The national lockdown in South Africa has left many companies financially distressed and unable to meet their contractual obligations. Looming on the landlord's horizon may well be its approach to tenants who are placed under business rescue.
In an attempt to save the company from impending insolvency, section 136(2) of the Companies Act 71 of 2008 ("the Act") grants the business rescue practitioner ("the BRP") the power to entirely, partially or conditionally suspend the company's contractual obligations. As long as the company's obligations arise from contracts that were concluded prior to the commencement of business rescue and these obligations fall due within the business rescue period, the BRP may suspend the contractual obligations for the duration of the business rescue process.
Even more empowering to the BRP is section 136(2)(b) of the Act, which provides the BRP with the opportunity to apply to court, on an urgent basis, to cancel any contractual obligation on any terms that are just and reasonable in the circumstances.
It must however be noted that the BRP may not suspend, and a court may not cancel, any employment contracts and agreements contemplated in 35A and 35B of the Insolvency Act 24 of 1936 ("the Insolvency Act"). These two sections deal with exchange agreements and master agreements related to over-the-counter derivatives.
To cancel or not to cancel, that is the question
In the event that a tenant breaches any terms of the lease agreement prior to or after the commencement of business rescue proceedings, the landlord retains the right to cancel the lease agreement during the business rescue process, provided that the cancellation is valid.
In BP Southern Africa (Pty) Ltd v Intertrans Oil (Pty) Ltd,1 the court held that a landlord's obligation to avail the premises and the tenant's obligation to pay rental are reciprocal obligations. If the BRP elects to suspend or cancel any of the tenant company's contractual obligations, then the tenant company in business rescue will not be entitled to insist on counter performance.
Moreover, in Murray N.O. & Another v First Rand Bank Ltd t/a Wesbank,2 the court found that valid cancellation of an agreement for the rental of property would render the company's possession of the property pursuant to cancellation unlawful. Given that the moratorium on legal proceedings does not cover unlawful possession, a landlord is entitled to commence eviction proceedings against the company with the BRP's written consent or with leave of the court.
Should a landlord elect to continue to lease premises to a tenant in circumstances in which the tenant continuously fails to meet its rental obligations then the landlord will enjoy the rights attributed to a concurrent creditor in respect of its claim for arrear rental, in the business rescue process. The landlord would be entitled to vote on the adoption of a business rescue plan and the recovery of rental owing to it will depend on the terms and successful implementation of the business rescue plan. According to section 154(2) of the Act, once a business rescue plan has been approved and implemented, a creditor is bound by its terms and cannot seek to enforce any debt owed by the company immediately prior to the commencement of business rescue proceedings not contained in the adopted plan.
With regards to a contracting party's right to recourse in the event that contractual provisions are suspended or cancelled by the BRP, section 136(3) of the Act provides that any party to an agreement that has been suspended or cancelled may assert a claim against the company for damages only.
It may be that the post Covid-19 landscape will entail a large reduction in demand for rental space. Property owners may accordingly decide that it is commercially beneficial to assist their tenants through the business rescue process in order to secure their future tenancy.
1 2017 (4) SA 592 (GJ).
2 2015 (3) SA 438 (SCA)
Originally published by Clyde & Co, on June 2020
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