Takashimaya wins rent dispute with landlord

Takashimaya was sued by Ngee Ann Development last year after both sides were unable to agree on the meaning of "prevailing market rental value" in the lease agreement.
Takashimaya was sued by Ngee Ann Development last year after both sides were unable to agree on the meaning of "prevailing market rental value" in the lease agreement.ST PHOTO: ONG WEE JIN

The court fight between Takashimaya and its landlord Ngee Ann Development (NAD) over the way to calculate rent has concluded in favour of the department store.

By ruling in favour of Takashimaya, the High Court has denied NAD's claim that it could charge Takashimaya a far higher rent because, hypothetically, the department store could cut back its own area and increase the area it sublets to speciality shops.

NAD had sued Takashimaya - the anchor tenant at its Ngee Ann City complex on Orchard Road since 1993 - last year after both sides reached a deadlock on the meaning of "prevailing market rental value" in the lease agreement.

  • 38k 

    Out of the 56,000 sq m leased to it, Takashimaya uses 38,000 sq m for its department store. The rest is sublet to speciality shops. 

    20 

    Initial number of years of the lease between the parties, with Takashimaya given six options to renew for 10 years each. 

Takashimaya, represented by Senior Counsel Alvin Yeo and Ms Lim Wei Lee, contended that the rental rate should be valued based on the existing space configuration.

Out of the 56,000 sq m leased to it, Takashimaya uses 38,000 sq m for its department store and the rest is sublet to speciality shops. Takashimaya says this use of space reflects the business model of its parent company in Japan.

But NAD contended that the rent should be valued based on the highest potential of the property.

This method would be based on reducing department store space as speciality shops command higher rent.

In a written judgment released yesterday, Judicial Commissioner Debbie Ong accepted Takashimaya's interpretation.

She found that when they entered into the lease agreement, both parties had intended to have a long-term relationship - Takashimaya would run its department store as Ngee Ann City's anchor tenant and NAD would enjoy strong property values as a result of Takashimaya's presence and ability to attract customer traffic.

She noted that the relationship between NAD and Takashimaya was more like a joint business partnership rather than the typical landlord-tenant relationship.

She noted that Takashimaya Japan has a 26.3 per cent stake in NAD and has four directors on NAD's board.

"Given this foundational context to the 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 demised premises even while Takashimaya continues to use nearly 70 per cent of its leased space for its departmental store," she said.

The consequence of using NAD's basis is that Takashimaya would pay far higher rent based on a hypothetical configuration with reduced area for its department store use.

If Takashimaya does indeed reduce the size of its department store in order to maximise profits, that would run contrary to its main business.

"It is doubtful whether Takashimaya would have entered into the lease if it contemplated that it may one day have to run a property leasing business instead of operating its departmental store," she said.

The lease between the parties was initially for 20 years, with Takashimaya given six options to renew for 10 years each.

The rental rate is to be reviewed every five years.

In 2013, after Takashimaya exercised its first option, NAD proposed to revise the rent to $19.83 per sq ft (psf) a month, more than double the existing rate of $8.78 psf. This was based on a valuation report that reduced the space for department store use.

Takashimaya rejected it.

After months of negotiation, both sides agreed in April 2014 to each appoint a valuer and take the average of the two rental values.

Ten days later, unbeknown to Takashimaya, NAD wrote to the two valuers, noting that they are not constrained by the existing space use.

Takashimaya found out only after the two reports - based on hypothetical configurations that reduced department store space - were issued.

NAD explained the failure to send Takashimaya a copy of the letter as an administrative oversight.

Both sides then reached an impasse on how to continue with the valuation exercise.

In her judgment, the judicial commissioner urged both sides to "resolve their disputes amicably" in the light of their long-term business relationship.

Contacted for comment, NAD said in a statement: "We will seek our lawyer's advice and come to a decision thereafter".

A version of this article appeared in the print edition of The Straits Times on September 15, 2016, with the headline 'Takashimaya wins rent dispute with landlord'. Print Edition | Subscribe