By Liad Hadar, Director at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s July 2023 edition

Dealing with tenants in financial distress is a scenario every landlord hopes to avoid, yet it remains a reality in the ebb and flow of economic cycles. The recent South African Post Office (SAPO) debacle has brought this topic to the forefront.

It has been reported that SAPO rented 759 leased premises for operating branches or satellite offices and that the rent was up to date for only approximately 188 leased premises, resulting in a debt of hundreds of millions of rands and a severe impact (and headache) for numerous landlords.

This situation has highlighted the importance of understanding your rights as a landlord with a tenant facing financial distress resulting in liquidations or business rescue proceedings. To take the appropriate steps, you are required to recognize and consider your legal options and to then decide how to best protect your property asset value.

This means cancelling the lease agreement, obtaining ejectment orders and ejecting the tenants from the leased premises, despite the tenant being in business rescue proceedings or in liquidation.

Landlords are not obliged to continue suffering by housing such tenants, including SAPO by way of example. This article will serve to assist landlords facing this unenviable position.

Business Rescue and Liquidation in South Africa

When a tenant is a juristic entity (company or close corporation) and it proceeds with liquidation or business rescue proceedings, there is generally a significant implication for the lease agreement and the landlord-tenant relationship.

In South Africa, the Companies Act, 2008 governs business rescue and liquidation proceedings, with the Insolvency Act, 1936 also applicable.

Business rescue is a procedure aimed at rehabilitating a company in financial distress by providing temporary supervision, a temporary moratorium on creditors’ claims, and the development and implementation of a plan to rescue the company.

Liquidation, conversely, involves winding up the company’s affairs, selling its assets, and distributing the proceeds to its creditors.

Effects on Lease Agreements

When a tenant enters business rescue, the appointed practitioner may suspend or apply to court to cancel any obligation arising under an agreement to which the company is a party, including the lease agreement.

This could mean a temporary suspension of the tenant’s obligation to pay rent, subject to just and equitable compensation for any resultant damages that the landlord incurs. It’s crucial to note, however, that such suspension does not automatically terminate the lease agreement.

Upon liquidation, the liquidator may elect to abide by the agreement or terminate it, depending on what would be most beneficial to the creditors.

The above decisions however, left in the hands of the business rescue practitioner or liquidator, often results in placing the landlords in a state of uncertainty.

To compound this, in a worst-case scenario, landlords can find themselves with a tenant in substantial arrears continuing to occupy the leased premises all the while not paying current rental due to a suspension of the lease agreement (business rescue proceedings) or with little to no prospects of ever recovering increasing rent arrears from the tenant (liquidation).

Landlord’s Right to Cancel

In terms of Section 133(1) of the Companies Act, no legal proceeding, including enforcement action, may be taken against a tenant during business rescue proceedings.

As this essentially “freezes” legal proceedings against the tenant (without the written consent of the practitioner or with the leave of the court), a misconception has been created that the landlord is restricted from terminating lease agreements and ejecting the tenants without the leave of the court or consent of the business rescue practitioner – and this is simply incorrect.

The correct position is that landlords are within their legal rights to cancel a tenant’s lease agreement despite the abovementioned moratorium created in business rescue proceedings. The same applies in a liquidation scenario, where a landlord can cancel a tenant’s lease agreement if the tenant is in breach of the lease agreement.

Furthermore, as importantly, landlords are within their legal rights to proceed with legal action to obtain an ejectment order against the tenant in business rescue or liquidation.

Conclusion

The legalities surrounding a tenant’s business rescue or liquidation are complex, and landlords need to be well-versed in their rights and obligations such that they make the right decision to protect their asset values when dealing with a tenant in financial distress.

Landlords are not obliged to accept the situation and are not bound by any moratorium which precludes them from taking steps to cancel the lease agreements if the tenants are in breach of such agreements.

They also need to be proactive in protecting their interests by acting swiftly in cancelling lease agreements where they face the untenable position of a tenant occupying their leased premises without any reasonable prospects of recovery and whilst undergoing business rescue proceedings or liquidation.

The landlords should therefore take control of the situation, not rely on the discretion of the business rescue practitioner or liquidator and to then instruct attorneys to proceed with legal action to obtain ejectment orders against such tenants. This will ensure that they ultimately regain possession of the leased premises and begin the re-letting process. This includes, again by way of illustration, ejecting SAPO from their leased premises.