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The rental dispute between Takashimaya and its landlord Ngee Ann Development (NAD) ended on Wednesday, with the High Court ruling in favour of the department store.
The patch began when NAD sued its anchor tenant Takashimaya in 2015 after the two parties failed to agree on how to interpret the ‘prevailing market rental value’ in the lease agreement.
On 17 May 2013, NAD proposed a renewal rent of S$19.83 per sq ft per month — a significant increase from the existing rate of S$8.78 per sq ft — based on a valuation report that determined rent based on the property’s highest potential (Highest and Best Use principle). Takashimaya rejected the proposal, but the two parties then agreed to each nominate one valuer and take the average of the two valuations as the renewal rent.
Both parties also agreed to provide each other a copy of their respective correspondence to the valuers.
However, NAD sent the valuers a letter on 22 April 2014, telling them to use a hypothetical configuration, without copying Takashimaya. They later explained that the failure to forward a copy of the letter was an “administrative error and oversight”.
Takashimaya said the two parties must first agree that the valuation be based on the existing configuration.
NAD disagreed saying that there is nothing in the lease agreement that requires rental value to be based on any specific configuration.
In her judgment, Judicial Commissioner Debbie Ong agreed with the contention of Takashimaya that the ‘prevailing market rental value’ in the lease refers to a valuation based on the existing configuration.
“In interpreting what is meant by “prevailing market rental value”, I sought to ascertain, by relevant objective evidence, the intention of the parties at the time they entered into their agreement,” she said.
The judicial commissioner noted that the parties had contemplated a long-term business relationship based on mutual trust and confidence when they entered into the lease.
Their relationship is “not of a typical landlord-tenant relationship but rather of a joint business partnership,” she said. Takashimaya’s parent company held a 26.3 percent interest in NAD, and appointed four directors in NAD’s board. Takashimaya has served as the anchor tenant of Ngee Ann City building since 1993, using 38,000 sq m to operate a department store, out of around 56,000 sq m leased to it. The remaining area was largely used by specialty shops and as common access areas.
The provisions in the lease further reflected the parties’ intentions that the relationship was to continue for a considerable length of time. It is apparent that the rights of Takashimaya under the lease are fairly extensive, she added.
“I find that the intention of both parties at the time they entered into the contract was to have a long-term relationship in which Takashimaya would operate its departmental store as Ngee Ann City’s anchor tenant and NAD would enjoy strong property values as a result of that,” the judge noted.
With this “somewhat symbiotic relationship,” it would be inconsistent with the parties’ core understanding and agreement for NAD to obtain rent based on the highest and best hypothetical use of the premises even while Takashimaya continues to use nearly 70 percent of its leased space for its departmental store.
“The consequence of using such a basis is that Takashimaya would pay far higher rent based on a hypothetical reduced area designated for departmental store use that fails to cohere with its actual use,” she said.
Both parties were also urged to “resolve their disputes amicably in the light of [their] long-term business relationships.”
Image: Ngee Ann City
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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