By Anja Van Wijk, Senior Associate and Chantelle Gladwin-Wood, Partner
Due to the time, costs and the risk of a poor (or no) recovery occasioned with the institution of legal proceedings by a landlord against a tenant for arrear rentals, it is predicted that the main focus of landlords will now 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 addressed the various options available to landlords to mitigate their damages in terms of overdue rental payments. In this 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, and to reduce the risks associated with their leniency.
A landlord has an automatic security right in the form of the landlord’s tacit hypothec. However, the landlord does not derive any rights from this form of security until such time as the landlord has served a Rent Interdict Summons on the tenant and “attached” the movables on the property in security for the unpaid rental. Further to that, it is only once the hypothec is perfected (once judgment has been obtained against the tenant for unpaid rental) that the landlord can sell the movables by public auction. This legal remedy tends to be seen as a “last option” because it firstly requires the landlord to sue the tenant for the arrears, which means that the landlord is incurring legal fees, and secondly, obtaining judgment and perfecting the security can take a long time (more than a year sometimes). Moreover, the sale of the movable items at a public auction may very well not satisfy the rental debt, let alone the interest or the legal fees incurred to obtain the judgment, because the value of the goods subject to the security right might be low and the value of the amounts to be recovered might exceed the value of the saleable goods. It is therefore not an appropriate remedy in all circumstances.
The landlord’s hypothec arises automatically the minute one cent of rental is outstanding, and this is even if the lease does not expressly provide for it (because it comes from our common law). Upon insolvency of the tenant, it will allow the landlord to rank as a secured creditor in relation to the movables of the tenant that were on the premises when the tenant was declared insolvent. This, on its own, is an extremely valuable form of security, where the tenant has sufficiently high-value goods on the property. The landlord will still obtain the security of the hypothec at insolvency if the good are attached, but not yet removed, because judgment has not yet been granted, at the date of insolvency. This is recommended if you are awaiting judgment.
Rather than claiming the debt from the tenant, who may be financially distressed, the landlord could try to hold a third party liable for the rental obligations by entering into a suretyship agreement with the third party, in terms of which the third party promises to pay the debts of the tenant if the tenant doesn’t pay.
In the event that the tenant defaults, the landlord would have the option and security of holding another party liable for the rental. The third party, usually a family member or friend of the tenant, does however need to agree to be the co-principal debtor for the rental payments and as surety, must be aware of the serious implication that he or she is responsible for the tenant’s lease in that he or she is liable for all the tenant’s debt.
In terms of Section 6 of the General Law Amendment Act, a suretyship agreement must be in writing. The third party then becomes responsible when he or she signs a surety agreement, which may be an entirely separate agreement or form part of the tenant’s lease agreement. The surety agreement may provide that the landlord can claim directly from the surety all amounts owed by the tenant, without claiming from the tenant, alternatively, the surety agreement may state that the landlord must first demand the payment from the tenant before trying to recoup the debt from the surety. This type of security, however, is personal in nature and does not provide any real rights to the creditor at insolvency.
Pledge of an Item
In this case, an item or thing is handed over by the tenant to the landlord and kept safe by the landlord, and then returned to the tenant when the debt is paid. Examples of pledged items are often Kruger Rands, expensive pieces of art or jewellery, or even shares in a company (the transfer of shares will, however, also require a cession agreement).
While the item is pledged, the landlord must take care of the pledged item (especially if the pledged item is considered expensive or valuable), because the landlord will be held liable for any loss or damage to the pledged property whilst it is under his/her care. If the debt is not paid on time, the landlord can immediately sell the pledged item in order to recoup loss. A court order is not needed to authorize the sale of the item with pledges. This is the most valuable aspect of a pledge, because supervision by the court is required in every other type of security referred to herein, which makes the costs of ‘realising’ that security greater for the other forms.
The landlord must sell the item for a fair price. If the item is not sold for a fair and/or reasonable amount by the landlord, the tenant can have the sale reviewed and possibly set aside by the court. This option is advisable when the debt is of a value that could be covered by a pledged item.
This form of security can be beneficial to the landlord because the drafting of a pledge agreement is uncomplicated and if the tenant continues to default, the landlord is able sell the pledged item relatively easily and quickly.
A notarial bond is a bond which is registered in the Deeds Office in favour of landlord (creditor) over movable items, for example, Kruger Rands, motor vehicles, equipment or expensive jewellery. The writers hereof would not recommend this option for debts of less than R 50,000.00 due to the costs involved with the registration of the notarial bond.
The benefit of this type of security is that the tenant remains in possession of the item subject to the bond and can still use the item whilst the landlord has registered rights over the item.
If the tenant does not honour any payment plan entered into with the landlord, the landlord is required to approach a court for an order authorizing the sheriff to take the item into the landlord’s possession (through the sheriff) in order to sell it. Selling the item however incurs the costs of a public auction, which may or may not be recouped by the sale of the item.
This process is very much the same as the abovementioned option, except that the mortgage bond would be registered over a piece of immovable property or land owned by the tenant in favour of the landlord. This type of bond is registered in the Deeds Office.
Cession of Insurance Policy
The landlord and the tenant would need to execute a cession agreement in order for the tenant to cede its rights in terms of its insurance policy to the landlord. The landlord and tenant would also need to notify the insurance company of the cession. Depending on the terms of the insurance policy, it might be within the insurance company’s discretion to prohibit the cession entirely, in which case this will not be a viable option.
The landlord would need to carefully scrutinise the insurance agreement in order to ascertain whether a cession in favor of the landlord would be allowed. This option would also only be advisable in the case whereby the surrender value (i.e. the value that is paid out if the tenant stops paying the premium) is more than the secured debt, because there is no guarantee that the tenant will continue to pay the policy until it reaches its full maturity value (whenever that might be).
This option is also a form of pledge so the landlord can “take over” the policy and surrender it upon default by the tenant, without requiring a court order provided that: –
- The landlord has a proper pledge and cession agreement with a paratie executie clause; and
- The landlord can give the tenant fair value for the policy when the landlord surrenders it.
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.