It is difficult to believe that the hard lockdown, which arguably changed the way business is done, not only in South Africa, but worldwide, hit us all, nearly three (3) years ago, towards the end of March 2020. Landlords and managing agents will recall that, for the initial period from the end of March to June 2020, there was much uncertainly in the commercial property industry as to whether tenants are liable for the payment of full rental during lockdown periods in which they were prohibited from trading as a result of the regulations put in place by Government. This firm has, since the time that the possibility of a lockdown was first raised early in March 2020, held the view that a lockdown would not constitute impossibility so as to ordinarily excuse a tenant from the obligation to pay rent.
Up to now, the matter was not dealt with fully in any reported court decision. There were a number of judgments where tenants were ordered to pay rental for periods after the so-called hard lockdown, in circumstances where tenants were no longer legally prohibited from trading, but either chose not to trade, or where they were trading but suffering losses due to reduced trading conditions.
In a recent decision of the Gauteng Division of the High Court of South Africa, Pretoria, handed down in December 2022, some clarity is at long last given with regard to the question as to whether a retail tenant is obliged to make payment of rental for the hard lockdown period of April and May 2020. The judgment was in the matter of Hennops Sports (Pty) Ltd v Luhan Auto (Pty) Ltd.
The facts of the matter, in short, are that the landlord, Hennops, had concluded a commercial lease agreement with Luhan, the tenant, during July 2017, in terms of which Luhan leased certain premises from Hennops for a period of five (5) years, in order for Luhan to conduct a business of a motor vehicle dealership from the leased premises. The lease agreement, as usual, makes provision for rental to be paid monthly in advance. Even before the lockdown, Luhan had been a problematic tenant, as a compromise was reached between Luhan and the landlord during February 2020 for the payment certain arrear rentals, which undertaking was in any event not adhered to. Once the lockdown was declared, Luhan ceased trading during the lockdown period, but resumed trading thereafter. It also failed to pay rental and other charges for the months of April to July 2020. Interestingly, the lease agreement provides for a penalty of 10% upon non-payment of rental, which formed part of the landlord’s claim, and which will also be discussed below.
As a result of the arrears, the landlord issued summons in the Magistrate’s Court against Luhan for payment of the arrear rentals and other charges. The landlord’s claim was dismissed, and it filed an appeal to the Pretoria High Court. The decision in this matter is therefore a decision by two judges, which of course carries more weight than a decision by a single judge. A Magistrate’s Court, as well as a High Court of first instance, will therefore be bound by this judgment.
Luhan’s defense to the claim was, in the main, premised on the contention that the lockdown regulations constituted casus fortuitus, which is an exceptional or extraordinary occurrence that was not reasonably foreseeable at the time that the agreement was concluded, and which renders performance of a contractual obligation temporarily impossible. As such, the central point of the dispute was whether the lockdown constituted a supervening impossibility in respect of the performance of the parties’ obligations in terms of the lease agreement.
The Court commenced the discussion by considering the essential elements of a lease agreement, which are the following:
- There must be a lessor;
- There must be a lessee;
- There must be a thing;
- There must be a use and/or enjoyment of the thing;
- There must be a fee or price for the use of the thing.
If any of these essential elements falls away, the lease agreement would terminate by operation by law.
The court stated that the lease agreement was not founded on the successful sales of motor vehicles, but was founded on the basis of a premises being provided for vehicles to be housed prior to sale. Having examined the English authorities in this regard, the court pointed out that the foundation of the contract is the primary aspect to be examined when a situation arises where impossibility is claimed. It does not matter what one of the parties’ objects in concluding the agreement was, as such object would probably be irrelevant to the other contracting party. The court reiterated findings by different courts in our country that commercial impossibility, or the fact that performance of the contract is no longer as profitable as initially anticipated, does not discharge a party to a contract from the duty to perform its obligations.
The court found that, in the present matter, the lockdown regulations, even though it prohibited Luhan from trading from the leased premises, did not preclude it from continuing to store vehicles at the leased premises. The lockdown regulations did not render it illegal to give usage and enjoyment of an immovable property, and so too did it not become illegal to make payment of rental. As such, the tenant cannot argue that it was legally impossible for it to perform its obligations under the lease agreement.
The court furthermore pointed out that the lockdown regulations aimed to prohibit people from moving in and out of premises, but did not prohibit the conducting of business in a virtual manner. As such, the restrictions of the lockdown did not imply that no vehicles and/or other stock may be kept or housed inside a leased premises or that such stock could not be traded electronically. As such, even during the hard lockdown, leased premises throughout the country continued to be occupied by tenants, and other tenants continued to pay rent. Performance in respect of the lease agreement was therefore not made impossible. In our view, a further example of this is that many tenants were in fact able to trade (e.g. pharmacies) and that, had the premises not been occupied by the tenant in question, the landlord could have let out the premises to such a tenant who was legally permitted to trade – as such the tenant therefore still had beneficial use and occupation of the premises.
An important aspect discussed by the court was the landlords’ obligation to give the tenant free and undisturbed possession of the leased premises, which only entails that the landlord is not entitled to disturb such possession – it does not mean that whenever a tenant is disturbed in his occupation, he is excused from paying rent. In a number of matters over the past few years in which our firm was involved, the tenant alleged that the lockdown resulted in it being deprived of its beneficial use and occupation of the leased premises as a result of the lockdown. The court indicated that this argument is legally incorrect, as the obligation on the landlord does not extend to situations such as the lockdown.
As a result of the aforegoing, the court was of the view that the tenant, Luhan, was obliged to make payment of rentals and other charges in respect of the hard lockdown period.
In so far as the penalties for non-payment was concerned, the court pointed out that, where the parties had agreed on a specific penalty in a lease agreement, it was incumbent on the party who subsequently wishes to challenge such penalty, to prove that the penalty raised was disproportionate to the prejudice suffered. This means that, in the present matter, Luhan had the onus to prove that the penalty equivalent to 10% of the unpaid rental was disproportionate to the prejudice suffered by the landlord as a result of non-payment. As it failed to lead any evidence of this aspect, it was not open to the court to reduce the penalty, and the court was not entitled to reduce same on its own accord, without evidence being tendered on that aspect.
As a result, the landlord was successful with the appeal, and the tenant was ordered to make payment of rentals for the lockdown period, together with the penalties raised.
We welcome the judgment, as it certainly gives some clarity with regard to landlords’ claims for arrear rentals during the lockdown period. Even though most of the claims in respect of that period would be finalised by now, it is of course still possible for a landlord, in circumstances where the issue of liability for payment of rent for the period from 1 April 2020 has not yet been resolved, to institute action for the recovery of those amounts. It is to be kept in mind that such claim will have to be instituted, and summons served on the tenant, prior to 31 March 2023 in order to ensure that the claim does not become prescribed.