By Anja van Wijk, Senior Associate and Nicole Rens, Candidate Attorney
Introduction
As the whole country self-isolates in the safety of their homes, landlords and tenants fear the economic backlash of the COVID-19 novel virus.
Commercial tenants are advised by the State, and their landlords, to close-up shop and send employees home. These tenants and, in some cases, their landlords, will be hardest hit by the COVID-19 outbreak.
There is also much uncertainty for residential tenants, including whether any income will be forthcoming from their employers and/or their investments. If an income is received, uncertainty remains as to whether it will be substantial enough to cover costs of living. Conversely, landlords are uncertain about receiving the rental amounts owed by these tenants. Such rental payments are vital to the landlord and are necessary to cover expenses such as repairs, mortgage bond repayments, levies and utility bills.
There has been much “fake news” circulated about the above relationship in the last week. Some false claims made on social media have alleged that the Health Department has barred landlords from collecting rent. These articles have been accompanied by forged documents purportedly proving the truth of these allegations. It has, however, been confirmed that such claims are indeed false.
On 28 March 2020, Justice Minister Ronald Lamola announced that no evictions will be carried out during the lockdown. The overall economic effect of COVID-19 will be felt by both landlords and tenants and in this environment (to a greater extent than has ever been required in the past), the time has come for landlords and tenants to collectively and collaboratively decide on how best to decrease the risks to all involved.
Before examining the theoretical aspects of the issue, both commercial and residential tenants should anticipate that they may still have to effect rental payments.
What is a force majeure in our common law?
In most cases, the failure of a tenant to make payment of the full rental and ancillary costs to the landlord would constitute a breach of the lease agreement. Such a breach would entitle the landlord to cancel the lease agreement, claim arrear rentals, and sue the tenant for damages.
A force majeure (also known as a causa fortuitus, viz major, or “act of God”) is an extraordinary event or circumstance which is outside the control of the contracting parties to an agreement. In certain situations, a force majeure can cause an agreement to become impossible to comply with and can potentially extinguish a party’s contractual obligations.
For a force majeure to trigger the type of impossibility that extinguishes a party’s contractual obligations, certain common law requirements must be fulfilled. These requirements include: –
- The impossibility must be objectively impossible;
- The impossibility must be absolute as opposed to probable;
- The impossibility must be absolute as opposed to relative (in other words if it relates to something that can generally be done, but the one party seeking to escape liability cannot personally perform, such party remains liable in contract);
- The impossibility must be unavoidable by a reasonable person;
- The impossibility must not be the fault of either party; and
- The mere fact that a disaster or event was foreseeable does not necessarily mean that it ought to have been foreseeable, nor that it is avoidable by a reasonable person.
The abovementioned requirements do not form a closed list and can often be vague, which requires extensive legal interpretation. Further to that, each case involving the above must be considered on its own facts and merits.
Natural disasters, strike action, or acts of the State are generally accepted examples of forces majeures. However, as prescribed by our common law, not all forces majeures excuse a party’s supposed impossibility to perform their contractual obligations.
In order to avoid the potential ambiguity of the common law application of force majeure and the application of the principle of “supervening impossibility”, some contracting parties make provision in an agreement for what would constitute a force majeure.
Does the lease agreement have a force majeure clause?
Landlords and tenants should review their leases in order to determine the following: –
- Is there a force majeure provision? If there is:
- Is it applicable to these COVID-19 events?
- Does it excuse performance by the landlord, or by the tenant, or both?
- Does it permit a party to terminate the lease? If so, is the landlord entitled to immediately terminate the lease agreement or is there a time-limit imposed?
- Does the lease specify within how many days of a party’s knowledge of a potential delay or non-performance a landlord must provide notice to a tenant? If unspecified, notice of any delays or non-performance should be provided to the other party as soon as possible.
If a lease agreement does not specifically mention an outbreak of a disease or virus as a force majeure, a commercial lease agreement can provide that an “unexpected” or “unavoidable” governmental act will qualify as a force majeure. Accordingly, if there is a government-mandated quarantine or restriction on the tenant’s business operations due to an outbreak like COVID-19, a tenant could potentially assert that such governmental actions be considered a force majeure, preventing its performance.
Following the SARS and MERS viruses which also endangered global health, some contracts have included these threats in their force majeure clauses. If the contracting parties had the foresight to include instances of “disease”, “illness”, “pandemic” or “epidemic” in their force majeure clauses in their lease agreements, then it is likely that the COVID-19 virus has already triggered such clauses.
However, before declaring that COVID-19 has triggered the force majeure, the parties need to ensure that such clauses have indeed been triggered. If COVID-19 has not triggered the force majeure clause and a declaration by the lessee has been made to the contrary, the landlord could accept such a declaration as a repudiation of the lease agreement and if accepted by the landlord, could open the tenant up to a damages claim.
These clauses sometimes have a time-limit allocated to the implementation of the force majeure as an impediment to perform certain contractual obligations. After the time has expired, the landlord would be entitled to demand performance. The party seeking to rely on such clause would bear the onus to prove that the COVID-19 outbreak falls within the wording of the agreement, and, further, that non-performance occurred as a result of the outbreak. If the force majeure clause does not reference the abovementioned trigger-words, the common law principle of supervening impossibility may then apply.
Is COVID-19 considered to be a force majeure for purposes of lease agreements in terms of common law?
If the lease agreement is silent on a force majeure, then the common law would apply and the parties may be able to rely on the common law principle of “supervening impossibility of performance” to suspend their obligations under the contract.
