We are encountering many situations where tenants are requesting some form of rental relief for the lock-down period and sometimes beyond. In practice, this is a complex area with legal, commercial and moral implications. From the tenant perspective, there can be genuine financial hardship due to closure of businesses during the lock-down. While landlords will have an overriding desire to secure the future occupation of the premises by the tenant, there are also very real commercial issues including the need to cover service and financing costs.
Today, we bring you two perspectives. The first is from one of our previous contributors, Warrick de Wet, giving a legal view. The second view is from commercial property consultant Kevin Goncalves (Acumen Properties). Kevin combines a multi-disciplinary academic background with a wealth of practical property sector experience, and I have always found his advice to be insightful and practical.
From the guidance given it is clear that the reference must be made to the wording in the lease agreement and the implications thereof. The other dominant theme is the need for negotiation between the landlord and the tenant. I thank both Warrick and Kevin for making their expertise available to us. It once again illustrates the importance of a collaborative approach in responding to this crisis.
COVID-19: Implications of the National Lockdown Regulations on Property Leases – a Legal Perspective
By Warrick de Wet (attorney)
The National lockdown Regulations (“Lockdown Regulations”) that were passed in response to the COVID-19 pandemic have resulted in serious financial implications and uncertainty for landlords and tenants alike.
Where businesses can no longer trade from their leased premises due to the Lockdown Regulations, the obligation to continue paying rental under the lease is obviously questioned.
Supervening Impossibility of Performance
Under normal circumstances the non-payment of rental will be a breach of contract entitling a landlord to cancel the lease and evict the tenant.
However, in circumstances where the performance of a contractual obligation or the enjoyment of a contractual right becomes impossible for reasons beyond a party’s control, the common law principle of supervening impossibility may find application.
The general rule is that where performance of an obligation becomes objectively impossible as a result of an unforeseen or unavoidable event, a party’s obligation to perform is extinguished. The implementation of the current Lockdown Regulations will qualify as such an event.
Application to Non-Payment of Rental in Respect of Lease Agreements
The abovementioned rule, however, is not a guaranteed defence to non-payment in all circumstances. Whether the Lockdown Regulations will excuse non-payment of rental will depend on the nature and wording of the relevant written lease agreement.
It is in these scenarios the so-called force majeure clauses in contracts find application. Such clauses adapt or extend the common law principles explained above. Usually they will enforce time periods for which the unforeseen event must exist before it can be relied on to terminate the contract.
So, even though the Lockdown Regulations qualify as an unforeseen event justifying non-payment of rental by a tenant who cannot occupy its premises, the terms of the lease might require the Lockdown to continue for 60 or 90 days before it can be used to excuse non-payment of rental.
The Courts have found that where a tenant has been deprived of beneficial occupation of a leased premises they may be entitled, in principle at least, to a remission in rental. The extent of the remission will be dependent of the extent of the deprivation. Should a tenant wish to successfully avoid its rental payment obligations altogether, it will need to establish that the leased premises are incapable of being used for the purposes for which they were leased. In other words, the tenant must be deprived of beneficial occupation of the leased premises.
Mitigating this is could be the fact that the tenant continues to store its wares or equipment on the premises, where they are kept safe. This will mean that the tenant has not been totally deprived of occupation and accordingly the tenant could be liable to pay a reduced rental for the benefit of storage.
Covid-19 Block Exemption for the Retail Property Sector, 2020
In an attempt to deal with some of the uncertainties surrounding supervening impossibility of performance and force majeure clauses in respect of rental agreements, the Minister of Trade, Industry and Competition passed the COVID-19 Block Exemption for the Retail Property Sector, 2020 on 24 March 2020.
In essence the Regulations operate to exempt certain categories of collective agreements and practices undertaken amongst and between landlords and retail tenants (in the clothing, textiles, personal care and restaurant sectors) from the application of section 4 and 5 of the Competition Act No. 89 of 1998.
The result being that the relevant rules contained in the Competition Act have been relaxed somewhat so as to allow retail landlords and these designated retail tenants to work together, in response to the issues faced by the sector occasioned by the COVID-19 pandemic, by reaching agreements or undertakings which would normally contravene the provisions of the Competition Act.
