will be set out in subsidiary legislation.
Additional relief for SMEs who are significantly impacted by COVID-19
- The Bill will require landlords to match what the Government is doing. They will be required to grant qualifying SME commercial tenants an additional waiver of 2 months’ rental or base rent, and qualifying SME industrial and office tenants an additional 1 month’s waiver of base rent.
- This additional relief will apply to SME tenants who have suffered at least a 35% drop in average monthly revenue in April and May 2020 compared to the same period in 2019. This will be calculated at the rental unit/outlet level.
- Tenants must have entered into the tenancy before 25 March 2020, or extended such a tenancy before 25 March 2020, to get this relief.
- There are smaller landlords who may face genuine hardship. For example, retirees who have purchased a small commercial property, and the rental yield from that property forms a very large proportion of their income.
- For this group, they may seek an assessment on the grounds of financial hardship. The assessment will take into consideration the annual value of the landlord’s properties, and whether rental income forms a substantial part of his or her total income.
- Qualifying landlords will only be required to give half of the additional rental waivers.
- We will set out the criteria for landlords to qualify for this, in subsidiary legislation.
Some implementation details
- During our consultations, stakeholders have asked for clarity on a few matters. Landlords wanted more clarity on when their obligations will be triggered. Tenants wanted clarity on when they will be entitled to the relief.
- For the landlords, their obligations will be triggered when IRAS issues the notice of the cash grant or nominal notice to eligible property owners. IRAS will provide more details of the cash grant on its website, once it works the details out.
- We want to preserve the status quo. The Bill provides for a moratorium on enforcement action for non-payment of rent, in the time between the Act coming into force, and the triggering of the landlords’ obligations.
- Even before the Act comes into force, tenants who are unable to pay their rent, and require protection from eviction, can serve a Notification for Relief under COVID 1, as it exists today.
- Second, we understand, recognise that many landlords may have already given relief, and this could have been in the form of rental waivers or rebates. These landlords will be able to set off the equivalent value against the amount of waiver that they are required to give under the Bill.
- The kinds of reliefs that landlords have given and which can be taken into account for this purpose - this will be set out in subsidiary legislation.
- Third, what if the tenant has already paid the rent for the months in which relief is meant to be granted? In such a situation, the landlord will be required to credit any amounts already paid, to the tenant. This may be in the form of a waiver being applied in the next month of rent that is due. If the lease is coming to an end, the landlord will have to provide a refund to the eligible tenant.
- Fourth, MAS has separately announced some additional relief from banks and finance companies, in relation to the landlords’ existing loan repayment obligations.
- Individual landlords who have been required to provide relief to their tenants under this Bill can apply to defer payments of both principal and interest on their commercial and industrial property loans till the end of the year.
- So, moratorium was given until October for tenants; landlords will get assistance by applying for an extension of loan tenure by up to the corresponding deferment period, to make the monthly instalments more manageable when they resume regular payments.
- SME landlords who face financial difficulties can already apply to defer the principal repayments on their mortgages, under the industry relief package that MAS announced some weeks ago.
- Larger landlords can likewise work with their banks and finance companies if they require assistance.
- Those who need to access additional credit to meet their immediate cash flow needs can either apply for mortgage equity withdrawal loans, or loans under ESG’s Temporary Bridging Loan Programme or Working Capital Loan Scheme.
Scheme of repayment
- SME tenants who are eligible for the additional relief described above can also get relief under the third plank of the Bill.
- They will be allowed to defer payment of part of the rental arrears accrued from 1 February until 19 October 2020. They will have to start repaying the arrears from November 2020.
- These arrears of course do not include, for example, the 4 months which have been waived – they are no longer payable.
- Tenants can elect to repay their rental arrears in equal instalments, with payment of the first instalment to start no later than November 2020. And that can be done over the duration of the remaining term of their tenancy, up to a maximum of 9 months, with interest capped at 3% per annum. If the tenancy is shorter, then it has got to be paid during the term of the tenancy.
- For commercial properties, the maximum amount of arrears that can be paid in instalments will be 5 months’ base rent. For industrial and office properties, the maximum amount of arrears that can be paid in instalments will be 4 months’ base rent.
- This means that landlords take some credit risk.
- As a safeguard, we will provide that all outstanding arrears (including interest and other charges) will be accelerated and immediately payable in accordance with the terms of the original contract, if:
a. Instalment payments under the scheme are not paid within the prescribed time after they become due;
b. The tenant terminates or repudiates his lease agreement during the rescheduled repayment period; or
c. The lease agreement is terminated due to other defaults by the tenant.
