By Liad Hadar – Director
This article first appeared in Asset Magazine’s August 2022 edition

Practical advice on how to handle tenant utility non-payments

Any landlord or managing agent almost certainly knows how frustrating and expensive it can be to deal with tenants who fall into arrears with their rental and utility payments. Notwithstanding that this pertains to all tenants, when it comes to industrial tenants, the cost of non-payment of utility charges can spiral rapidly, and in some cases, leave landlords substantially out of pocket due to the typically high amounts involved.

Whilst rent arrears alone are not acceptable, utility charges are effectively out of pocket disbursements which the landlords pay on behalf of recalcitrant tenants and evoke even stronger feelings of injustice and resentment.

Landlords don’t always factor in the time required for legal and procedural recourse to be implemented. It’s always a good policy to maintain awareness of your tenant’s business health and to act promptly and proactively if issues arise. It is equally important to be aware of all options available to a landlord experiencing these situations and decide which steps to take to protect the landlord’s position.

Spot the early warning signs

Be aware of circumstances which may result in rental and utility payment defaults. Notable red flags may include sudden staff layoffs or equipment sales, deterioration of premises, and, most telling, – a pattern of late or part payments. If you are concerned about a tenant’s ability to meet their obligation, the best thing you can do is to act immediately.

Engage early, engage decisively

The sooner you act, the better.

Allowing arrears to run into weeks or months can have a disastrous knock-on effect. Adding the utilities non-payment into the equation further exacerbates the situation.

When it comes to substantial utility arrears, a very practical remedy available is to approach the relevant municipality to request a disconnection of utilities at the leased premises and/or to approach the High Court seeking a Court Order to that effect.

From the point of view of the municipality option, even if a municipality is approached directly with a request by the landlord to cease providing services to the leased premises,
disconnection is not immediate. In fact, each municipality’s respective collections process must still be followed strictly by the municipality. The standard procedure is commonly as follows:

• The municipality issues a demand for payment providing the account holder with a certain number of days for settlement of the account, whereafter only then is a pre-
  termination notice issued.
• This procedure generally then allows for a further 14 day period for payment or the
  negotiation of an arrangement.
• If no payment is made, services are usually (or hopefully) disconnected approximately seven days after the notice is issued.

The above is a best-case scenario of a fully functioning and well managed municipality with systems and processes in place. Factoring in procedural delays, this process can sometimes take two to three months – while utilities are still being freely (literally) consumed by a tenant.

Avoid cumulative financial losses

A landlord or managing agent might be tempted to delay action due to the mistaken belief that a tenant will rectify their arrears in due course. It’s necessary to bear in mind that failure to seek legal or practical recourse early on will only make it more difficult to curtail greater losses as the situation worsens. Obtaining a Court Order enables the landlord to initiate action early on and to compel a tenant to prioritise their financial obligation – especially when faced with complete shutdown of their access to utility services.

When dealing with tenant utility arrears, every single day counts, and every step taken can lead to the protection of the landlord’s position.

The process, executed properly

In cases where a tenant is in default and there is a poor prospect of recovering payment, coupled with a strong likelihood of rapidly increasing utility charges, disconnection of utility services must be expedited as quickly as possible. This can be approached in two ways:

• Approaching directly or instructing your property attorney to approach the relevant municipality directly to inform them of the issue and that the landlord no longer wishes for services to be provided to the property (as well as a threat that the landlord will no longer make any payments towards the account). This will ultimately lead to disconnection by the municipal authority on the basis of non-payment by the account holder and registered owner of the property.
• Approaching the High Court to apply for a disconnection order which authorises the landlord to lawfully disconnect utilities to the leased premises itself without the need
  for the municipality to do so.

Both these approaches can be implemented concurrently. Either one could yield a faster response and it makes practical sense to employ both.

Avoid losing a dispute

When utility services are disconnected unlawfully, a tenant may seek a spoliation order from the Court, on the basis that they have been unlawfully deprived of the right to possession. The common law remedy of spoliation is intended to provide relief to those who have been deprived of services without due legal process having been followed.

Landlords should not take matters into their own hands or pre-empt due legal process. If a tenant seeks a spoliation order, they must be able to demonstrate that they have been unlawfully deprived of their peaceful and undisturbed right of possession. As unfair as it may appear in the circumstances, the tenant will ultimately be successful in obtaining a Court Order compelling the landlord to reconnect the services and the landlord will most likely be ordered to pay the tenant’s legal costs.

Conversely, if due process has been followed there are generally no grounds upon which a tenant can successfully seek the reconnection of the utility services to the leased premises.

Given the prejudice suffered by landlords in the above situations, it is encouraging that recent case law has been in support of applications for disconnection of services from leased premises. In Eskom Holdings SOC Limited v Masinda [2019] ZASCA 98, and similar cases where tenants opposed such applications, the Court has consistently upheld the validity of disconnection orders and allowed same.

Consult the experts

If you are faced with utility non-payment by a tenant, speak to a property law specialist who can assist you with taking the necessary steps to best ensure an effective disconnection of services to the leased premises. This not only helps minimise financial losses but also doubles as an effective tool to push the tenant into remedying its breach of non-payment.