The Regulations make provision for agreement to be reached on payment holidays and/or rental discounts, moratoriums on evictions and other measures to protect viability during the national disaster without fear of falling foul of the provisions of Competition Act.
It appears that the Minister is banking on landlords voluntarily coming together for the purpose of carrying out the aims of the Regulations as there is no express direction to landlords to reach the agreements or undertake the practices referred to above.
The Regulations do not permit the designated retail tenants (or any tenant for that matter) to unilaterally decide to not make payment of rental which is contractually due during the operation of the Lockdown Regulations.
Negotiating a discounted rental linked to reasonable storage rates or some sort of payment arrangement whereby the landlord allows the tenant the opportunity to make payment of a reduced rental amount provided that they undertake to amortise the short payment over an extended period once the Lockdown is lifted are likely solutions.In the event that there is an agreement to alter or suspend the terms of the lease agreement temporarily, it is important to ensure that there is a written record of it, as the lease will probably require it to be in writing for it to be valid
Warrick de Wet
COVID-19: Lockdown and Commercial Rental Relief
By Kevin Goncalves (Commercial Property Consultant)
As a commercial property consultant working with both landlords and tenants, my view is that irrespective of the legal position, both parties need to work together to find a sustainable solution that provides a balanced outcome.
Initial discussions will be around the actual lockdown period but this should be extended to include the inevitable impact of the immediate post-lockdown phase. I am advising landlord clients that their number one priority should be to retain their tenants and work together with them to help them through these tough times.
The starting point should be recognise that the circumstances in each case are different and rental relief should accordingly be dealt with on the specifics of each case. With relief depending on the severity of impact it may be necessary for the tenant to provide financial information to the landlord.
There are two ways in which a landlord can offer assistance. One is to help with cash flow only and to defer rental until a later date (rental holiday) with or without interest. Alternatively, a gratuitous rental discount is a transfer of wealth to the tenant. Generally, a relief package will utilize both these measures.
Following the imposing of lockdown, the major representative bodies for real estate in South Africa published a Retail Tenant Assistance and Relief Package. The Relief Package includes a qualification that retail tenants must undertake not to retrench staff during the relief period. While this focusses on the retail sector it is a practical model and provides a good starting point for landlord/tenant discussions.
Their recommended relief guidelines are:
- Relief categories:
- High Impact SMME
- April – 35% to 100% rental discount plus potential rental deferment free of interest and repayable over 6 to 9 months from 1 July
- May – up to 50% rental deferment
- Medium Impact SMME
- April – 35% to 50% rental discount plus potential rental deferment
- May – up to 25% rental deferment
- Larger Tenants – Non-Essential Goods
- April – 35% rental discount and 15% rental deferment
- May – 15% rental discount and 35% rental deferment
- Larger Tenants – Essential Goods
- No relief
- Government and SOE’s – no relief
- High Impact SMME
- Rental excludes municipal charges (rate and utilities) and insurance, which are required to be paid in full
- Rentals are to be paid by no later than the 17th of April and the 7th of May.
- The above recommendations were made before the extension of the lockdown.
It is important to stress again that the above are aimed at retail tenants. Other commercial property sectors such as offices, factories, hospitality, industrial etc are all affected differently. While the tools used will be the same, the percentages will differ from sector to sector and tenant to tenant.Some additional relief instruments that can form part of an overall package are:
- Using the tenant’s deposit to pay the rental – possibly with it being re-instated at a later stage.
- Combining relief with an extension of the lease.
Lastly, many tenants see it as the landlord’s responsibility to reduce their rental during lockdown. Often this is based on a value-judgement, for example I have seen a major company advising their landlords that they are prioritizing payment of their staff, followed by SMME’s. Whilst admirable, this assumes the Landlord is less deserving, which may not the case. Many retired persons own property and the net rental is effectively their “salary” on which they rely to live.
And let’s not to forget that many landlords have bonds. Although banks are offering a short-term payment moratorium, the capitalized interest remains a real cost. And it may surprise tenants that even excluding bond interest, it is not uncommon for property expenses (rates, maintenance, security, levies etc) to exceed 40% of the gross rental tenants pay.