On 26 March 2020, and in terms of the Disaster Management Act, South Africa was placed under nationwide lockdown. Originally set to continue until 16 April 2020, regulations were subsequently amended extending the lockdown to 30 April 2020.
As we know, in terms of the regulations, all businesses are to remain closed during the lockdown period except for certain “essential services” which include medical facilities, supermarkets and banks, together with those businesses which support the essential services. This enforced closure is plunging tenants and landlords into the unknown as the coronavirus (COVID-19) begins to significantly impact businesses. The negotiation of rent while tenants’ incomes are heavily affected will be key for the financial viability of both parties moving forward. Negotiating rentals will be a major priority for commercial property landlords and tenants in the coming months, as the impact of coronavirus is felt across the country.
However, the fundamental question that arises is whether tenants are legally obliged to continue to pay their rent during the lockdown period? The answer flows from two distinct areas of South African law; contract law and the common law.
THE COMMON LAW
In terms of our common law, where an agreement has been reached between parties and something occurs beyond the control of one the parties, which makes the performance of their contractual obligations impossible, the principle of supervening impossibility will apply.
Generally, this means that if an event occurs (national lockdown), which does not flow from a deliberate act/omission of the parties (tenant or landlord), which makes it impossible for one party (tenant) to perform (pay rent), then that party does not have to perform.
This view has been supported by our Courts which have held: “A remission is claimable where the enjoyment of the property for the purposes for which it was let is hindered or prevented by some vis major happening without the default, actual or constructive, of either party”.
Our courts have gone further to confirm that an act of government, in the current situation the imposition of a national lockdown, qualifies as a vis major. Accordingly, in terms of the common law, tenants who do not supply essential services and are forced to shut will be deprived (or at least partially deprived) of the beneficial enjoyment of their leased premises, on the basis that it is legally impossible for landlords to perform their obligation to give undisturbed use and enjoyment of the premises due to the national lockdown, and will be excused (or at least partially excused) from paying rent.
The difficulty with the common law is that it can be somewhat limiting, in that our Courts have held that when considering an alleged supervening impossibility, the Court must consider:
“the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, to see whether the general rule ought, in the particular circumstances of the case, to be applied”.
Accordingly, a large proportion of commercial lease agreements vary the common law position and include a specific “force majeure” clause which is used to protect the the parties in circumstances where either of the parties is unable to perform in terms of the lease agreement due to an event which is beyond their control and not caused through either parties act or omission.
This type of clause usually includes:
- A closed list of events that would constitute a force majeure;
- A further general definition of what constitutes a force majeure;
- Whether notice must be given if a party intends relying on the force majeure clause;
- The time period during which a party unable to perform pursuant to force majeure can be excused from performance; and
- The time period after which, should the force majeure continue to exist, the other party may cancel the contract.
The terms of a force majeure clause may or may not make particular reference to a pandemic or may specifically exclude such an event as a force majeure completely. The terms will depend on what was negotiated at the time of signing the lease agreement.
Tenants and landlords need to therefore take into account that each lease agreement may contain different specific provisions regulating a force majeure situation, or indeed may contain no reference to a force majeure at all, in which case the common law will apply. They accordingly need to take considered legal advice in relation to their specific situation and their specific lease agreement.
How should affected tenants and landlords approach rent negotiations?
Our State President, Cyril Ramaphosa, has repeatedly made it very clear that all citizens must work together, in solidarity and in partnership. It is therefore important to consider alternatives outside of the strictly applicable legal position, to find alternatives may provide a middle ground through which both landlord and tenant may seek to mitigate their loss.
Bearing this in mind, here are some key points to consider.
ENGAGE SOONER RATHER THAN LATER
It is critical that if commercial tenants are facing financial challenges, they should speak to their landlord as soon as possible. Don’t wait until 30 April 2020 to start engaging. The earlier the conversation begins, the more likely it is that a palatable resolution will be found.
SIMPLY NOT PAYING IS NOT AN OPTION
While many businesses will have little to no income during this period it is not practical nor likely to be legally defensible to remain in the property rent-free. Landlords will continue to have fixed costs in relation to the property, which they will similarly have to honour. This includes municipal rates, insurance, security and maintenance. Among the options available as part of negotiating a new agreement are reduced rent, which may mean paying a percentage of the full rent for a certain period, or deferred rent, which involves putting off a portion of the current rent and repaying it at a later date once the business environment has stabilised.
TENANTS SHOULD SEEK FINANCIAL ASSISTANCE
It goes without saying that tenants should attempt to access any and all financial assistance available to assist with rental payments. Funding from :
- SMME Debt Relief Finance Scheme administered by the Department of Small Business Development;
- Sukuma Relief Fund administered by Business Partners;
- Payment holidays offered by the major South African banks;
- Tax relief offered by the South African Revenue Service;
- Other industry specific relief funds.
All of which may limit the level of concessions a tenant needs to ask of their landlord. This is also important as many landlords will not qualify for relief in terms of these options.
AIM TO MAINTAIN TENANCY
An occupied commercial property is the best result for both parties, as it means the tenant and their business are in the best position to survive the downturn, while for the landlord it means they’re generating some rental income. A vacant commercial property means the business and tenancy has not survived, while for the landlord it will mean no rental income until the property is rented, and with vacancies likely to rise across most sectors, finding a new tenant quickly may be challenging.
Although it may sound trite – “a problem shared is a problem halved”, and every effort that both landlords and tenants can make to find a workable solution can only be for the benefit of both parties and our economy as a whole.