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Landlord’s Rights against Companies in Business Rescue

Landlord’s Rights against Companies in Business Rescue

Restructuring of companies in financial distress is on the increase. Chapter 6 of the new Companies Act, No. 71 of 2008 (the Act) introduce business rescue to the South African business playfield.

Section 133 of the Act provides for a moratorium on legal proceedings and enforcement action against a company undergoing business rescue, save where consent is granted by a court of law and/or consent is granted from the specific business rescue practitioner. This has far reaching effects on landlords, creditors and employees only to name a few.

The reasoning behind the moratorium offers critical breathing space to business rescue practitioners allowing them to investigate the affairs of a distressed company, and in order to provide a basis to formulate a business rescue plan, to the benefit of creditors, without alternative distractions of litigation against the company.

A question on every landlord’s tongue where a tenant is placed under business rescue, is when and how it can evict a tenant who was placed under business rescue in order to mitigate its damages.

The predominant debate in the South African courts around moratoriums under Section 133(1) of the Act is what constitutes a “legal proceeding” or “enforcement action” for the purposes of the moratorium.

Do the wording “Cancellation” and “Eviction” falls within the proper meaning of Section 133(1)? If so, and in the absence of written consent by the business rescue practitioner or leave of the court, any cancellation will be of no force or effect.

In Cloete, Murray and another NNO versus First Rand Bank Ltd trading as Wesbank 2015 (3) SA 438(SCA), the court decided that the creditor of a company under business rescue can unilaterally cancel an existing agreement that it has concluded with a company prior to it being placed under business rescue as the phrase “enforcement action” in Section 133(1) of the Act does not include the cancellation of an agreement.

In the matter of Kythera Court versus Le Rendes-Vous Café CC and another, the Applicant, Kythera Court, was a property rental firm, and the Respondent, Le Rendes-Vous Café CC, was renting a business premises form the Applicant. The Applicant brought an urgent eviction application on the grounds that the lease agreement between the parties has been cancelled, alternatively has expired. The Applicant in its court papers sought an order granting it leave to bring the application. The learned judge found that the requested leave was not necessary in this particular matter.

The learned judge further found that if the Respondent had invoked Section 136(2)(a) of the Act, the Applicant would have been prevented from cancelling the lease agreement and instituting eviction proceedings. Section 136(2)(a) of the Act makes provision that a business rescue practitioner may suspend an obligation arising out of an agreement to which the company under business rescue was a party to. In causa the business rescue practitioner did not suspend the Respondent’s obligations in terms of the Agreement of Lease and in fact confirmed the existence of the lease agreement and undertook to give the Applicant written confirmation that the rental payments will be made. The general moratorium which is captured in Section 133(1) of the Act, does not exclude legal proceedings for ejectment, where a rental property is in an unlawful possession of a tenant, e.g. where the agreement of lease was lawfully cancelled.

Therefore it is of paramount importance that a business rescue practitioner need to suspend totally, or in part, the obligations of the company in business rescue arising in terms of any agreement. If this has been done timeously, the landlord/creditor will not be able to evict the unlawful occupier of the premises without consent from the business rescue practitioner or court order. Phrased differently, in order to circumvent the effect of the moratorium, the landlord/creditor that wishes to cancel the agreement and evict the tenant must do so prior to the business rescue practitioner suspending the company’s obligations.

Therefore, once a tenant has been placed under business rescue, a landlord, should, in order to protect itself, urgently consider whether it would be necessary to evict the tenant and then take the appropriate steps.