Landlords, Leases, Lessees and Legalities in Business Rescue

In most cases a company or corporation is placed in business rescue while occupying one or more business premises as a tenant. The business rescue practitioner (the practitioner) will need to exercise care in dealing with the lease-related affairs of the distressed entity. This article examines the legal aspects of these leases.

The starting point for this exercise is that the fact that a company is placed in business rescue does not on its own affect any of the terms and conditions of the lease agreement.

There is of course a likelihood that because the company is financially distressed, it will already be in arrears on its rentals and operating costs (lease charges) due to the landlord, and/or is about to fall into arrear. We therefore examine the various categories into which claims for lease charges can fall.

In summary, the landlord's claims for lease charges will fall into one of four categories:

  • Pre-commencement claims for any form of lease charges;
  • Claims for the period between commencement of the business rescue and date of suspension of payment obligations and/or date of vacation of the premises;
  • Claims for any period after date of vacation but before suspension or cancellation of the lease
  • Claims for the period after date of vacation and/or date of suspension.

First, any lease charges that arose prior to commencement of the business rescue will be treated as ordinary claims against the company. They will not be secured claims, subject to what appears below on the subject of the landlord's tacit hypothec. When a company is liquidated the landlord is automatically afforded a secured claim over any movable assets of the lessee on the leased premises. In terms of section 85(2) of the Insolvency Act 24 of 1936, this preference is conferred for a period of up to three months of rental (assuming rental is paid on a monthly basis), without the need for the landlord to perfect its hypothec.

However, a company in business rescue has not been liquidated and accordingly section 85(2) of the Insolvency Act does not apply. The landlord has therefore no hypothec. Even had the landlord applied to court prior to commencement of the business rescue for an order granting leave to attach the movable assets on the leased premises and thereby perfecting its hypothec, it would not be able to rely on that hypothec since it would be rendered unable to do so by the general moratorium imposed by section 133(1) of the Companies Act 71 of 2008 (the Act).

Second, we examine the claims of the landlord for the period after the date of commencement of the business rescue. The date on which such period will end depends on the facts, as expanded on below. The practitioner would be entitled in terms of section 136(2)(a)(i) of the Act, to furnish to the landlord a written notice to suspend the lessee's obligation to pay the lease charges (a suspension notice). It is also possible, indeed it is common, that the practitioner quickly comes to the opinion that continuing to rent particular leased premises is detrimental to the company in distress and therefore that the premises must be vacated as soon as possible. A suspension notice may be given before or after the leased premises are vacated, or simultaneously with a vacation of the leased premises.

Let us assume that the vacation occurs first, before the suspension notice is given. In that event, the company in business rescue incurred lease charges to the landlord from the commencement of the business rescue until the date of vacation. These lease charges necessarily form part of the operational expenses of the business and as such, in our view, constitute "costs arising out of the business rescue proceedings" as contemplated in section 135(3) of the Act. These costs will therefore be elevated above and paid before all categories and rankings of claims, including the super-preferences accorded to the claims of employees and secured creditors contemplated in sections 135(1) and 135(2) of the Act.

If a suspension notice is given before the date of vacation of the leased premises, once again the lease charges incurred during the interim period between commencement date and the date of the suspension notice, will constitute costs of business rescue in terms of section 135(3).

Practitioners should note that until and unless the company vacates the leased premises or a suspension notice is given, the company will continue to incur these section 135(3) costs.

The third category of claims arises where the company vacates the premises but the practitioner does not give a suspension notice. The company has repudiated the lease agreement. The landlord then has in common law an election either to accept the repudiation and cancel the lease agreement, which entitles the landlord to claim damages, or to reject the repudiation and continue to claim lease charges.

Clearly any damages claim by the landlord would constitute an ordinary unsecured claim against the company, as one would expect in common law and as is in any event confirmed by section 136(3). This section provides that from the date of suspension of any obligation in terms of a contract or the cancellation of a contract, the counter party will have only a claim for damages against the company in business rescue.

The question arises as to the nature of the landlord's claims for the lease charges while the lease continues. In my view, while these are claims for specific performance and not damages claims, they do not fall into the category of section 135(3) costs of business rescue. This is because the lease charges are not incurred for the purposes of the company continuing to operate its business (the company having vacated the premises). Such claims are nevertheless not afforded any special ranking and would be ordinary unsecured claims.

The fourth category of claims arises as soon as a suspension notice is given by the practitioner. Once the suspension notice is given, section 136(3) of the Act will apply. Such a claim would be an ordinary unsecured claim in the business rescue ranking concurrently with all other unsecured claims.

One of the important skills required of the business rescue practitioner is managing the expectations of affected parties, and this is particularly true when dealing with landlords. It will be borne in mind that most landlords will have a mindset, deriving from decades of past experience, that they have secured claims over the movable assets. As explained above, this is not the case.

Practitioners do not have it entirely their own way. The general moratorium imposed by section 133(1) of the Act does not prevent the counter party to a contract with a company in business rescue from lawfully cancelling the contract. This can be of significance in a lease scenario, as the practitioner might want the company to continue to occupy one or more leased premises as part of the rescue plan. If that is the case the practitioner needs to ensure either that the lease charges for the desired premises are paid (as section 135(3) costs of business rescue), or that a suspension notice is given, before the landlord can exercise an election to cancel.

Practitioners are advised to tread with care in dealing with leases.

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