19 May 2020 by , , and Business Rescue, Restructuring & Insolvency Newsletter

My tenant is in business rescue and is not paying rent. What are my options?

The measures South Africa has put in place during the national lockdown has caused much economic strain on both individuals and businesses. The main reason for this, is that many businesses in South Africa have had to put all operations on halt, which has resulted in their income dropping dramatically. Since businesses across the country are experiencing cash flow constraints, we can expect a drastic rise in defaults on ever-growing lists of expenses – one of which being rental obligations.

But can a landlord cancel a lease agreement whilst the tenant remains under business rescue?

In terms of section 133(1) of the Companies Act 71 of 2008 (Companies Act), no legal proceedings, including enforcement action, may be commenced or continued with in any forum against the company, or in relation to any property belonging to the company, or lawfully in its possession, during the business rescue proceedings.

This section has caused for much debate in the South African legal fraternity, since some business rescue practitioners argued in the past, that if a party to a contract with a company under rescue, cancels an agreement, it would amount to “enforcement action”. Since an “enforcement action” against a company is expressly prohibited whilst the company remains under business rescue, such cancellation would be unlawful. Parties trying to get out of contracts with companies under business rescue argued the contrary.

The debate was finally settled in the case of Cloete Murray and Another NNO v FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA). The court held that that the cancellation of a contract does not constitute “enforcement action” prohibited by section 133(1) of the Companies Act, and that a creditor can therefore lawfully and unilaterally cancel a contract that it had concluded with a company under business rescue prior to the latter being placed under business rescue. One of the reasons provided by the SCA for the aforementioned conclusion, is that the terms “enforcement” and “cancellation” are mutually exclusive, and not interpreting them as such would be contrary to the language, context, provision and purpose of section 133(1) of the Companies Act.

However, section 136(2) of the Companies Act provides that during business rescue proceedings, the business rescue practitioner may entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that arises under an agreement to which the company was a party at the commencement of the business rescue proceedings, which obligation would otherwise become due during the proceedings.

This could include the suspension of the company’s obligation towards its landlord to pay rental. The question then remains as to whether this suspension of obligations could affect the landlord’s right to cancel the lease agreement in the event that the tenant (under business rescue) fails to honour such obligations.

In the matter of Kythera Court v Le Rendez-vous Café CC 2016 (6) SA 63 (GJ), although the specific issue of the suspension of obligations by a business rescue practitioner in terms of section 136(2)(a) of the Companies Act was not the main dispute that the court had to preside on, Judge Boruchowitz mentioned obiter that:

In the context of business rescue proceedings, the right to cancel a lease may be affected by the provisions of section 136(2)(a) of the Act. The section provides that the business practitioner may, despite any provision of an agreement to the contrary, entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that arises under an agreement to which the company was a party at the commencement of the business rescue proceedings. By invoking this section, the business practitioner may prevent a landlord from cancelling a lease and from instituting eviction proceedings.”

There is, however, a potential counter argument which can be found in the common law principle of reciprocity. In the decision of BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd and Others 2017 (4) SA 592 (GJ), the court held that from the wide wording of section 136(2)(a), the suspension of an obligation by the business rescue practitioner, includes obligations that are contractually tied with a reciprocal obligation of the creditor. The court further stated that:

Since the section is silent about the effect that the suspension has on such an obligation, and since the Legislature knew and knows the residual Law of Contract, it must be accepted that the creditor has available, subject to the normal rules, the exceptio non adimpleti contractus and, again, if the normal rules of materiality and contractual notices apply, the creditor also has available the normal rights of cancellation.

Based on the court’s ratio decidendi in the BP judgment, where a business rescue practitioner suspends an obligation to pay rent, the landlord would still have the right to, inter alia, cancel the lease agreement.

The suspension of obligations by business rescue practitioners, especially to pay rent, will certainly become a hot topic as companies are coming to terms with the damage that the lockdown has caused (and will continue to cause).

While it is clear that landlords will be able to cancel an agreement during business rescue (for a breach that occurred prior or post to the commencement of the business rescue proceedings), if the business rescue practitioner did not suspend the company under rescue’s obligations in terms of section 136(2)(a) of the Companies Act, landlords will have to keep in mind that if the business rescue practitioner did suspend the company under rescue’s obligation to pay rent, it could potentially complicate the cancellation of the lease agreement.

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