Is the rent due in light of the disruption caused by the Corona Virus COVID 19 pandemic?
Litigation over lease agreements is a frequent occurrence in our day to day lives and is going to be exacerbated by the disruption caused by the Corona Virus COVID 19 pandemic.
The failure to pay rent timeously or at all is the most common dispute that arises between the tenant and landlord.
A failure to pay the agreed full rent and operating costs on time is a breach of the lease, entitling landlords to cancel the contract, claim arrear rent and sue for damages and evict the tenant from the premises alternatively claim specific performance.
The parties to lease agreements which are currently running there course could not have reasonably foreseen the effects of the COVID 19 outbreak at the time the contract was concluded. So, what happens when something out of the parties control happens after entering the contract?
In South Africa, the common law principle of supervening impossibility of performance is accepted in law as a good reason (or excuse) for the parties not doing what they agreed to do in terms of the contract.
However, it is essential to note that the performance must be “objectively impossible”. In other words, the impossibility must not be something that affects only the particular debtor which known as “subjective impossibility”. For example, the payment of rent is not entirely impossible for anyone to perform.
For the excuse for non-performance to succeed, the impossibility must not be due to the fault of any of the parties, and neither party can have taken the risk of such an event on themselves for example, by guaranteeing performance, no matter what. In other words, if a party promises performance explicitly no matter what happens in the wording of the contract, they will still be liable even if performance becomes impossible, because of something beyond their control.
Notwithstanding the declaration of a State of Disaster and lockdown regulations residential tenants will remain in occupation of the leased premises during the lockdown period, alternatively, they are entitled to that, and therefore enjoy full beneficial occupation. There are, therefore, no contractual or other rights for such tenants to withhold the payment of rent.
If it is difficult or inconvenient, but still possible, for any person to perform in terms of the contract, the contract remains valid notwithstanding possible financial hardship.
On the other hand, the forced closure of non-essential commercial tenants in terms of the lockdown regulations will not have the full beneficial occupation of the leased premises for the duration of the lockdown.
Under these circumstances, it could be argued that the closure is a direct consequence of the lockdown, therefore, entitling the tenant to pay a reduced rent. The entitlement will be subject to the particular wording of any clause in the specific lease agreement which may exclude or limit the remedy of reduction of rent based on force majeure or vis major.
It is unlikely that the tenant can justify a full remission of the rental as the tenant’s equipment, stock etcetera are usually stored at the leased premises, resulting in the tenant still having a beneficial occupation of the leased premises, albeit a restricted benefit.
The appellate division case of Peters Flamman & Co v Kokstad Municipality, 1919 AD 427 gives an example of supervening impossibility. The appellant, a German company, had a contract with the Kokstad Municipality to provide street lighting for the town. During the term of the contract the Union of South Africa became involved in World War 1 on the side of the allies, the South African government passed a law forbidding German companies to conduct business within the country. The law made it legally impossible for the German Company to meet their obligations under the contract. The learned judge decided that performance by the company was excused as a result of the supervening impossibility.
The majority of lease agreements in the household and commercial rental sector contain a clause that excludes a tenant’s entitlement to deduct or set-off any rental amounts for any reason whatsoever. As a result, a tenant is obliged in terms of lease agreement containing such a clause to pay the full agreed rent timeously.
It is recommended that tenants that are facing financial hardship communicate with their landlords, to reach an agreement and negotiate alternative measures such as a suspension or reduction in rent for an agreed period to avoid the strict application of the law.
A non-variation clause is also usually commonplace in lease agreements and is a contractual provision which restricts the variation of a contract. Any variation of the contract will, therefore not be of any effect unless reduced to writing and signed by the parties concerned.
The only way for tenants and landlords to overcome the disruptive effects of the COVID 19 virus is well-thought-out financial planning, negotiations and discussions in the spirit of solidarity.
It is important to note that each case will be decided on its own set of facts thus what is set out above merely constitutes general information and should not be used or relied on as legal or other professional advice.
If you require legal advice to determine what your rights and obligations are or interpreting a lease agreement and navigating you through these unprecedented times, please feel free to reach out to us for assistance.
For more information, contact Kugen Pillay at Goldberg & de Villiers Inc on 041 501 9800 |060 997 7011 | firstname.lastname@example.org