Goodbye Delinquent Tenant

Goodbye delinquent tenant

Belinda 2Jerome 2by Belinda van der Vyver and Jerome Veldsman

Southern Value Consortium v Tresso Trading 102 (Pty) Ltd, a judgement of the High Court, Cape Town on 23 November 2015, dealt with the right of a lessor to cancel the lease of a non-paying lessee under business rescue.

The lessee failed to pay rental, and the lessor cancelled the lease.  Then the lessor launched an application in the Court on 27 August 2015 for an order that the lessee be ejected from the property.  Prior to the matter being heard in Court, on 16 September 2015, the lessee commenced business rescue proceedings.  Note that the cancellation of the lease predated the commencement of business rescue proceedings.

A primary goal of business rescue proceedings is to give the beleaguered company ‘breathing space’ to get its financial affairs in order.  Part of the ‘breathing space’ is a moratorium on legal proceeding against the company.  The moratorium is not absolute.

The applicable provisions in Chapter 6 of the Companies Act are:

– During business rescue proceedings, no legal proceeding … against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with …

– No person may exercise any right in respect of any property in the lawful possession of the company, irrespective of whether the property is owned by the company …

Predictably, the business rescue practitioners relied on these provisions to avoid the ejectment order.  The Judge found otherwise:

Applicant [the lessor] claims to be the lawful owner of the property.  The business practitioners did not refute this claim.  It follows that the property never belonged to respondent [the lessee].  Following the cancellation of the lease agreement respondent was, furthermore, no longer in lawful possession of the property.  The business practitioners can therefore not rely on [the applicable provisions in Chapter 6 of the Companies Act] as a defence to applicant’s claim.”

In my view it could not have been the legislature’s intention that the company in business rescue would restructure its affairs by utilising assets to which it has no lawful claim.”

This judgment is a welcome antidote to what has previously been unscrupulous conduct by certain business rescue practitioners.

Another part of the business rescue proceedings ‘breathing space’ is the (not absolute) right of a business rescue practitioner to suspend an obligation of the company (1) that arises under an agreement to which the company was a party at the commencement of the proceedings, and (2) that would otherwise become due during the proceedings.

What will the position be if the lessee fails to pay rental, then the lessee commences business rescue proceedings, and only then the lessor cancels the lease?  We are of the view that the position ought to be the same as in Southern Value Consortium – the lessor ought to prevail.

What will the position be if, at the commencement of business rescue proceedings, the lessee is up to date with rental, but the business rescue practitioner fails to pay rental, and then the lessor cancels the lease?  What will the position be if the business rescue practitioner timeously suspended the obligation of the company to pay rental?  Can the lessor be compelled involuntarily to provide post-commencement finance to the company?  The answers to these questions will require a separate article.

Back to the September article.