Case Details
- Citation: [2012] SGCA 48
- Court: Court of Appeal of the Republic of Singapore
- Decision Date: 27 August 2012
- Court of Appeal Judges (Coram): Chan Sek Keong CJ; Andrew Phang Boon Leong JA; V K Rajah JA
- Case Number: Civil Appeal No 108 of 2011
- Parties: HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) (Appellant) v Toshin Development Singapore Pte Ltd (Respondent)
- Appellant/Applicant: HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust)
- Respondent/Defendant: Toshin Development Singapore Pte Ltd
- Legal Areas: Contract; Civil Procedure; Landlord and Tenant
- Procedural History: Appeal from the High Court decision in HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd [2012] SGHC 8
- Counsel for Appellant: Alvin Yeo SC, Sim Bock Eng, Tan Mei Yen, Lawrence Foo and Lim Shiqi (WongPartnership LLP)
- Counsel for Respondent: Cavinder Bull SC, Gerui Lim, Adam Maniam (Drew & Napier LLC)
- Judgment Length: 25 pages, 14,963 words
- Key Contractual Provision: Clause 2.4(c) of the Lease Agreement (Rent Review Mechanism)
Summary
This Court of Appeal decision addresses the legal effect of a contractual clause requiring the parties to “in good faith endeavour to agree” on a matter, and the consequences when one party acts in a way that arguably undermines the rent review process. The dispute arose under a lease between HSBC Institutional Trust Services (Singapore) Ltd, as trustee of Starhill Global Real Estate Investment Trust, and Toshin Development Singapore Pte Ltd. The lease contained a structured rent review mechanism for determining the “New Annual Rent” for successive rental terms, culminating in a “Last Rental Term” relevant to the appeal.
The rent review mechanism operated in stages. First, the parties were required to endeavour in good faith to agree on the prevailing market rental value. If they failed to agree within a specified time, the mechanism moved to the appointment of three international firms of licensed valuers, either by mutual agreement or, failing agreement, by nomination through the President (or other designated officer) of the Singapore Institute of Surveyors and Valuers. The valuers were to act as experts, with their determinations binding and conclusive, and the new rent was subject to contractual floors and caps.
The Court of Appeal ultimately upheld the High Court’s conclusion that the rent review mechanism remained operable despite the tenant’s conduct. The tenant had, without notifying the landlord, approached multiple valuers and obtained valuation reports for the relevant market rental value date. The landlord argued that this unilateral conduct rendered the mechanism inoperable, effectively depriving the landlord of the contractual process for appointing valuers. The Court of Appeal rejected that argument and clarified the legal content and consequences of “good faith endeavour to agree” clauses in the context of expert determination and contractual machinery.
What Were the Facts of This Case?
The appellant, HSBC Institutional Trust Services (Singapore) Ltd, was the trustee of Starhill Global Real Estate Investment Trust. The respondent, Toshin Development Singapore Pte Ltd, was the tenant under a long-term lease of commercial premises within Ngee Ann City. The demised premises comprised six floors (Basement 2 to Level 4) forming part of the shopping centre managed by the tenant. The lease had a 20-year term expiring on 7 June 2013, with an option for the tenant to renew for a further 12 years. The lease divided the 20-year term into successive three-year rental terms, except for the last rental term, which ran from 8 June 2011 to 7 June 2013.
The rent payable under the lease was not fixed for the entire term. Instead, the lease provided for periodic rent review. Clause 2.4(c) of the lease agreement set out a multi-stage mechanism for determining the “New Annual Rent” for each rental term after the first. The mechanism began with a negotiated stage: before the commencement of each rental term (other than the first), the lessor and lessee were to “in good faith endeavour to agree” on the prevailing market rental value of the demised premises, excluding service charge and disregarding the value of fixtures and fittings installed by the tenant.