- Landlords may also draw the existing security deposits to offset accumulated rental arrears during the repayment period. They may do so until there is the equivalent of at least one month’s rent remaining in the security deposit. At the end of the repayment period, the tenant will be obliged to reinstate the full amount of the security deposit as provided in the contract.
- In addition, we will require tenants who have rescheduled the payment of arrears to provide specified documents and information to their landlords if
a. The lease agreement is terminated or repudiated during the repayment period; and
b. There are two or more rescheduled repayment instalments outstanding.
- The documents and information to be provided will include filing a statutory declaration on their statement of accounts from April 2020 until the termination or repudiation of the licence. And the tenant will also be required to set out how he proposes to repay the outstanding rental arrears.
- This will ensure transparency and accountability, but only in respect of tenants who terminate and have at least two months of repayments outstanding.
- If, of course, any fraudulent behaviour is revealed – for example, if the tenant was using the period of relief to fraudulently dissipate assets – there could be criminal sanctions.
- Tenants will be expected to negotiate, in good faith, the terms of repayment. Any court, when deciding whether the conduct is criminal, will likely take into account the totality of the conduct.
- We have also heard concerns from REITs about potential constraints on their operating income and cash flow. REITs are concerned that they may be liable for additional tax and that their ability to meet financial covenants in bank loan agreements could be affected.
- They also worry that this could have a knock-on impact on S-REIT investors and the S-REIT industry as a whole. We discussed this matter carefully with MOF, IRAS, MAS, the banks.
- MOF and IRAS have temporarily extended timelines for the distribution of taxable income by S-REITs, to qualify for tax transparency treatment. The leverage limits for S-REITs have also been increased from 45% to 50%. This will give S-REITs more flexibility to manage their cash flows and prevent them from incurring additional tax expenses.
- Corporate landlords, which include S-REITs, can also approach their banks or finance companies to explore funding if they face cash flow issues.
- Banks have also assured MAS that there will be no automatic enforcement of loan covenant breaches for landlords impacted by the requirements under this Bill.
Relief for tenants who are unable to vacate their premises
- Besides cash flow difficulties, what’s been happening in the industry is that people face difficulties in a variety of other ways.
- For example, if you take tenants whose tenancies have expired, or were expiring.
- During the circuit breaker period, they had difficulties moving out because they were not allowed to go back to the office or shop to pack up, or they could not find movers, or they were delayed because they could not find workers to carry out the work, to put the place back to the original condition.
- In such cases, it would be unfair for the tenant to have to pay double rent or similar charges under the contract or the law.
- The Bill allows us to deal with these situations, through subsidiary legislation.
- We will provide that a tenant who cannot vacate the premises due to COVID-19 may serve a Notification for Relief (NFR) under the COVID-19 (Temporary Measures) Act. And the tenant will be protected from enforcement.
- In addition, the tenant will not be liable for double rent.
- In some situations, it might be fair for the tenant to pay some amount, especially if the tenant continued to derive benefit from the premises. We will prescribe the circumstances and how that amount can be assessed.
Relief for delay in construction-related or supply-related contracts
- Finally, we have also received feedback that stoppage of construction work has led to difficulties. There are also difficulties with supply-related contracts. These difficulties have also affected contracting parties, who may not themselves be parties to the construction or supply contract.
- For example, a developer who has entered into a contract to fit out an office may be unable to do so within the timeline stipulated in the contract because of COVID-19 restrictions on construction work.
- That would expose the developer to liquidated damages for failure to deliver the fitted out office on time, through no fault of the developer.
- The second example: the tenant has entered into a tenancy agreement which provides for a 3-month rent-free period for the purposes of renovation and fitting out. But they are unable to proceed with construction works due to COVID-19 restrictions, effectively losing the benefit of the rent-free period entirely.
- Or a third example, Company A rented scaffolding material from Company B, until mid April, for a project. But circuit breaker kicked in on 7 April, Company A could not return the scaffolding material to company B because of circuit breaker, and Company B says, “No, I’m going to charge you for an additional month of hiring fee.”
- In these cases, the affected parties are not parties to the construction contract itself. But they are parties to contracts that are nevertheless affected by stoppage in construction work or other circuit breaker measures.
- The Bill therefore provides a mechanism for parties in some of these contracts, to seek relief.
- They will be allowed to apply to an Assessor, who may then make a determination to either adjust the manner in which the prescribed obligations are to be performed, or vary a prescribed term in a contract, in order to achieve a just and equitable outcome.
- The precise scope of contracts, the obligations to be covered, and the kinds of adjustments that Assessors may make, will be set out with more clarity in subsidiary legislation.
- A similar approach will be taken for supply-related contracts.
(V) Other amendments
- Let me quickly touch on some of the other amendments.
- COVID 1 was passed and came into force in April this year.
