Advice and Opinion

SAPOA: Commercial Leases and Business Rescue

SAPOA has obtained a legal opinion pertaining to the rights of a landlord in the event that a commercial tenant is placed in business rescue. These rights are based on the inherent common law rights and obligations that are enhanced or replaced in one form or another by the terms of a lease agreement.

The recommendations flowing from the legal opinion indicate that landlords need to re-structure their lease agreements in order to enable landlords to take measures to safeguard against the negative consequences of business rescue provisions contained in Chapter 6 of the Companies Act No. 71 of 2008 (“Act”).

These recommendations are as follows:

Rights under a Lease

The most important thing about a lease in the context of business rescue is that it is a bilateral contract. Each party’s obligation to make performance is undertaken in return for the other party’s performance. As such, this bilateral contract gives the landlord the defence known as the exceptio non adimpleti contractus. This means that the tenant is not entitled to demand performance by the landlord unless the tenant has performed its reciprocal obligations.

Accordingly, all leases must be drafted on the basis of reciprocal obligations. The right of the tenant to occupy premises and to receive services from the landlord must be unequivocally conditional on the payment of rent, utilities and services.

Termination

There is nothing in the Act and in law that prohibits a landlord from including a provision in the lease that it automatically terminates if the tenant places itself under voluntary business rescue proceedings by way of a company resolution. When the resolution is passed by the board, the business rescue process has not yet begun and termination at the time is not prohibited by Chapter 6.

2.2 The commercial property industry is well aware that when a landlord terminates a lease it is a drastic step and it has certain legal consequences as on termination, the landlord is entitled to a claim for eviction and a claim for damages for the unexpired portion of the lease. Accordingly, every landlord must assess at the time that the tenant is placed under business rescue if it is in the landlord’s best interest to terminate the lease.

2.3 The wording contained in s134 (1) (c) of the Act is probably wide enough to cover a landlord’s right to cancel and to evict a non-paying tenant from the premises.

2.4 As soon as a tenant goes into business rescue and a practitioner is appointed, the landlord should pursue the right to terminate the lease if the practitioner will not pay rent.

Rescue Plan

There is no reasonable basis upon which a tenant may continue to occupy leased premises without paying rent.

As the obligations of the landlord and tenant are reciprocal, the business rescue plan cannot ignore the tenant’s obligation to pay rent whilst preserving the obligations of the landlord under the lease. There is nothing under s150 of the Act which allows the tenant the right to remain in the leased premises without paying rent. If the tenant cannot afford the rent, the tenant must vacate the premises and find alternative premises which it can afford.

However, this is not an absolute rule. Where the tenant is paying rent, which rent is above market value, and it would be difficult for the landlord to find a replacement tenant at the same or higher rent, the landlord would be wise to negotiate a lower rent provided that the tenant undertakes to pay the full rent whilst it continues to remain in the premises.

Suretyships

Any suretyship obtained by the landlord from a surety in respect of an agreement of lease must provide that the suretyship can be enforced against the surety even if the tenant is placed under business rescue.

In the recent SCA case of New Port Finance Company (Pty) Ltd vs Nedbank Ltd, the SCA held that if a judgment against sureties had been obtained prior to the adoption of a business rescue plan or if the suretyship contains clauses often found in suretyships that allow the creditor to pursue the sureties notwithstanding any compromise reached regarding the scope and extent of the principal debtor’s indebtedness, the sureties are not relieved from liability because of the adoption and implementation of a business rescue plan.

Deposit

In regards to the deposit, the best way to ensure that the landlord has the right to the deposit is to ensure that the deposit is the property of the landlord and that it has the right to set-off the deposit against any rent due at the time that the tenant goes into business rescue.

The lease must provide that set-off operates automatically against the deposit if the tenant goes into business rescue. With set-off, the deposit will be the money of the landlord the moment that the tenant falls into arrears. If the terms of the lease allow the landlord to do so, the landlord can then ask the tenant for a replacement of the deposit.

Acceleration Clause

It will be expedient for all landlords to insert an acceleration clause in the lease if the tenant breaches the lease or is placed under business rescue. The acceleration clause causes the full value of the lease to become due and payable as soon as the tenant is in breach of the lease or is placed under into business rescue.

Conclusion

7.1 Where the tenant is placed under business rescue, the landlord is not without rights.

7.2 The difficulty is that the landlord may need to enforce these rights either by negotiating with the practitioner or through the courts.

7.3 If the tenant goes into business rescue, any unpaid rent must be demanded immediately from the practitioner. If the practitioner fails to pay the rent and the landlord is easily able to re-let the premises, the landlord must do its best to negotiate an early termination of the lease. If the landlord is unable to negotiate an early termination, the landlord must consider approaching the courts for relief.

7.4 What is stated in this letter does not adequately solve the existing problems for landlords in relation to the business rescue provisions of Chapter 6 of the Act.

7.5 In order to address this situation, we confirm that SAPOA has made written representation to Professor Michael Katz, the chair of the Commission that has been appointed to investigate the business rescue provisions of Chapter 6. SAPOA has addressed the challenges and problems faced by landlords in relation to Chapter 6 and we eagerly await the Commission’s response to SAPOA’s representations and recommendations.

The abovementioned recommendations are mere guidelines and only for the purposes of assisting landlords in situations relating to business rescue. Each lease is unique and the user must seek legal advice for the user’s specific circumstances. This legal opinion is only to be used as a guide and should not be merely copied with the expectation that it will serve each party’s individual circumstances. Most of the above recommendations have not been tested in our courts and SAPOA doesn’t guarantee any success in any court if any of the above recommendations are put into use.