The legal position of a landlord in business rescue proceedings

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BUSINESS NEWS - A landlord is faced with a dilemma when his tenant enters into business rescue proceedings, due to the activation of a moratorium (“cease”) of legal proceedings against the party in business rescue.

The tenant in business rescue often continues to occupy the leased premises under the protection of the moratorium and fails to pay his rent for the leased premises, with the result that the business rescue process is effectively conducted at the expense of the landlord.

To compound the issue, the landlord has to bear the additional expense of municipal rates and taxes and in some cases public utility services such as electricity and water, sanitation and refuse removal.

The landlord is faced with inter alia three main issues, namely the recovery of his property, the ongoing payment of rent and the payment of recurring third-party charges. As regards the recovery of his property, a number of cases have held that the property owner may institute legal proceedings to recover his property if he simply cancels the lease agreement, whether cancellation takes place before or after the commencement of business rescue proceedings. This may be done without consent of the court or the business rescue practitioner. The moratorium in S 133(1) of the Companies Act 71 of 2008 (as amended) does not prevent a creditor from cancelling an agreement with a company that is under business rescue. Cancellation does not amount to ‘enforcement action’ within the purview of S 133(1). This is supported by Cloete Murray NO v FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA).

In contrast to enforcement action, cancellations are not ‘commenced or proceeded within any forum’ as envisaged by S 133(1). The mere cancellation of the contract per se however has no impact on the company’s continued possession or occupation of the property and in simple terms, it does not automatically entitle the landlord to repossess the premises, unless permission is obtained from the business rescue practitioner or by an order of the court.

The suspension of a contract under S 136(2) applies only to contractual obligations of a company that become due during the business rescue proceedings, however pre-commencement obligations cannot be suspended. This is supported by Stanford Hill CC v Velvet Star Entertainment CC (1506/15) [2015] ZAKZDHC 34, where the court held that the suspension of a lease agreement by the business rescue practitioner had no effect on the claim for rental due prior to the commencement of business rescue proceedings and held that the landlord was entitled to cancel the lease agreement.

In Kythera Court v Le Rendez-Vous Café CC 2016 (6) SA 63 (GJ), the court decided that the moratorium provided for in S 133(1) did not apply to ejection proceedings where the lease has been cancelled, yet the company has failed to vacate the property. Once the lease has been cancelled, the court stated (on an unduly wide interpretation of the phrase) that the company is no longer in ‘lawful possession’ of the property. The landlord was consequently not required to obtain the leave of the court under S 133(1)(b) to bring the ejection proceedings.

These cases have ‘the effect of chipping away at the moratorium contained in S 133(1) of the Act.’ The moratorium, in essence, is intended to allow the company in business rescue to continue its commercial activities by retaining amongst others, rented business premises in its possession, even if the owner of the property wishes to recover it.

The moratorium is intended to restrict the property owner from freely repossessing its property from the company during business rescue, thereby, frustrating the rescue process. As regards the rights of the property owner to be paid ongoing rent or other charges during business rescue, the property owner may, only with written consent of the business rescue practitioner in terms of S133(1)(a) or with the leave of the court under S 133(1)(b), bring legal proceedings in respect of the payment of rent. In Chetty t/a Nationwide Electrical v Hart NO 2015 (6) SA 424 (SCA) para 40, the court decided that a creditor may seek the leave of the court under S 133(1)(b) to institute legal proceedings either if the business rescue practitioner refuses to give his permission or without first seeking the permission of the business rescue practitioner under S 133(1)(a).

The legal position regarding landlords in business rescue proceedings continues to develop and the proposed Companies Amendment Bill of 2021 refers to landlords in more definite terms to confirm their position, either as a concurrent creditor with voting rights in terms of the proposed business rescue plan, or where outstanding rent post-commencement is regarded as post-commencement financing and therefore preferent in claims.

Article by Marinus Barnard, Associate (LLB)

For more information, kindly contact Marinus on marinus@rgprok.com or 044 601 9900 (George office).