HDB Childcare Centre Takeover: Tenancy Rules and ECDA Approval

What are you actually buying when an HDB childcare centre is for sale?

You are buying a business that occupies HDB premises under a tenancy, so the deal depends on HDB agreeing to the change as well as ECDA.

ECDA says it conducts joint tenders with HDB and the Singapore Land Authority for private operators, and that HDB offers sites in HDB void decks and in commercial malls for amenities uses. HDB publishes results for these exercises under the heading "ECDA-HDB Tender for Child Care Centre under Price Quality Method". The operator that wins holds a tenancy from HDB, not a title to the unit.

So when a "void deck childcare for sale" is advertised, what changes hands is the operating business, its ECDA licence and the right to stay in the premises. The licence and the tenancy each have their own approval path, and neither can be assumed.

What does ECDA require when the centre is in HDB premises?

ECDA will not approve a transfer of licence until the buyer's name is on a valid HDB tenancy agreement.

Section 3.3.2 of ECDA's Code of Practice for Operators says that if the centre is located in HDB premises, the current licensee must approach HDB to seek its approval for any changes to the tenancy agreement, and must obtain "a valid tenancy agreement that reflects the intended licensee's name from HDB before ECDA can approve the transfer of licence". The obligation sits with the seller, as current licensee.

The rest of the transfer rules still apply: the application and the parent letter must go in at least 3 months before the effective date, and the licence must be a 12-month licence with at least 7 months remaining when the application is submitted (s3.3.1, s3.3.4, s3.3.9). Our guide to the ECDA transfer of licence covers each step.

On planning, URA lists HDB void decks among the developments where no planning permission is required to convert to a childcare centre, subject to its authorisation conditions, and its property-use guidance says that for HDB commercial premises no planning permission is required but you should check with HDB to obtain its consent. See our guide to URA approvals for childcare and tuition centres for the conditions.

Can an HDB commercial tenancy be assigned to a buyer?

HDB's published terms for commercial tenants say assignment of tenancy has not been permitted since 16 October 2013.

HDB's terms and conditions for tenants applying to change their tenancy state that, with effect from 16 October 2013, assignment of tenancy is not permitted. Long-standing tenants had a window to assign that ended on 15 October 2019. For tenancies that started on or after 16 October 2013, the terms say assignment will not be permitted, and tenants must return the premises to HDB for re-tender if they wish to terminate their tenancies.

These are HDB's general terms for commercial tenants. A childcare tenancy allocated through an ECDA-HDB tender may carry its own conditions, and ECDA's s3.3.2 clearly contemplates HDB issuing a tenancy in the intended licensee's name in some cases. Whether HDB will do that for a particular centre, and on what terms, is HDB's decision. We do not publish HDB processing times or approval criteria because HDB does not set them out for childcare tenancies on the pages we reviewed. Ask HDB directly, in writing, early in the sale.

What about selling the company instead of the business?

A share sale can avoid an ECDA licence transfer, but HDB's tenancy terms treat a large change in shareholding as an assignment, which brings HDB back into the deal.

HDB's terms say the tenant must not make any substantial change in the composition of its partners or shareholding without HDB's prior written consent. If the sole proprietor, partners or shareholders at the commencement of the tenancy, and their next of kin, retain less than 51% of the shares, HDB deems this a substantial change in control. Clause 2.1.2 says such a change is deemed to constitute an assignment of tenancy, which is not permitted unless it falls within the assignment windows described above.

HDB's own page on changes of partners and shareholders lists what does not count as an assignment:

• changes where the original tenant (as at the first tenancy) or their next of kin keep at least 51% of the shareholding;
• transfer of the tenancy to next of kin (parents, siblings, spouse and children);
• transfer of the tenancy between holding and subsidiary companies.

A typical childcare share sale transfers 100% of the shares to an unrelated buyer, which is well outside those exceptions. On the ECDA side the share route is a change of Key Appointment Holders with at least 1 month's notice (see our guide to the ECDA KAH change in a share sale), but on HDB premises the tenancy question has to be settled first.

What does HDB check when a tenant applies for a tenancy change?

HDB's terms require the existing tenant to confirm a clean record on the tenancy before HDB will consider a change.

Under clause 1.3 of HDB's terms, the existing tenant must confirm that, at the date of application, there is no breach of the existing tenancy agreement, no arrears or outstanding debt owed to HDB, that neither the existing nor the proposed tenant is bankrupt, wound up or dissolved, and that there is no judgment or pending court case against either of them. HDB may also ask for personal credit reports of partners, directors or shareholders (clause 1.4), and it reserves the right to reject an application without giving reasons (clause 1.12).

Clause 1.5 adds two practical points. Where a new tenancy agreement is signed, the existing tenant stays liable under the current agreement until the new one is signed and starts. And HDB's written approval is automatically revoked if the proposed tenant fails to sign a required new tenancy agreement within one month of the approval.

Why does the order of the tenancy and licence change matter?

Because an ECDA licence lapses when the licensee stops being the lessee of the premises, the tenancy and licence steps have to be timed together.

Section 15(1)(c) of the Early Childhood Development Centres Act 2017 says a licence lapses on the date the licensee is no longer the owner or a lessee of, or no longer has a licence to occupy, the premises used as the centre. Meanwhile s3.3.2 of the Code requires the HDB tenancy to reflect the buyer's name before ECDA approves the transfer. Agree the sequence with HDB and ECDA together so that the centre is never without a licensee in occupation.

Termination is also governed by the tenancy. HDB's page on terminating a commercial tenancy says that for tenants of childcare centres, the notice period for termination is based on the terms in the tenancy agreement with HDB. Separately, ECDA requires at least 6 months' written notice to parents and the CLO before a centre ceases operating (CoP s2.5.1), and s2.5.2 requires parents and ECDA to be told once the licensee learns the tenancy may not be renewed.

What should a buyer check on an HDB childcare centre?

Check the tenancy as carefully as the accounts, because the tenancy decides whether the deal can be done at all.

Our childcare due diligence checklist covers the rest of the review.

How Edugrow helps with HDB childcare takeovers

Edugrow has advised on 70+ education business transactions since 2014, and HDB premises are one of the first things we check when a childcare owner asks us about selling. We review the tenancy and licence position before a buyer is introduced, help the parties decide between an asset sale and a share sale in light of HDB's rules, and coordinate the HDB, ECDA and parent steps with the parties and their lawyers. If you own an HDB centre and are considering a sale, start with our sell-side service.