By Liad Hadar, Director of Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s July 2022 edition

Hearing the words “business rescue” leaves most feeling downbeat, perhaps fairly so, especially when it comes to its potential effect on a landlord’s rights.

On the whole, since the inception of business rescue proceedings in 2011, there has been a steady uptick in the annual number of companies that are making use of business rescue mechanisms.

Given that these companies are predominantly private companies, it is no surprise that many landlords have encountered the “dreaded” business rescue notice pertaining to one or more of their commercial, retail or industrial tenants.

This article will deal with the purpose of business rescue and the specific impact that it has on the tenant-landlord relationship. It will help landlords understand their rights and their potential risks, and also provides practical tips on how to gain an advantage to best protect their position.

The purpose of business rescue – tenant specific

The purpose of business rescue is to maximise the likelihood of a financially troubled tenant continuing to trade, hopefully long term. In fact, in terms of the New Companies Act, “business rescue” is defined as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

The whole idea is to provide the appointed business rescue practitioner (BRP), generally an expert in this role, ample opportunity to develop, present and implement a plan to rescue the tenant by, amongst other things, restructuring the business and its affairs.

The win/win situation would be that the tenant avoids a liquidation and that the plan delivers a better return for the landlord and other creditors than what they would have received in an immediate liquidation of the tenant.

Whilst great in theory, there is no guarantee that the BRP will determine that the tenant is in a position for a viable plan to be developed and implemented, nor that any such plan, if viable, will be accepted by the tenant’s creditors.

Further, even if there is a prospect of long-term recovery for the tenant, there are several possible consequences, particularly for landlords housing such tenants.

Consequences of business rescue on landlords

The primary concerns of business rescue proceedings for landlords are:

• A general moratorium on civil legal proceedings against the tenant; and
• That its lease agreements may be cancelled, or the tenant’s contractual obligations may in certain circumstances be entirely, partially or conditionally suspended by the BRP.

In terms of the moratorium on civil legal proceedings, a landlord cannot execute against a tenant in business rescue, even if a judgment against it for prior arrears has been obtained. Further, more worryingly, the landlord could be in a position where it cannot cancel and evict a tenant throughout the business rescue process, which could run for several months. While Section 132 provides that business rescue proceedings should last for a period of three months, an extension is possible, and does often happen.

In terms of the other possible effects on the landlord’s rights, there is a very real risk that the BRP develops a plan which includes a rental payment “freeze”, i.e. non-payment of rental, a rental reduction or an early cancellation of a lease agreement.

As a landlord or managing agent, imagine being saddled with a tenant – already in arrears – who is now in business rescue, and then the BRP proposes that rental should not paid for several more months, in order to allow the tenant breathing room to revive its financial position.

In our experience over many years as attorneys for landlords dealing with tenants in business rescue, this is a common recommendation by the BRP (and naturally without any objection of other creditors of the tenant!).

Act now; thank us later

Despite the moratorium on legal proceedings, the landlord is entitled to cancel a lease agreement during business rescue for a breach/es that occurred prior to the commencement of the business rescue proceedings.

If your tenant has been in breach of the lease agreement prior to going into business rescue, and you have no intention of continuing the relationship with them, then we advise you to act immediately to cancel the lease agreement based on such breach/es.

This removes the risk of the BRP subsequently suspending the tenant’s obligation to pay rent, which then makes any subsequent cancellation more complicated or invalid.

In such circumstances, having lawfully and validly cancelled the lease agreement, the tenant is required to vacate the landlord’s premises. Should they refuse, the landlord can instruct its attorneys to proceed with a formal application for the tenant’s eviction, notwithstanding the moratorium on all civil proceedings.

In conclusion

Be aware of your rights and the potential risks if you receive notice of your tenant going into business rescue. And then – act fast!

If necessary, cancel the lease agreement as soon as you can to avoid the unenviable position of being forced to continue the relationship with a tenant in business rescue with its obligations to pay rental suspended by the BRP or a reduced rental being implemented.

Additional tip: you can always negotiate a new lease with the tenant, after cancellation, if you believe that the BRP’s plan is sustainable and suitable for you.

As a landlord facing the situation of a tenant going into business rescue, if you are unsure about anything, approach an attorney, preferably a Property Law expert with experience in handling tenants in business rescue, to timeously protect your rights and to place you in the best possible position during the ensuing storm.