In response to the world-wide pandemic, the increasing COVID-19 infections in South Africa and in an attempt to “lower the curve”, on 22 March 2020, the State declared a national state of disaster and a national lockdown has been introduced to last from 27 March 2020 to 16 April 2020. By instituting the lockdown, the COVID-19 virus could be considered a force majeure under the common law, however, that does not mean that this force majeure would allow tenants to withhold rental or be entitled to a remission in rental.
It is generally accepted that natural calamities, acts of State and strikes are examples of forces majeures. In the case of MV Snow Crystal, Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal, the court advised that “the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, [be considered] to see whether the general rule ought, in the particular circumstances of the case, to be applied”.
It is our opinion that, as a residential tenant still has occupation of the property, has utility services, and has the physical ability to pay rental (i.e. EFT payments to the landlords are still in operation), residential tenants in all likelihood cannot escape their liability to effect payment. Lease agreements, especially residential lease agreements, where there is no force majeure clause, are unlikely to allow a lessee to invoke the COVID-19 virus as an excuse to escape his/her obligation to pay rental.
Mitigating risk
Considering the financial impact that COVID-19 has had on the global economy, tenants need to take proactive steps to ensure that they are able to pay their rental to their landlord, timeously.
For commercial tenants, these steps can include seeking alternative sources of income, reducing employee travel, retrenchments (as uncomfortable as this may be for all concerned), applying for various relief measures announced by government, cutting unnecessary expenditures, or, if all else fails, putting the enterprise into business rescue and/or liquidation in order to reduce the loss suffered by the enterprise’s creditors.
Any commercial or residential tenant that fears that the payment of the full rental (or any amount of rental) would be impossible should immediately contact their landlord to try to, in good faith, renegotiate the terms of payment for the upcoming weeks or months.
In the best-case scenario, the landlord should be kept informed as to the probability of the tenant effecting payment and of the steps taken by the tenant to attempt to comply with its contractual obligations. An open channel of communication between the parties will help reduce risk on both sides, while also laying the foundation for good faith negotiations.
Remedies available to the contracting parties upon a force majeure event
A force majeure generally extinguishes the obligations owed between parties. No action for damages would then be available for the landlord arising from a breach of contract, where the tenant is unable to perform resulting from a force majeure, but the landlord may have a claim for unjustified enrichment, if the tenant continued to perform in the case of reciprocal obligations, despite advising that the force majeure has caused non-performance.
Force majeure as a factor considered in deciding eviction applications
During the lockdown, all evictions have been suspended.
It is likely that once eviction applications are brought against defaulting tenants who are unable to make payment as a direct or indirect result of COVID-19 after the lockdown, the courts will consider whether or not the force majeure, and the supervening impossibility as a result thereof, has eliminated the tenant’s obligation to effect rental payments in that particular case. The courts will essentially consider whether or not the COVID-19 pandemic was indeed a force majeure. More importantly the courts will consider whether this force majeure relieved the tenant of certain obligations, or a portion of the obligations, owed to the landlord and whether the landlord was lawfully entitled to cancel the lease agreement as a result of a breach constituted by non-payment of rental.
It is highly likely that for months after the lockdown has been lifted, the financial implications of the COVID-19 virus will continue to impact tenants.
Unlike residential evictions, in commercial eviction applications, the courts do not have to take into consideration factors like “justness and equitability”. Granting of commercial eviction should therefore not be delayed to the same extent as residential evictions.
On the other hand, in residential eviction applications, this financial impact will likely be a consideration that the court takes into account when deciding on whether or not the granting of the eviction application would be just and equitable. Due to the tendency of courts to empathise with indigent/struggling tenants, we are of the opinion that while a residential eviction may be granted, it is likely that the consideration of the pandemic and its effect on that particular tenant will allow tenants further time in which to vacate the landlord’s property. Unfortunately, the effect of this delay in evicting the occupant, undoubtedly, will results in the landlords bearing a large part of the brunt of the economic impact.
Conclusion:
We are of the opinion that: –
- All tenants should anticipate having to effect rental payments.
- In commercial lease agreements, if the force majeure clause is sufficiently worded, the tenant may be able to raise the COVID-19 pandemic as a force majeure and therefore escape their rental liability (obtaining legal advice before declaring their inability to perform in terms of the force majeure clause and provide proper notice thereof);
- Because of the ambiguity of the common law, if there is not a specifically worded force majeure clause, the commercial tenant will likely not be able to escape its liability to effect rental payments to the landlord; and
- In terms of residential tenants, it is highly unlikely that they would be able to negate their responsibility to effect rental payments but the economic impact of the pandemic would be a factor that the court would consider when adjudicating the granting of an eviction.
These unprecedented times call for all South Africans to work collectively to ensure that the least prejudicial and most equally compromising remedies can be reached. Landlords and tenants need to be understanding of the dire reality with which South Africa is currently faced, and what is yet to come. Landlords and tenants must familiarise themselves with the clauses of their lease agreements, and more importantly, whether there is a clause in the lease agreement pertaining to force majeure.
Landlords and tenants must make use of mediation and negotiation processes during this period of uncertainty. It is no longer as simple as using litigation to resolve a dispute, as there is limited access to courts during this lockdown period. Once the lockdown period has lapsed, the courts will have a severe backlog of litigation to manage. Should a landlord and tenant fail to amicably resolve a dispute themselves, contact an attorney to act as mediator and to negotiate settlement terms.
Disclaimer
What is set out above merely constitutes an opinion which deals with the usual clauses in commercial and residential leases. It is not clearly known how landlords or the courts will react to any action taken by landlords and tenants and as such parties should seek legal advice.
