Knowledge Highlights 17 December 2020
On 10 December 2020, the Ministry of Law (“MinLaw”) announced that small and micro businesses that have been significantly impacted by Covid-19 and wish to renegotiate selected types of contracts with their counterparties can do so under the Re-align Framework (“Framework”) from 15 January 2021.
Under the Framework, businesses that wish to renegotiate certain types of business-to-business contracts must serve a notice of negotiation (“Notice of Negotiation”) on the other party or parties to the contract (“Other Party”), between 15 January 2021 and 26 February 2021. The parties will then have four weeks to renegotiate the terms of the contract. If negotiations are unsuccessful and the parties are unable to come to a mutual agreement, the contract will be terminated on just and fair terms in accordance with the Framework.
The Framework complements a range of Government support measures to help businesses and the economy tide through this exceptional period, such as the Jobs Support Scheme and Rental Relief Framework. Together with existing legal remedies and other Covid-19 reliefs, as well as the upcoming Simplified Insolvency Programme, the Framework will help release businesses from non-performing and unproductive endeavours more efficiently. This will allow the economy to unlock assets and resources more quickly and be better repositioned for recovery.
1. Eligibility criteria
A business will be eligible for the Framework if:
- its annual revenue for the financial year 2019 does not exceed S$30 million on a global group basis; and
- it has experienced at least a 70% fall in monthly average gross income for July to December 2020, compared to July to December 2019.
Eligible types of contracts
The Framework is designed to cover key business-to-business contracts, and will only apply to a contract that:
- is governed by Singapore law;
- was entered into before 25 March 2020;
- has at least one party who has a place of business in Singapore; and
- falls within the following categories (“Scheduled Contracts”), which are likely to have substantial obligations that may need renegotiation:
- leases or licences for non-residential immovable property;
- hire-purchase and conditional sales agreements for commercial equipment or commercial vehicles (except agreements entered into with banks and finance companies regulated by the Monetary Authority of Singapore);
- rental agreements for commercial equipment or commercial vehicles;
- contracts for sale and purchase of goods and services.
Certain contracts will be excluded from the Framework even if they fall within the list of Scheduled Contracts. These include consumer contracts, employment contracts, insurance contracts, and construction and supply contracts.
2. Renegotiation process
Service of Notice of Negotiation
A business that seeks to invoke the Framework (“Affected Business”) must serve a Notice of Negotiation on the Other Party and other interested parties to the contract (e.g. guarantor, surety or assignee), at any time between 15 January 2021 and 26 February 2021. The Affected Business must use the designated forms and submit relevant supporting documents proving its eligibility under the Framework, including financial statements.
Four-week negotiation period
The Affected Business and the Other Party will have a four-week period after the date of the Notice of Negotiation to renegotiate the terms of the contract (“Negotiation Period”). If negotiations are successful, the parties will proceed with the amended contract, or terminate the contract on mutually agreed terms.
Two-week objection period
The following process applies if the parties are unable to successfully renegotiate and come to a mutual agreement within the Negotiation Period:
- If the Other Party objects to the Affected Business’s eligibility under the Framework, it may object to the Notice of Negotiation by lodging a notice of objection (“Notice of Objection”) with the Registrar of assessors (“Registrar”) within two weeks after the Negotiation Period ends (“Objection Period”), and serving a copy of the same on the Affected Business and other interested parties to the contract (e.g. guarantor, surety or assignee). An independent assessor appointed by MinLaw will make a determination on the Affected Business’s eligibility and the parties’ obligations upon termination. Until the determination is issued, there is no termination and the contract and its corresponding obligations will continue to run.
- If the Other Party does not lodge and serve a Notice of Objection within the two-week Objection Period, the contract will be deemed terminated two days after the Objection Period ends.
3. Terminated contracts
If a contract is terminated under the Framework, a set of default just and fair terms will apply. Generally, the Affected Business will not be liable for future obligations after the date of termination, subject to specific exceptions. However, accrued obligations up to the date of termination remain payable and enforceable.
Parties who are of the view that the default terms of termination should not apply or should be adjusted to better fit their particular circumstances, and who cannot first reach an agreement amongst themselves, may, within two weeks after the end of the Objection Period, lodge a notice for adjustment to request that an assessor make a determination.
All assessors’ determinations are binding and not appealable. Although parties may seek legal advice, legal representation will not be allowed in the course of the determinations.
4. Coverage of contracts terminated on or after 2 November 2020
The Framework will not apply to any contract which has been terminated before 2 November 2020.
However, where a contract is terminated on or after 2 November 2020 under any other laws or under the terms of the contract, and the eligible business subsequently serves a Notice of Negotiation, the terms of termination under the Framework will apply.
5. Landlord hardship relief
Small landlords who might face financial hardship arising from the termination of the lease or licence agreement may lodge with the Registrar and serve on their tenants a notice for compensation within two weeks after the Negotiation Period ends.
Such landlords will receive compensation in the event of an early lease termination by a tenant under the Framework. The amount of the compensation will be determined by an assessor.
To qualify, a landlord must meet all the following requirements:
- He is an individual, a sole proprietor, or a holding company of individual(s) and/or sole proprietor(s).
- The individual or sole proprietor depends on rent for a significant portion of his income, such that the average monthly rental income from the property is more than 50% of his monthly average income.
- The individual’s or sole proprietor’s annual individual income does not exceed S$107,500.
6. Repayment Scheme for hirers and renters of commercial equipment
Hirers and renters of commercial equipment or vehicles whose revenues have fallen by 70% or more will struggle to pay the arrears and meet regular payments in accordance with original terms of the contract. Such businesses who are eligible for the Framework will be given the option to take up the Repayment Scheme, which is an instalment plan that allows them to pay their accrued arrears within 18 months.
They must serve a notice of revision, using the designated forms, on all parties to the contract and all interested parties (e.g. guarantor, surety or assignee in relation to the hirer / renter’s obligations under the contract) within the same six-week period starting 15 January 2021 and ending 26 February 2021.
The following materials are available from the MinLaw website www.mlaw.gov.sg:
- MinLaw press release
- Annex A - Contracts covered/excluded from Re-Align Framework
- Annex B - Process of Renegotiation
- Annex C - Terms of Contract Termination
- MinLaw Re-Align Framework webpage
In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at email@example.com.