HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 27 August 2012
• Neutral Citation: [2012] SGCA 48
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 108 of 2011
• Year: 2012
• Published date: 29 August 2012
• Hearing Date: 29 February 2012
• Plaintiff Counsel: Alvin Yeo SC, Sim Bock Eng, Tan Mei Yen, Lawrence Foo and Lim Shiqi (WongPartnership LLP)
• Defendant Counsel: Cavinder Bull SC, Gerui Lim, Adam Maniam (Drew & Napier LLC)
• Citation: [2012] SGCA 48

V K Rajah JA (delivering the judgment of the court): Introduction

Is a contractual clause directing the parties to in “good faith endeavour to agree” valid in law? If valid, what might be its legal content? Are there any legal consequences if such a clause is breached? Is an expert or adjudicator obliged, before accepting appointment, to inform all parties involved in the appointment process of any prior relationship with any appointer that might be viewed as compromising his impartiality? These are some of the interesting issues discussed in this judgment. This appeal involves a dispute between the appellant landlord, HSBC Institutional Trust Services (Singapore) Limited (“the Appellant”), and the respondent tenant, Toshin Development Singapore Pte Ltd (“the Respondent”), over a contractual rent review mechanism in the lease agreement between them (“the Lease Agreement”). The rent review mechanism in question (“the Rent Review Mechanism”) provided that the rent for each new rental term after the first rental term was to be determined by agreement between the Appellant and the Respondent (collectively, “the Parties”), or, failing agreement, by “three international firms of licensed valuers”¹ appointed either jointly by the Parties or by the President (or other designated officer) of the Singapore Institute of Surveyors and Valuers (“the SISV”).

Between July 2010 and early 2011, the Respondent, without notifying the Appellant, unilaterally approached all eight “international firms of licensed valuers”² present in Singapore – namely, CB Richard Ellis (Pte) Ltd (“CBRE”), Chesterton Suntec International Pte Ltd (“Chesterton”), Colliers International Consultancy & Valuation (S) Pte Ltd (“Colliers”), Cushman & Wakefield, DTZ Debenham Tie Leung (SEA) Pte Ltd (“DTZ”), Knight Frank Pte Ltd (“Knight Frank”), Jones Lang LaSalle (“JLL”) and Savills (Singapore) Pte Ltd (“Savills”) – to prepare valuation reports on the market rental value of the demised premises (“the Demised Premises”) as at 8 June 2010 (the sole exception in this regard was JLL, which was tasked to prepare a valuation report as at 31 December 2010). It should be noted that the date 8 June 2010 was exactly one year before the commencement date of the next new rental term, viz, 8 June 2011. The Respondent subsequently engaged the seven firms which agreed to prepare the requested valuation reports. These seven firms (collectively referred to hereafter as “the seven 2010 Valuers” for convenience, even though not all of them were actually engaged by the Respondent in 2010) were the eight firms just mentioned minus Savills, which declined to act for the Respondent The Appellant was dismayed when it discovered what had transpired. It claimed that the Rent Review Mechanism had been rendered inoperable by the Respondent’s actions and commenced Originating Summons No 376 of 2011 (“OS 376”) seeking a declaration to this effect.

The High Court judge who heard OS 376 (“the Judge”) concluded that the Rent Review Mechanism remained operable and dismissed the Appellant’s application (see HSBC Institutional Trust Services (Singapore) Ltd, (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd [2012] SGHC 8 (“the GD”)). This is the Appellant’s appeal against that decision.

The facts

The Appellant is the trustee of Starhill Global Real Estate Investment Trust, which is in turn managed by YTL Starhill Global REIT Management Limited. The Demised Premises consist of six floors of Ngee Ann City (namely, Basement 2 to Level 4), which are all part of the shopping centre managed by the Respondent.

The lease granted by the Appellant to the Respondent is for a 20-year term expiring on 7 June 2013, with the Respondent possessing an option to renew the lease for a further 12 years. This 20-year term is divided into rental terms of successive three-year periods, except for the last rental term, which is for the two-year period from 8 June 2011 to 7 June 2013 (“the Last Rental Term”). It is the Last Rental Term which we are concerned with in the present appeal.