- As of 1 June, we have had more than 4,000 Notifications for Relief, and about 500 Applications for determinations have been filed.
- During this period, we have observed that the operation of the Act has been effective. The fact that out of the 4,000 notifications, only slightly more than 10% have come forward, suggests that most of the others have managed to settle it. And because of the clarity of the previous Act, our understanding is that a lot of people have managed to deal with their issues along the lines provided for in the legislation, without even having to file an NFR.
- We have been talking to the Assessors to get feedback on how it’s working. So we are making some clarificatory amendments, for example, that information and matters disclosed in the course of proceedings before an Assessor are to be kept confidential.
Cap on late payment interest
- For late payments, payment arrears and interest that accumulate during the relief period under COVID 1, we will put a cap on how much late payment interest there can be.
- The cap will not apply to secured loan facilities given to SMEs, as well as hire purchase agreements taken out with banks and finance companies.
- MAS has worked with the banks and finance companies on various relief measures to support individuals and businesses affected by COVID-19. These measures include principal repayment deferments for SME secured loans and hire purchase agreements.
- Borrowers can also extend their loan tenure to spread out their loan repayments over a longer period.
- Banks and finance companies will also take into account their borrowers’ repayment ability after the relief period and adjust repayment plans if necessary.
- Mr Speaker Sir, let me now conclude.
- The reliefs contained in this Bill will have substantial impact.
- All in all, up to about 260,000 SMEs may benefit from this assistance. There are an estimated 31,000 SMEs in the F&B and retail sectors, and their employees will benefit from the additional relief that is being granted.
- We are moving this Bill to help our SMEs. We hope that businesses will be able to make good use of easing of the pressure to focus on transforming and levelling up, to thrive in our new operating environment.
- And there are, of course, a large number of office and industrial tenants who will also benefit.
- While it’s unusual, let me conclude by saying a little bit about the process for preparing this Bill, which runs into about 40 pages or so.
- At first sight it looks simple enough, 2 months plus 2 months.
- But it is actually quite complex.
- Just to take one point. How do you pass down the waiver of rental relief through three or four layers? There are three or four layers of intermediate landlords. What happens if one of them is a non-SME? And multiple questions of that sort.
- When does it take effect? When will the landlords give the relief and to whom? How do you handle the moratorium, and the best balance between the different interests.
- And the aspects relating to smaller landlords, REITs, types of tenants who should qualify.
- And of course the other types of contracts that should be dealt with, in a myriad of situations.
- It was a significant effort to conceptualise, crystallise, get the feedback from the different stakeholders, take in the feedback, and then draft the legislation in about 3 weeks.
- We really saw the best of Public Service: how the different agencies came together and worked round the clock.
- MTI and ESG gave us the data, which allowed us to work out where the balance ought to be, who should qualify. They attended all our meetings, including stakeholder meetings, helped to tweak our proposals, and also worked their own loan schemes and identified for us how the loan schemes can help.
- MAS played a crucial role in reassuring the REITs as well as the landlords, and talking to the banks. And they also attended all meetings, including stakeholder meetings.
- IRAS, MCCY, MHA, MND, HDB, JTC, MOF. If I can say this, all roads lead to MOF, and all roads lead from MOF as well. They attended all our meetings, were very supportive, facilitated, and agreed to pay for the Bill.
- The private sector lawyers, Patrick Ang and Sushil Nair. I mentioned them during COVID 1. They did a lot of work here as well.
- Committee Members - I will put it as part of the record of my speech, without having to mention all of them. The different stakeholders did very well. (Click here for committee members)
- MinLaw - If I can put a note down for the exceptional team in MinLaw. They put their heart and soul into this. Led by the PS & DS, a team of highly motivated and talented young officers worked round the clock.
- Justice Kannan Ramesh - his valuable expertise was very useful for us.
- And finally AGC, the 3 lawyers - Lee Chuan Huei, Hema Subramanian and Leong Kit Yu, who worked until 5am regularly, the entire two weeks.
- This legislation could not have been drafted in most places in 3 weeks. Let alone conceptualise, crystallise and draft.
- Led by our Attorney-General, Mr Lucien Wong, I said some things about him during COVID 1 Second Reading. I was trying to be understated. I think it helped tremendously that we had one of the best corporate lawyers in the world helping us from day one, word for word, conceptualising it, checking every word.
- I think Singapore is extremely fortunate to have him in Public Service, checking everything and making sure that it works again, working into the early morning hours every day.
- AGs don’t do that in most places. But it gave me a lot of confidence that he was doing that.
- So in this Bill, preparing it, we saw the best of Public Service at work – coming together, working for the benefit of the broader public.
- I wish to thank them, and put on record their contributions.
- Thank you Sir.
Last updated on 05 Jun 2020