Parallel to the panic induced by Covid-19 in recent months has been the rising fear felt by individuals and business owners regarding their contractual obligations, or rather their looming inability to follow through on these obligations. In a bid to find relief, attention has been drawn to the legal provision force majeure, which translates literally as “superior strength” and refers to extraordinary events and calamities which render the performance of contractual obligations objectively impossible. What has previously been merely glossed over by contracting parties, is now more relevant than ever to South Africans desperate to obtain some relief in these harrowing times. In this interview with Alec Hogg, Philip Geromont, executive at ENSafrica, provides a clearer understanding of this provision and its application to commercial rental contracts in South Africa.- Nadya Swart
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It’s a warm welcome now to Philip Geromont who’s a partner at ENS. I see the communication that ENS sends out often and I read through it Philip, and there’s always something interesting there, but particularly interesting was the piece that you wrote in it this past week about rentals. Many business owners are wondering whether they have to still pay rent because the government has stopped them from using the premises for 21 days – in the lockdown of 21 days you have to stay at home. So, what’s the legal position on this?
Thank you very much Alec. Our firm has really received a number of inquiries from corporate clients – both local clients but also overseas clients which lease business premises here in South Africa, and they’ve asked us to investigate whether, as you mentioned now, they would be entitled to suspend the payment of rental during the lockdown period. In Germany, for instance, you may have heard large groups, such as Adidas, have suspended payments of rental in respect of the stores which they rent for the duration of their lockdown period. Other companies have done so as well in Europe and we’ve been asked by both international and local clients whether we would investigate this point and see whether, in South Africa as well, there is a possibility for tenants to suspend payments of rental during the lockdown period. We have considered this, and our view is that it should be possible in not all but in certain instances.
Okay, that’s interesting. So, for people who are paying rent at the moment or will have been sent their invoices – do they just not pay them, and what are the instances where, by law, they won’t have to pay?
This would really depend on what the agreement says but, perhaps to give you some context and to explain how we’ve come to this conclusion. Just a few words about lease agreements; as you would know a lease agreement is an agreement entered into between two parties – on the one hand you’ve got the landlord, which is the owner of the property, and on the other hand you’ve got the tenant, who wants to lease the property. Both parties have got certain fundamental obligations in terms of the agreement. The main obligation of the landlord is to make available the property to the tenant and to ensure that, during the entire lease period, the tenant has the undisturbed use and enjoyment of the property, and of course the main obligation of the tenant is to pay rent. Now in terms of the lockdown regulations; a number of businesses or stores have to remain closed for the duration of that period. This means that the landlords of such stores or premises that are leased have a legal impossibility to perform their main obligation under the contract which is to ensure that the tenant has the undisturbed use and enjoyment of the property. So, this is a legal impossibility – they’re not allowed to make the premises available and this would constitute in our law a case of force majeure or supervening impossibility. What happens in such cases is that when the performance of the contractual obligations becomes impossible, as is the case here, and the landlord cannot ensure that the tenant can enjoy and use the premises in an undisturbed manner, the landlord, because it’s a case of force majeure or supervening impossibility, would be relieved from its obligation for the duration of the impossibility – that would be the duration of the lockdown period. The other party to the contract, which would be the tenant here, is likewise relieved of performing its reciprocal corresponding obligation, which would be the payment of rent. That’s the principle as it applies under South African law. Generally, our courts have also applied this principle to lease agreements and have in different cases held that the tenant which doesn’t have the enjoyment of the property can either claim total or partial remission of rent during the period where they cannot use and enjoy their property. This has also been confirmed in a matter by the Court of Appeal which specifically mentioned that the intervention of the sovereign power whether by legislation or by executive action – and here the lockdown regulations which have been published would be considered as an executive action – would be considered to be a case of force majeure or supervening impossibility. So in those circumstances; tenants whose shops or businesses have to remain closed during the lockdown period would in principle – and underlining principle – be released from the obligation to pay rent – either totally or partially depending on whether they are totally or partially deprived of the enjoyment of the premises.
Well there’s a good legal background, but in the practical world what happens – do you just not pay your rent at the end of the month when you get sent the bill?
Practically, what we would recommend really is for the tenants to approach the landlords to explain the situation from their perspective. Also, to have a look at what the agreement states, because there could be provisions in the agreement which would differ from the principles I’ve just described or which would derogate from them, and try to find an amicable bill or an arrangement with the landlord which would hopefully be to the satisfaction of both parties. I wouldn’t just recommend for the tenant to stop paying without first notifying and / or discussing with the landlord. Hopefully, they will have the landlord also understand the position.
Fascinating insights there from Philip Geromont of ENS – putting the law on the table and exactly what the situation is if you are a tenant, which many business owners are, and you haven’t got use of your property, well – it’s force majeure. It will be interesting to see how the landlords react to all of this, but I guess the laws are pretty clear on it.