The Rent Review Mechanism

The Rent Review Mechanism is set out in clause 2.4(c) of the Lease Agreement (“Clause 2.4(c)”), which stipulates how the rent for each new rental term after the first rental term is to be determined. The material part of Clause 2.4(c) reads as follows:³ (c) (i) Prior to the commencement of each Rental Term (other than the first), the Lessor and the Lessee shall in good faith endeavour to agree on the prevailing market rental value of the Demised Premises (excluding service charge payable and disregarding the value of all fixtures and fittings installed by the Lessee) for [the] purpose of determining the New Annual Rent for the relevant Rental Term. (ii) If by three (3) months (time being of the essence) before commencement of the relevant Rental Term the parties have not reached agreement on the New Annual Rent, the parties shall appoint three international firms of licensed valuers (the “licensed valuers”) on the basis that each of the licensed valuers shall proceed to separately determine the prevailing market rental value of the Demised Premises. The licensed valuers shall be nominated by agreement between the Lessor and the Lessee or in the absence of agreement by the parties on any one of the licensed valuers by a date ten (10) weeks (time being of the essence) before commencement of the relevant Rental Term, such of the licensed valuers as have not been agreed upon shall be nominated by the President for the time being of the Singapore Institute of Surveyors and Valuers (or its successor institute) on the application of either the Lessor or the Lessee. If the said President is not available or is unable to make such nomination at the time of [the] application, the nomination may be made by the Vice-President or the next senior officer of the said Institute then available and able to make such nomination. All costs and expenses of and in connection with the appointment of the licensed valuers shall be borne by the Lessor and the Lessee in equal shares. The licensed valuers shall act as experts and not as arbitrators and their respective decisions shall be binding and conclusive on the parties. (iii) Each of the licensed valuers shall be required by the Lessor and the Lessee to submit its report to the Lessor and the Lessee within one (1) month from the date of its appointment and the licensed valuers in determining the prevailing market rental value shall have regard to the annual rental value of the Demised Premises in the open market as a shopping centre at the date of review on a lease for a term equal to the relevant Rental Term based on an assumed area (the “assumed area”) of 21,000 square metres. Each of the licensed valuers in determining such prevailing market rental shall: (aa) take into account the notional circumstance that the assumed area would necessarily include areas used for circulation; (bb) disregard the service charge payable and the value of all fixtures and fittings installed by the Lessee; (cc) assume that the Demised Premises are ready for and fitted out for immediate occupation and use for the purpose or purposes required by the willing tenant. (iv) The prevailing market rental value of the Demised Premises thus agreed by the Lessor and the Lessee pursuant to clause 2.4(c)(i) or the average of the three market rental values as determined by the licensed valuers, as the case may be, shall be the New Annual Rent for the relevant Rental Term Provided Always that: (aa) if the prevailing market rental value is less than the Current Annual Rent, the Current Annual Rent shall continue in force and shall be deemed to be the New Annual Rent for the relevant Rental Term; and (bb) if the prevailing market rental value is an amount which exceeds one hundred and twenty-five percent (125%) of the Current Annual Rent, the New Annual Rent for the relevant Rental Term shall be fixed at an amount equivalent to one hundred and twenty-five percent (125%) of the Current Annual Rent. (v) In the event the New Annual Rent has not been determined in accordance with this clause prior to the commencement of the relevant Rental Term, the Current Annual Rent shall continue until the New Annual Rent has been determined, but shall be adjusted retrospectively to the commencement of the relevant Rental Term as soon as the New Annual Rent has been determined. Any accumulated arrears of rent owing to the difference between the New Annual Rent and the Current Annual Rent shall be paid by the Lessee to the Lessor within thirty (30) days of the determination of the New Annual Rent.

[emphasis added in italics and bold italics]

Under the Rent Review Mechanism, therefore, the new rent for each new rental term after the first rental term is determined via a three-stage process as follows: At the first stage (“Stage One”), the Parties are to first “in good faith endeavour to agree on the prevailing market rental value of the Demised Premises”,⁴ which will constitute the new rent for the new rental term. At the second stage (“Stage Two”), which is triggered if the Parties fail to reach agreement on the prevailing market rental value of the Demised Premises by the date three months before the commencement of the new rental term, the Parties shall jointly appoint “three international firms of licensed valuers”⁵ (“the Designated Valuers”), which will each separately determine the prevailing market rental value of the Demised Premises. The average of the three valuations will constitute the new rent for the new rental term. At the third stage (“Stage Three”), which is triggered if the Parties are unable to reach agreement on the three valuation firms to be appointed as the Designated Valuers at Stage Two, the President (or other stipulated officer) of the SISV shall nominate such of the Designated...