18 January 2009

Cession of rentals - warning to landlords

In the recent case of Picardi Hotels Ltd v Thekweni Properties (Pty) Ltd 2008 SCA 128, the Supreme Court of Appeal (SCA) was asked to consider whether or not Thekweni Properties had divested itself of the power to sue for arrear rentals by virtue of a cession in securitatem debiti executed in favour of the mortgagee, Investec Bank.

When sued for payment of arrear rentals by Thekweni Properties, Picardi Hotels raised a special plea wherein it disputed the locus standi of Thekweni Properties to bring the action. Picardi Hotels based the special plea on the fact that Thekweni Properties had ceded all its rights, title and interest in and to all rentals to Investec in terms of a registered mortgage bond which contained the following provision:

“Should the Bank give its consent to the letting of the mortgaged property, then Thekweni cedes, transfers and assigns to the Bank all Thekweni's rights, title and interest in and to all rentals . . . which may accrue from the mortgaged property . . . provided, however, that the cession . . . shall not be acted upon by the Bank without the consent of Thekweni unless Thekweni has failed to comply with any term or condition of the bond or any loan secured thereby or has otherwise committed a breach thereof . . .”

The Durban High Court held that the proviso to the aforesaid provision had the effect of suspending the operation of the cession pending the fulfilment of the conditions therein mentioned. The court a quo held further that as neither of the conditions had been fulfilled, the cession had not come into effect and Thekweni Properties was not deprived of its right to recover the arrear rentals.

On appeal, the SCA dismissed this finding. It held that the transfer of the rights was effected by means of the cession and that the right to act in accordance with the cession or to enforce such rights had been suspended. This judgment has far-reaching implications for a landlord, in particular.

In light of the above, a landlord will be wise to consider the terms of any agreement, whether contained in a mortgage bond or otherwise, which contains a cession of the landlord's rights to rentals in securitatem debiti, prior to instituting legal proceedings against a defaulting tenant. Where necessary, a landlord will need to approach the relevant cessionary or mortgagee to request that such rights be ceded back to the landlord to enable the landlord to institute legal proceedings in its own name for the recovery of arrear rentals.

The cessionary or mortgagee, on the other hand, may need to consider the risk to its security of a landlord not being able to institute legal proceedings in its own name without such rights first being ceded back to the landlord, as well as the effect of ceding its rights back to the landlord. It is advisable that professional advice be sought in this regard.

Hugh Jackson and Quintin du Plessis

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