When a company goes into business rescue, every creditor of that company, understandably, becomes concerned. Landlords are no exception, as business rescue limits and curtails certain creditors' rights. The amendments brought about by section 135 (1A) of the Companies Act 71 of 2008 have at least brought a little sigh of relief to landlords. The amendment provides for the costs in respect of and not exceeding the aggregate for all public utility services such as the company in business rescue's share of rates and taxes, electricity, water and sanitation paid by the landlord on behalf of the lessee to constitute post commencement finance. The position before the amendments was that these costs formed part of the landlord's unsecured claim.  

In this podcast Lucinde Rhoodie and Muwanwa Ramanyimi, in the Dispute Resolution practice unpack the amendments as well as the landlord's rights to cancel lease agreements and to bring eviction proceedings against the company in business rescue.

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Transcript

Lucinde Rhoodie: Welcome to CDH Conversations podcast, and specifically welcome and hello to all of our listeners. I am Lucinde Rhoodie, a director of Cliff Dekker Hofmeyr, practicing in its dispute resolution department, and I'm also part of the Corporate Debt Turnaround & Restructuring sector. Today I am joined by Muwanwa Ramanyimi, a Senior Associate also in the Dispute Resolution department, and a member of the Corporate Debt Turnaround & Restructuring sector.

We are going to talk to you today about the position of a landlord, both residential and commercial, specifically in the current business rescue landscape in South Africa. Up until the recent amendments to the Companies Act, a landlord's position in business rescue was tenuous to say the least. At least in a liquidation scenario, a landlord has a limited secured claim usually for a period of three months, depending on how often rental was payable, which was in arrears as at the date of liquidation. That's not the case in business rescue and in order to unpack the position of landlords in business rescue, let us start by just reminding ourselves what business rescue is.

So we know that business rescue proceedings are proceedings aimed at facilitating the rehabilitation of a company that is financially distressed. Chapter 6 of the Companies Act deals with business rescue and financially distressed is defined in Section 128 thereof as meaning that a company is reasonably unlikely to pay all of its debts as they become due and payable within the next six months, or a company is reasonably likely to become insolvent within the immediately ensuing six-month period. If either of those two requirements are met a company is regarded as being financially distressed and in such a scenario business rescue provides for the temporary supervision of a company and the management of its affairs, businesses and property by a business rescue practitioner.

It provides for a temporary moratorium or a stay on the rights of claimants against the company or in respect of property, lawfully in its possession. Muwanwa is going to unpack that requirement and that component a bit further, as well as the rehabilitation process of the company, which is being facilitated through the development and implementation of a business rescue plan.

And if a business rescue plan is approved it serves to restructure the company's business, the company's property, its debts, its affairs, or liabilities, as well as its equity, keeping in mind what the objectives and benefits of business rescue proceedings are. So in broad terms, the primary aim of business rescue is to maximize the likelihood of the company continuing to exist on a solvent basis in a manner that balances the rights and interests of all relevant stakeholders, especially employees, as well as your creditors. If this is not possible, it doesn't mean that business rescue is a failure. The secondary aim of business rescue is to restructure the business in such a manner that results in a better return for the company's creditors or shareholders as opposed to the immediate liquidation of a company.

We know that liquidation is one of the biggest value destroying processes that there is in regard to assets of a business. And it's this very thing that business rescue seeks to avoid. The benefit of business rescue is that if it's entered into soon enough, a company can trade its way out of its financial distress through the implementation of a business rescue plan, as well as the suspension of its obligations by its business rescue practitioner.

Ultimately the business rescue saves a company from the fatality of liquidation and being wound up. Before I hand over to Muwanwa, I just want to on a high level and very broad terms, discuss how agreements generally are dealt with In business rescue, everybody thinks and one will often see clauses in commercial agreements, which says that a company going into business rescue constitutes an event of default, entitling the innocent party to cancel or terminate an agreement -  that is unfortunately, legally not sound or enforceable.

Section 136 (2) of the Act provides that any form of contract, concluded prior to the commencement of business rescue proceedings by one of the parties thereto is not suspended or cancelled by virtue of the business rescue, but the business rescue practitioner may suspend or apply to court to cancel any obligation of the company under the contract.

This means that the business rescue practitioner can seek to suspend certain obligations under the lease agreement, including, and Muwanwa will talk to this, payment of rental. Section 133(1) of the Companies Act provides that during business rescue proceedings, no legal proceedings, including enforcement action against the company or in relation to any property lawfully in the possession of the company or belonging to the company may be commenced or proceeded within  and which includes arbitration proceedings, except with the written consent of the business rescue practitioner or with the leave of the court in accordance with the terms the court may find suitable.

The SCA in a matter of Cloete Murray N.O. versus First Rand Bank held, and this was very important at the time and still is, that the cancellation of a contract does not constitute [00:07:00] enforcement action prohibited by Section 133 of the Act and that a creditor can therefore lawfully and unilaterally cancel a contract that it had concluded with the company under business rescue prior to the latter being placed under business rescue. And one of the reasons the SCA in the Cloete Murray judgment provided for its conclusion was that the term enforcement and cancellation are mutually exclusive and not interpreting them as such would be contrary to the language, the context, the provision, and the purpose of Section 133 of the Companies Act.

I'm now going to hand over to Muwanwa to discuss specifically lease agreements and landlord rights in the current business landscape. So Muwanwa, thank you. I'm handing over to you.

Muwanwa Ramanyimi: Thank you, Lucinde. As Lucinde has already mentioned, I will be discussing specifically how lease agreements are dealt with in a business rescue situation.

