COVID-19: LANDLORD AND TENANT RELATIONSHIPS IN COMMRCIAL LEASE AGREEMENTS
- 1 May 2020 marks the beginning of what President Cyril Ramaphosa termed as the “gradual and phased recovery of economic activity” in South Africa. Whilst the implementation of governments’ risk - adjusted strategy will be measured and incremental, the effects of the national lockdown (26 March 2020 – 30 April 2020) and the progressive spread of the Coronavirus will undoubtedly continue to have a significant and long - lasting impact on both the South African and global economy, with such effects being especially prevalent in the commercial property sector.
- According to legal author, W.E. Cooper, a lease of an immovable property is a reciprocal agreement between a lessor and a lessee whereby the lessor gives the lessee the temporary use and enjoyment of the property in return for the payment of rent. Accordingly, a relationship is established between the lessor (landlord) and the lessee (tenant) in terms of the lease agreement between them. This relationship is more than merely contractual as the best interests of both parties’ businesses are related to the performance by the other party of its obligations and, conceivably, therefore the success of the other's business. Such agreements therefore incorporate elements of mutual benefits and cooperation. For example, the tenant (who requires the use and enjoyment of the property) is reliant on the landlord successfully performing its obligations and therefore successfully conducting its business (in this context being that of a landlord) and providing the lessee with a property which is fit for the purpose for which it has been leased. In turn, the lessor (who requires the tenant to pay rent) is reliant on the tenant successfully conducting its business and accordingly enabling the tenant to afford to pay its rent.
- With the exclusion of businesses classified as exempt in terms of the applicable Regulations, the national lockdown compelled all businesses to cease trading from midnight on 26 March 2020 until midnight on 30 April 2020. The effect of this has seen the temporary closure of all retail businesses, leaving many without income and / or cash flow for this period.
- From a tenant’s perspective, having no access to and / or beneficial occupation of its rental premises could lead thereto that it is unable to conduct any business from such premises and thus not generate any income. This situation has likely led to many tenants to consider advising their landlords that they will not be paying or cannot afford to pay any rental (if they have not done so already). In doing so tenants will probably seek to avoid the payment of monthly rental by relying on the contractual principle of force majeure or (if the lease agreement does not contain a force majeure clause) the common law doctrine of supervening impossibility. Whether this is a prudent business decision is of course based on many factors such as the surrounding facts, the terms of the lease agreement and whether any relief measures are available to the tenant. It is important to consider such a decision carefully since it would surely affect the relationship between the landlord and tenant and the failure by a tenant to comply with its rental obligations in terms of a lease agreement would, unless justified in terms of the lease agreement or in law, constitute a breach of the terms of that agreement.
- From a landlord’s perspective it has been prevented, through no fault of its own, from fulfilling its obligation to provide its tenant with the use and enjoyment of the leased premises. Unless the lease agreement between the parties makes provision for force majeure, a landlord would in such circumstances be justified in requesting a tenant to abide by the terms of the lease agreement and accordingly pay its rent.
- The COVID-19 pandemic, the Regulations and the lockdown have undoubtedly affected both parties in the performance or fulfilment of their respective obligations which in turn affect or will affect the relationship between them. For example, a tenant could refuse payment of rent claiming supervening impossibility while the landlord could in turn reject this notion and seek to claim payment through legal avenues leading to litigation and, probably, a breakdown of the relationship between the parties.
- In a recent article published by the Business Insider, it was suggested that, in dealing with cases relating to disputes between landlord and tenants which arose as a result of the COVID-19 pandemic, Courts will have regard to the principle of ubuntu as a recognised principle in South African law. In addition, it is suggested that landlords will be required to demonstrate that they have somehow applied the principle of ubuntu prior to attempting to claim unpaid rental or evict a tenant. Similarly, tenants will be required to show their application of this principle insofar as the payment of their rent is concerned.
- The above view suggests that principles of fairness and reasonableness should be incorporated in the interpretation of contractual issues. While this may seem logical, such a view in fact competes with the principle of contractual certainty, a principle which is absolutely necessary given that transactions between parties are required, through legal interpretation, to produce reasonably foreseeable outcomes and be devoid of uncertainty.
- In the case of Oregon Trust v Beadica, the Supreme Court of Appeal declined to develop the law of contract in South Africa by accepting the principle of fairness and reasonableness as “self-standing principles” and, in doing so, overturned the decision of Davis J in Beadica 231 CC & others v Trustees, Oregon Trust and others. The latter decision flowed from that of the Constitutional Court in Everfresh Market (Virginia) (Pty) Ltd v Shoprite Checkers (Pty) Ltd wherein that Court stated that “it is highly desirable and in fact necessary to infuse the law of contract with constitutional values, including values of ubuntu which inspire much of our constitutional compact”. There is however an element of risk that exists, as expressed by Brand JA in Potgieter & another v Potgieter NO & Others, in that “Reasonable people, including judges, may often differ on what is equitable and fair. The outcome in any particular case will thus depend on the personal idiosyncrasies of the individual judge. Or, as Van den Heever JA put it in Preller & Others v Jordaan (A) at 500, if judges are allowed to decide cases on the basis of what they regard as reasonable and fair, the criterion will no longer be the law but the judge.”
- Having regard to the above, it is evident that South African Courts have not endorsed the notion that cases should be decided on principles of fairness and reasonableness. In the circumstances, we are of the view that both landlords and tenants should act prudently with due regard to the law as it has been applied by our Courts and thus in terms of their relevant lease agreements.
- There is no doubt however that one or more South African Courts will soon be required to consider this issue afresh within the context of the COVID-19 pandemic and its effects on the South African (and global) economy. Since the COVID-19 pandemic resulted in unparalleled circumstances, there is no reason to assume that our Courts could not similarly adopt an unparalleled approach to the interpretation of contractual provisions and disputes and potentially incorporate the principles of fairness and reasonableness as part of such an approach.
- While this viewpoint may allude to further uncertainty, the most pragmatic approach may be for landlords and tenants to engage each other in a spirit of mutual support and sharing of the economic burden. In a time where nations, companies and people are cooperating with each other in a fight against a common enemy, landlords and tenants could conceivably do the same. In doing so however we would advise both parties to seek legal advice and assistance, firstly, in the consideration of existing contracts, secondly in negotiating amendments of the contractual terms and, thirdly in preparing necessary addendums to accurately record amendments of such terms.
Construction Supervisor | Project Management, Attention to Detail
4yHi Jan-Hendrik , as usual very well written, and sound advice for consideration