30 September 2009

Landlort Alert!

A recent Supreme Court of Appeal (SCA) judgment signals an alert for landlords who rent out property that is bonded in favour of a bank or other financial institution.

Almost all bond agreements contain a clause ceding, transferring and assigning the mortgagor's rights to all rentals and other revenues that accrue from the mortgaged property as security for the mortgagor's bond repayments, provided that the cession shall not be acted on by the bank unless the mortgagor is in arrears. This clause is known as a "cession in securitatem debiti".

Most commercial property owners understand this clause to mean that they are only deprived of their right to collect rentals from their tenants if they fall into arrears with their bond repayments on the mortgaged property. A recent judgment of the SCA indicates that this is not the case and that an owner of mortgaged property may not institute action against a defaulting tenant for recovery of rentals, even if the owner is not in arrears with its own bond repayments.

In the case of Picardo Hotels Ltd v Thekwini Property (Pty) Ltd 2009 (1) SA 493 (SCA), the landlord instituted action against its tenant, a hotel, for payment of almost a million rand in arrear rentals. When the matter came to trial, the tenant raised the defence that the landlord had divested itself of the right to sue for arrear rentals by virtue of a cession in securitatem debiti executed by the landlord in favour of its bank as security for a mortgage bond. This defence was dismissed by the Durban High Court and the tenant appealed this decision to the SCA.

The SCA found that on a simple interpretation of the cession clause there was a strong indication that an immediate transfer of rights was intended. The cession itself was not suspended; it was only the right to act upon the cession by the bank that was suspended until the mortgagor/landlord was in arrears with bond repayments.

The landlord in this case, being up to date with its bond repayments, was left in the untenable situation where neither it, nor its bank, could sue the defaulting tenant for rentals. Commercial property owners who have, or who intend to, issue summons against tenants should carefully consider the terms of their mortgage bond agreements.

The purpose of a cession in securitatem debiti is to provide security to a bank for the loan that it is to advance - the cession provides security to the bank in the event of the mortgagor defaulting with its bond repayment and it also makes the bank a secured creditor in the event of the insolvency of the mortgagor.

For these reasons, it is unlikely that banks will agree to exclude cessions from mortgage agreements or to defer the actual operation of the cession until the mortgagor defaults.

When a tenant fails to pay rental timeously in respect of a bonded property, it is suggested that the most practical solution would be for landlords to get their banks to re-cede the disputed amount back to the landlord, allowing them to issue summons against the defaulting tenant.

Brigit Rubinstein,
Director, Dispute Resolution: Litigation and Arbitration

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