A Landlord’s Tacit Hypothec in Business Rescue: The Case of Ergomode and Sakhile

 Introduction to the Legal Principles

A landlord's tacit hypothec is a common law form of real security that allows landlords to claim movable property of tenants who are in rental arrears. However, landlords cannot enforce this hypothec through self-help; they must apply to a court for an order enforcing the hypothec over the tenant's property. This process, known as perfection, involves a sheriff attaching the tenant's property. Without perfection, the landlord's hypothec remains a theoretical remedy without legal enforceability.

The Facts of the Case

In the case of Ergomode (Pty) Ltd v Jordaan NO and Others, Ergomode entered into a lease agreement with Sakhile Contract Mining (Pty) Limited, where Sakhile operated a coal washing plant on Ergomode's property. By August 2020, Sakhile had accrued rental arrears of over R18.2 million. On October 23, 2020, Sakhile was placed under business rescue as per section 129(1) of the Companies Act 71 of 2008 (the Act). Shortly thereafter, business rescue practitioners (BRPs) were appointed. Ergomode submitted a claim for the rental arrears, but the BRPs only recognized ZAR12.8 million, citing damages caused by the removal of a filter press, a key component of the plant.

A business rescue plan was published on March 15, 2021, and adopted on March 30, 2021. The plan included relocating and refurbishing the plant. On February 22, 2022, the BRPs suspended the lease and initiated the removal of the plant. Ergomode then sought to perfect its landlord's hypothec in the High Court.

Findings of the Supreme Court of Appeal (SCA)

The SCA addressed several issues raised by Ergomode, primarily focusing on the perfection of the landlord’s hypothec.

1. Perfection of the Hypothec:
• Legal Moratorium: Under section 133 of the Act, a general moratorium on legal proceedings is imposed once a company is placed under business rescue. This means a landlord cannot perfect its hypothec without consent from the BRPs or the court.
• Lack of Perfection: The SCA found that Ergomode’s hypothec was not perfected before Sakhile entered business rescue. Consequently, Ergomode’s application to perfect the hypothec during business rescue was denied due to the moratorium.
2. Setting Aside the BRPs’ Determination:
• Independent Creditor Status: Ergomode challenged the BRPs’ decision that it was not an independent creditor. However, section 145(6) requires such a review to be filed within five days of receiving notice of the determination. Ergomode failed to meet this deadline and did not object to the determination until after the business rescue plan was adopted. The SCA ruled against Ergomode, emphasizing its participation and voting in the creditor meetings.
3. Validity of the Business Rescue Plan:
• Timeframe for Plan Publication: Ergomode argued that the business rescue plan was invalid because it was adopted after the deadline for publication had passed without a valid extension. The SCA dismissed this argument, noting that extensions were granted by the creditors and Ergomode did not raise any objections during the adoption process. The SCA found that Ergomode's objection was a result of dissatisfaction with the plan's outcome rather than any procedural invalidity.

Conclusion

The SCA’s ruling in Ergomode (Pty) Ltd v Jordaan NO and Others reaffirms the legal principles surrounding a landlord’s tacit hypothec and the impact of business rescue proceedings. A landlord must perfect its hypothec before a tenant enters business rescue to enforce it as real security. The case highlights the importance of adhering to statutory timelines and procedures, and the necessity for landlords to act promptly and within the bounds of the law.