In a business takeover, how can landlords in Singapore protect themselves?

Business closures have continued to trend upwards in Singapore this year, reaching more than 38,000 in just the first seven months.

This comes after 60,000 businesses shuttered in 2025 – surpassing even the 42,463 that closed in 2020 during the Covid-19 pandemic.

The closures came mainly from the construction and F&B sectors. But before they wind up, many small businesses typically try to sell their operations.

Whether they involve a small factory, restaurant, shop or nightclub, live business takeovers often carry additional risks for the various interested parties when they involve rented premises.

The Business Times spoke to lawyers on what to look out for in such situations.

Due diligence

While due diligence on the business may mitigate the man under the lease, and ensure all rents and other dues have been paid, one key clause to study is what trade the premises can be used for.

A critical deal-breaker in such a scenario would be the landlord’s refusal to assign the tenancy to the buyer.

Based on the “privity of contract” rule, only those who are party to a contract – including a lease or tenancy agreement – can enforce their rights or be held to obligations under the contract, said Samuel Yuen, managing director of Yuen Law.

Even if a buyer has taken over the assets and operations, it has no legal standing to take any action against the landlord, who in turn has every right to object to the takeover or kick the new buyer out.

But landlords’ hands are also tied to act against the new owner in the event of lease breaches, as they can only go after the original owner or lessee who signed the lease agreement.

If there are fraudulent intentions, a lessee may sign a lease under one company but run the business under a sister company that is difficult for a landlord to act against when the former becomes insolvent.

This can complicate the amount of recourse a landlord has if the party running the business is not a signatory to the lease – but a sister company to the lessee.

Company law stipulations

These circumstances are a “recognised risk” under Singapore company law, with the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) in place, said Lee Ee Yang, managing director of Covenant Chambers.

Under Section 224 of the IRDA, if unfair preference to any person or company is detected when a company is wound up, a liquidator can apply to reverse undervalued transactions that occurred up to three years before a winding-up order. 

Separately, if siphoning of assets was carried out knowingly to defraud creditors, people who were knowingly party to the “fraudulent trading” may be ordered to make personal contributions to assets of the insolvent company, added Lee.

Company directors and the sister company that received the assets in the process can be implicated as a result.

Lease novation?

A way to overcome these issues is for the landlord, the business seller and buyer to enter into a lease novation.

This is the legal process of transferring all rights and responsibilities under the tenancy agreement to a new party, while fully releasing the original party from the same. 

But this is usually “a tall order”, said Yuen, since it requires the written consent of all parties, which is “unlikely to happen” because one party may not agree to it.

“This means that when a tenant is wound up, the landlord joins the queue of creditors and may recover only a portion of what is owed,” he added.  

Lee said that specific terms of some leases may extend the rights and obligations to more than the direct landlord and tenant, too.  

Safeguards for landlords

Many businesses for sale may already be in dire straits for reasons ranging from poor sales to staffing and key personnel issues.

Thus, they may already be entangled in rental arrears – and landlords may loathe to get entangled with a third party.

Therefore, to safeguard themselves from rent losses, landlords sometimes take preventive measures at the time the original lease is signed.

They may ask for a financially stronger parent or sister company to be the lessee, or secure a guarantee in their favour in the event of a default, Lee and Yuen said.

A security deposit or banker’s guarantee is a welcome assurance, while personal guarantees from directors and controlling shareholders are another precautionary measure.

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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