Business rescue limits or curtails, certain rights which creditors would ordinarily have. This is achieved mostly through the temporary moratorium that Lucinde mentioned and the business rescue practitioner's right to entirely, partially, or conditionally suspend during business rescue the company's contractual obligations in agreements, which the company was a party at the commencement of the business rescue proceedings.

As Lucinde mentioned, it has been established by the Supreme Court of Appeal that if a right to cancel an agreement has already accrued at the commencement of the business rescue, cancellation of such agreement is permissible even when the debtor is a company in business rescue. This means like any other creditor, the landlord will also have a right to cancel a lease agreement.

Once a lease agreement is cancelled, the lessee would ordinarily have a duty to vacate the premises. The [00:09:00] failure to vacate the premises when there's an obligation to do so renders the lessee an unlawful occupier. In any other situation of events, the remedy against an unlawful occupier is to institute eviction proceedings against them, and the situation is no different in business rescue, this is obviously to ensure that the landlord regains possession of the premises.

Eviction proceedings may be regarded as enforcement action, which, as Lucinde mentioned earlier on, is not allowed in terms of the Companyies Act and would fall within the category of proceedings that are temporarily suspended during business rescue by virtue of the moratorium. However, in business rescue, the situation is different in at lease agreement situation.

The Gauteng High Court in the case of Kythera Court v Le Rendez-Vous Cafe CC and Another 2016 considered this very issue of whether eviction proceedings are not permitted in terms of Section 133, which prohibits  enforcement action. To give context again on what section 133 says, it says as follows: during business rescue proceedings, no legal proceedings, including enforcement action against the company or in relation to any property belonging to the company or lawfully in its possession may be commenced or proceeded with in any forum.

The court stated that the key words that we have to look at is the word "unlawful possession". As mentioned a bit earlier, once a lease agreement is cancelled, the continued possession of the property, by the lessee, that possession is unlawful possession. Therefore, in that instance, the company in business rescue where the lease agreement has been cancelled would be in unlawful possession of the property.

And as such, the landlord would be entitled to bring eviction proceedings in such an instance. Therefore, the landlord would not be curtailed by the provisions of section 133 of the Companies Act.

For many businesses, for example, retail and hospitality businesses, the premises from which the company operates from is of crucial importance. As such, the cancellation of a lease agreement and the subsequent eviction may have knock on consequences, which may affect the ultimate success of the business rescue. This is obviously not ideal for the company and for the business rescue practitioner, however a failed rescue is usually  not in the landlord's best interest, as the prospects of recovering any outstanding rental may be greatly diminished should the rescue fail and the company be liquidated.

Because of this, the business rescue practitioner and landlords often negotiate that any rental due during business rescue is either paid immediately or would constitute post commencement finance. Factor to consider though is the business rescue practitioner's powers contained in Section 136. Lucinde also discussed this a bit earlier on, just to refresh as this is what section 136 says, 136. Sub Section 2 specifically says: subject to sub Section 2A, and despite any provision of an agreement to the contrary during business rescue proceedings, the practitioner may entirely, partially, or conditionally suspend for the duration of business rescue proceedings, any obligations of the company that arises under an agreement to which the company was a party, and the commencement of the business rescue proceedings.

Therefore, prior to the cancellation of the lease agreement, in theory, the business rescue practitioner may exercise his or her rights in terms of Section 136, which is to suspend the company's obligations in that regard. Additionally, in order to avoid cancellation of the lease agreement as a result of the company's prior breach, the business rescue practitioner may also elect to pay all outstanding rental in order to distinguish the landlord rights to cancel and thus inevitably avoid eviction proceedings that the landlord would otherwise have been entitled to bring. This train of thought obviously opens up its own can of worms, such as the business rescue practitioner suspending its obligations to pay rent whilst it enjoys undisturbed use of the landlord's property.

And if that is the case, is it now a battle of who can send their notice first. i.e. the landlord cancellation notice versus the business rescue practitioner's. notice in terms of Section 136, perhaps this is where the phrase of when two elephants fight the grass suffers, comes into play. In this case the company in business rescue and other stakeholders.

Therefore, instead of a battle of the notices, perhaps cooperation between both parties is the answer, as the success of the rescue might depend on both parties supporting the process. The failure of the rescue is in many respects, not in the best interest of all stakeholders. This includes the landlord as well, and the business rescue practitioner.

Lucinde mentioned at the start that there were recent amendments to the Companies Act, which gives landlords a bit more protection than they previously had. So as mentioned, failing an agreement between the business practitioner and the landlord to treat post commencement rent as post commencement finance not only would the rent in that event be a concurrent claim, but the utilities such as rates and taxes, electricity, water, sanitation, and sewer charges, which the landlord would pay to third parties but be entitled to recover from the lessee. Such costs would also be a concurrent claim. The latest amendments to the Companies Act which can be found in Section 135 sub Section 1A, have entrenched that the amounts paid by the landlord to third parties for utilities shall be treated as post commencement finance. Giving the landlord preferent right in business rescue, at least in relation to those costs. The amendments are welcome because previously the costs incurred by a landlord on behalf of a company in business rescue would only form part of the landlord's claim as an unsecured creditor, which is the lowest in terms of ranking. So these amendments boost up the claim in relation to utilities that the landlord has paid. This amendment of course, does not relate to the landlord's claim in respect to rental owed therefore, it would still be necessary and advisable for a landlord to enter into an agreement with the business rescue practitioner in regards to payment of rental during business rescue to ensure that by agreement such amounts are also regarded as post commencement finance. The amendments are good news for both the business rescue practitioner and the landlord, as it gives an added degree of comfort to landlords, which in turn allows the business rescue practitioner to better rely on the landlord's corporation allowing for a more secured business rescue plan.

Lucinde Rhoodie: Thank you everybody. That is it for our discussion this morning. So thank you for joining us and for tuning in to listen.