Knowledge Highlights 12 November 2020
On 3 November 2020, Parliament passed the Covid-19 (Temporary Measures) (Amendment No. 3) Bill (“Bill”) to help businesses that have been significantly impacted by Covid-19 renegotiate selected types of contracts with their counterparties. This new measure, called the Re-align Framework (“Framework”), will be implemented by way of a new Part 10 in the Covid-19 (Temporary Measures) Act 2020 (“Act”).
In a press release issued on 2 November 2020, the Ministry of Law (“MinLaw”) stated that as the assumptions upon which businesses entered their contracts before Covid-19 have fundamentally changed, they may need to review their contractual obligations. However, some businesses, especially smaller and micro enterprises, may be deterred from renegotiating or exiting their contracts by the sizable penalties or damages they may incur.
The new Part 10 of the Act therefore seeks to provide a simple and targeted legislative framework to enable these businesses to renegotiate or subsequently terminate specified types of contracts with their counterparties. This allows businesses to re-align quickly in a just and fair manner and move forward in a business environment vastly changed by Covid-19.
Besides the introduction of the Framework, the Bill contains changes to the temporary measures concerning the remission of property tax under Part 6 of the Act. In addition, the Bill introduces additional relief measures to support stakeholders in the built environment sector affected by disruptions to constructions timelines caused by the Covid-19, as covered in our article titled “Covid-19 (Temporary Measures) Act 2020: Statutory extensions of time and cost sharing to provide further support for stakeholders in the built environment sector”.
The Framework is targeted at smaller and micro enterprises whose business outlook has been severely impacted by Covid-19 even after economic and social activities have resumed. Eligible businesses will be identified using two criteria:
- First, they will be subject to an annual revenue cap. This criterion will cover most enterprises in Singapore.
- Second, they must have experienced a significant fall in revenue across a comparable timeframe pre-Covid-19. This will identify businesses which have been severely impacted even after the resumption of economic and social activities.
MinLaw is in consultation with industry on these criteria and aims to find a threshold that helps smaller and micro enterprises and at the same time covers a broad enough spectrum. Finalised details will be set out later in subsidiary legislation.
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 five categories (“Scheduled Contracts”), which are likely to have substantial obligations that may need renegotiation or restructuring:
- 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
- contracts for sale and purchase of services.
Certain contracts will be excluded from the Framework, even if they fall within the list of Scheduled Contracts (“Excluded Contracts”). These include consumer contracts, employment contracts, insurance contracts, financial services contracts, construction and supply contracts, and contracts affecting essential services and national interests. The list of Excluded Contracts is in Annex A of the press release.
Process for renegotiation and termination of Scheduled Contracts
Under the Framework, a contractual party who wishes to renegotiate or terminate a contract must serve a notice on the other party or parties to the contract.
Parties will be required to enter into renegotiations with the counterparty. If they are unable to successfully renegotiate, contracts may be terminated. To encourage these arrangements to take place quickly, these measures will only be available for a limited period from the time of commencement. Limiting the time period to seek relief provides greater certainty to counterparties.
Where there are disagreements on a party’s eligibility or the liabilities payable upon termination, parties may serve a notice to have an independent Assessor make a determination on these issues.
- Additional compensation to small landlords for early termination: The Framework will seek to mitigate hardship that smaller landlords in financial hardship might face arising from the termination of the contract, similar to the Rental Relief Framework. The tenant will have to pay to an eligible small landlord additional compensation for early termination of the lease or licence agreement that is to be determined by an Assessor. MinLaw intends to set out the details in subsidiary legislation.
- Choice to pay arrears by instalment for hirers and renters of commercial equipment: As an alternative to contract termination, eligible hirers and renters of commercial equipment and vehicles will have the option to take up a Repayment Scheme to pay outstanding arrears in instalments. This is in recognition of feedback from some hirers and renters that while they have been substantially affected by Covid-19, they do not wish to terminate their agreements, as that would mean they have to return the equipment or vehicles and lose their source of income. Details of the Repayment Scheme are as follows:
- Eligibility: Businesses and individuals that meet the eligibility criteria for the Framework, and who are party to a hire-purchase or rental agreement for commercial equipment or vehicles. A party who chooses to take up the Repayment Scheme cannot make use of the renegotiation or termination reliefs under the Framework, and vice versa.
- Period of arrears covered: 1 February 2020 to the date before the service of the Notice of Revision.
- Period of repayment: Up to a maximum of 18 months. This period of repayment may extend beyond the existing period provided in the contract for repayment.
- Instalment amount: Equal monthly instalments over the period of repayment.
- Applicable interest rate: Capped at 5% per annum, or the contractual interest rate, whichever is lower.
- Date of first instalment payment: Must be paid within one month after the period of six weeks after the Bill comes into force.
- Application procedure: The eligible hirer or renter must serve a Notice of Revision on all parties to the contract and all interested parties within six weeks after the Bill comes into force.
MinLaw intends to set out further details in subsidiary legislation.
Other support measures
In view of the impact that Covid-19 has had on businesses, MinLaw is also introducing a Simplified Insolvency Programme under the Insolvency, Restructuring and Dissolution (Amendment) Bill to assist micro and small companies that require support to restructure their debts to rehabilitate the business, or to wind up the company as the business has ceased to be viable. Application details will be announced in due course. For more information on the Simplified Insolvency Programme, please refer to our article titled “Bill introduced to amend Insolvency, Restructuring and Dissolution Act 2018 to establish Simplified Insolvency Programme amid Covid-19”.
Remission of property tax
The Bill also introduces changes relating to temporary measures concerning the remission of property tax under Part 6 of the Act. Under the Bill, the Minister for Finance may make new or revised regulations so as to ensure that the obligation to pass on the benefit of the Property Tax Rebate will take into account the rent waived under the Rental Relief Framework. The amendment is intended to prevent unintended consequences, such as when there is a change of tenants during the year and the property owner is subject to the Rental Relief Framework.
- Covid-19 (Temporary Measures) (Amendment No. 3) Bill
- Press release: Re-align framework to renegotiate contracts for businesses significantly impacted by Covid-19
- Annex A: List of excluded contracts
- Annex B: Repayment Scheme for arrears under hire-purchase agreements and rental agreements for commercial equipment and vehicles
- Second reading speech by Second Minister for Finance Lawrence Wong on Covid-19 (Temporary Measures) (Amendment No. 3) Bill
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.