If the parties did not reach agreement by a specified deadline—three months before the commencement of the relevant rental term—the mechanism required the parties to appoint three international firms of licensed valuers. The clause contemplated that the valuers would be nominated by agreement between the parties; if the parties could not agree on the valuers, the nomination would be made by the President (or other designated officer) of the Singapore Institute of Surveyors and Valuers. The appointed valuers were to determine the prevailing market rental value separately, and the average of the three valuations would constitute the new rent. The clause also required that the valuers submit reports within one month of appointment and that they apply specified assumptions and exclusions, including an assumed area and the assumption that the premises were ready for immediate occupation.
The conduct giving rise to the dispute concerned the last rental term. Between July 2010 and early 2011, the tenant approached all eight international firms of licensed valuers present in Singapore without notifying the landlord. Seven of those firms agreed to prepare valuation reports on the market rental value of the demised premises as at 8 June 2010 (with one firm, Jones Lang LaSalle, preparing a report as at 31 December 2010). The tenant then engaged seven firms which agreed to prepare the requested reports. The landlord discovered this and contended that the rent review mechanism had been rendered inoperable because the tenant had effectively pre-empted the valuation appointment process and undermined the landlord’s ability to participate meaningfully in the selection of the designated valuers.
What Were the Key Legal Issues?
The appeal raised several interrelated legal issues. The first and central issue was whether a contractual clause directing the parties to “in good faith endeavour to agree” is valid in law, and, if so, what its legal content should be. Put differently, the Court had to consider whether such language imposes a justiciable obligation capable of being enforced, and what standard of conduct it requires from each party during the negotiation stage of a rent review mechanism.
The second issue concerned the consequences of breaching such a clause. The landlord’s position was that the tenant’s unilateral approach to valuers, without notice and outside the agreed process, amounted to conduct that frustrated the contractual machinery. The landlord argued that this frustration meant that the rent review mechanism could not operate as intended, thereby justifying a declaration that the mechanism was inoperable.
A third issue, tied to the appointment process, concerned whether an expert or adjudicator (here, the licensed valuers) is obliged, before accepting appointment, to inform all parties involved in the appointment process of any prior relationship with any appointer that might compromise impartiality. While the truncated extract does not set out all the evidence on disclosure, the Court’s framing of the issues indicates that impartiality and disclosure were part of the legal analysis relevant to whether the mechanism could still function despite the tenant’s prior dealings with the valuers.
How Did the Court Analyse the Issues?
The Court of Appeal began by examining the contractual architecture of Clause 2.4(c). The rent review mechanism was not a single negotiation; it was a staged process designed to ensure that a new rent could be determined even if the parties could not agree. The first stage required good faith endeavour to agree on market rental value. The second and third stages provided fallback mechanisms for appointing three licensed valuers, either by mutual agreement or by nomination through the SISV’s President (or designated officer). This structure suggested that the parties intended the mechanism to remain workable even where negotiations failed, because the appointment stages were designed to resolve deadlock.
On the validity and content of the “good faith endeavour to agree” clause, the Court treated the obligation as a contractual duty with legal consequences rather than mere moral exhortation. However, the Court also had to determine what “good faith endeavour” requires in practice. In the context of rent review, the obligation does not necessarily guarantee agreement on the market rental value. Instead, it requires each party to take reasonable steps to attempt to reach agreement, to engage constructively, and to avoid conduct that would defeat the purpose of the negotiation stage. The Court’s approach reflects a balance: the law should not convert every disagreement into breach, but it should also not allow a party to circumvent the contractual process by acting in a manner that undermines the other party’s participation.
The Court then considered whether the tenant’s conduct—approaching valuers unilaterally and obtaining valuation reports—meant that the rent review mechanism was rendered inoperable. The landlord’s argument essentially treated the tenant’s conduct as a frustration of the appointment process. The Court’s analysis, however, emphasised that Clause 2.4(c) contemplated that the parties might not agree and that the mechanism would proceed to appointment of valuers. The key question was whether the tenant’s conduct prevented the mechanism from operating, or whether it merely affected the negotiation dynamics without actually disabling the contractual fallback steps.
