By Anja Van Wijk, Senior Associate and Chantelle Gladwin-Wood, Partner
The chances of any landlord or tenant coming out of the COVID pandemic unscathed are very low. Now, more than ever, the chances of a landlord being placed in the same position as if the breach had never occurred by way of the recovery of damages from the tenant, are very low. Due to the time, costs and the risk of a poor (or no) recovery occasioned with the institution of legal proceedings, it is predicted that the main focus of landlords will shift from recovering debt to mitigating damages as much as possible during these trying times.
Society has called on landlords to show their struggling tenants some leniency towards rental payments when the tenants are sincerely unable to comply with their obligations as a consequence of the pandemic. In part 1 of this article, we will be addressing the various options available to landlords to in view of mitigate their damages in terms of overdue rental payments. In Part 2, we will be considering the kinds of security that landlords who are giving their tenants a “break” might consider taking to secure the payment of the rental, to reduce the risks associated with their leniency.
Negotiation is Key
One of the most effective ways to ensure that you don’t waste time and money on debt collection is to come to an arrangement with the debtor for payment to be made in a way that is agreeable to both parties.
In order to make negotiations even an option, the tenant and landlord need to be very forthcoming with their financial situations and keep the lines of communications open from both sides.
Reducing the Risk
However, when negotiating with tenants where they have been unable to pay in the past, it is advisable for the landlord to obtain some security (or collateral) in order to enforce compliance with any breach of the payment arrangement. A future article will examine the kinds of security that a landlord might utilize in this scenario.
If the tenant is unable to offer any security, the risk that the tenant will default increases (because the tenant has “nothing to lose” if it defaults), and the risk of an under-recovery or no recovery at all, rises sharply.
Regardless of which option you opt for, the agreement reached should be reduced to writing and signed by both landlord and tenant.
Does COVID change anything?
It is only under very special circumstances that a tenant would be absolved of its obligation to effect rental payments i.e. if the commercial tenant has a very specifically worded force majeure clause in its lease agreement allowing the tenant to avoid its rental payment obligations or when the COVID-19 epidemic has caused rental payments to be objectively impossible in terms of common law (the principle of supervening impossibility). In writers’ opinion, since rental payments are still technically possible (i.e. EFT payments are still possible), although difficult, the principle of supervening impossibility has not been triggered by the COVID-19 epidemic. Further to that, it is the opinion of the writers hereof that a residential tenant, due to having full use and enjoyment of their property during lockdown, would not be able to rely on the force majeure clause or supervening impossibility in order to avoid his/her rental obligations to the landlord.
Option 1: Rental Holiday
A very forgiving and financially stable landlord may completely waive the tenant’s obligation to effect rental payments for a month or more. This is usually only agreed to if the tenant can prove that the tenant has no income for the months in question but would be able to “get back onto its feet” in the foreseeable future. The parties should agree how long this rental holiday will apply for or re-assess the financial situation of the tenant on a regular basis. The parties can agree that, for instance, rather than paying the full amount of rental due, the overheads for the property are still covered by the tenant (for example, where the tenant still covers the municipal charges or operational costs in order to limit the landlord’s out of pocket loss.)
Option 2: Rental Deposit Utilisation
In terms of common law, and unless limited by the provisions of the lease agreement, a landlord is entitled to utilise the deposit held to cover any arrears owed by the tenant. However, usually the deposit will only be sufficient to cover a month or two of rental.
If the landlord utilises the deposit to settle arrears whilst the lease is still running, there is a risk that if the tenant vacates the property and there is damage to the property (excluding fair wear and tear), the landlord may need to repair such damage from its own pocket. To prevent this risk, the parties could, however, agree that once the tenant is back on its feet, the tenant would, on a monthly basis, make payments towards replenishing the deposit to mitigate this risk. Most well-written lease agreements include a “top up deposit” clause, which permits the landlord to require the tenant to “top up” the deposit or reinstate it to its original amount, when it has been used by the landlord to cover unpaid rental.
Option 3: Rental Deferment
Rather than waiving the rental completely, the landlord could agree that the rental obligation would be postponed for a certain period and would be settled at a later stage when the tenant is back on its feet. In this regard, we suggest that the tenant sign an Acknowledgement of Debt on a monthly basis for the deferred rental which is not paid. An agreement should be reached as to how much the rental debt constitutes and when the rental debt would be satisfied by the tenant.
Option 4: Rental Reduction
Under Levels 5 and 4, some tenants may still have been able to partially trade from the property, or might have been receiving a portion of their income/salary, and accordingly, the landlord and tenant may agree to reduce the rental for a specific time. The tenant’s income can be reviewed on a regular basis and later on, when the tenant is able procure a proper income again, the initial rental agreed upon can be reinstated.
A landlord of a commercial tenant may agree to accept a percentage of the tenant’s gross income, turnover or profit instead of a fixed monthly rental amount.
These unprecedented times call for all South Africans to work collectively to save companies and jobs, and doing so often requires a measure of flexibility and crafting unique and innovative solutions to legal and financial problems.
Landlords and tenants need to be understanding of the dire reality in South Africa, and that the worst may be yet to come.
If the worst comes to the worst and despite all efforts, the tenant is not able to make the rental payments, will not vacate voluntarily, and there is no or little hope of recovery, you may need to approach an attorney to “force its hand” and apply for business rescue or liquidation proceedings.