In this regard, the Court’s reasoning focused on the contractual purpose and the mechanics of appointment. The clause required appointment of three international firms of licensed valuers. Even if the tenant had previously engaged valuers to prepare reports, the mechanism could still function if the parties proceeded to appoint three valuers in accordance with the clause, including through nomination by the SISV President if the parties could not agree. The Court did not accept that unilateral preparation of valuation reports automatically meant that the subsequent appointment stage could not occur. The mechanism’s design—particularly the binding and conclusive nature of the expert determinations—supported the view that the parties intended a workable process rather than a fragile one.
The Court also addressed the issue of impartiality and disclosure in the appointment of experts. Where a valuer has a prior relationship with one party, the question becomes whether that relationship compromises impartiality and whether the valuer is under a duty to disclose it to the other party before accepting appointment. The Court’s framing indicates that it considered whether any such duty exists as a matter of contract, expert ethics, or general principles of fairness. The legal relevance of disclosure lies in whether it affects the validity of the expert determination or whether it is a factor that can be addressed through the appointment process and the parties’ ability to object or seek replacement. In the circumstances, the Court concluded that the mechanism remained operable and that the landlord had not established a sufficient basis to declare it inoperable.
Finally, the Court’s analysis of consequences of breach of the “good faith endeavour” obligation was consistent with its broader contractual approach. Even if the tenant’s conduct could be characterised as not fully aligned with the spirit of the negotiation stage, the remedy sought by the landlord was a declaration that the mechanism was inoperable. The Court effectively required a showing that the contractual machinery could not operate as intended, rather than merely a showing of procedural unfairness or strategic behaviour. This reflects a principle in contract law: where parties have provided a dispute-resolution or determination mechanism, courts should be slow to render it inoperative absent clear contractual or legal justification.
What Was the Outcome?
The Court of Appeal dismissed the appeal and affirmed the High Court’s decision. It held that the rent review mechanism under Clause 2.4(c) remained operable notwithstanding the tenant’s unilateral approach to valuation firms and the preparation of valuation reports prior to the negotiation stage.
Practically, the decision means that landlords and tenants cannot easily obtain declarations that rent review machinery has failed merely because one party acted strategically during the negotiation stage. Where the lease provides staged fallback mechanisms for appointing experts, those mechanisms will generally be treated as capable of operating unless the party seeking to disable them can demonstrate that the contractual process is genuinely incapable of being carried out.
Why Does This Case Matter?
This case is significant for Singapore contract law because it clarifies how courts approach “good faith endeavour to agree” clauses. While such clauses are often criticised as vague, the Court of Appeal treated the obligation as legally meaningful and enforceable to the extent of requiring constructive and reasonable steps towards agreement. At the same time, the Court avoided an over-expansive interpretation that would effectively guarantee agreement or allow parties to weaponise negotiation failures into termination of the contractual machinery.
For practitioners, the decision provides guidance on how to structure and administer rent review clauses and other expert determination mechanisms. Parties should recognise that courts are likely to focus on whether the contractual fallback steps can still operate. Strategic conduct that may be inconsistent with good faith negotiation may give rise to claims for breach, but it does not automatically render the entire mechanism inoperable. This is particularly relevant in commercial leases where rent review is essential to the economic balance of the bargain.
The case also has implications for the appointment of experts and the management of conflicts or prior relationships. Even though the extract does not provide the full evidential detail, the Court’s identification of the disclosure/impartiality issue signals that parties should consider transparency when appointing valuers or experts. Practically, parties should ensure that appointment procedures are followed, that any potential conflicts are disclosed where appropriate, and that objections or replacement mechanisms are available if impartiality is genuinely in question.
Legislation Referenced
- (Not specified in the provided extract.)
Cases Cited
- [2010] SGHC 92
- [2012] SGCA 48
- [2012] SGHC 8
Source Documents
This article analyses [2012] SGCA 48 for legal research and educational purposes. It does not constitute legal advice. Readers should consult the full judgment for the Court's complete reasoning.