To curb the spread of the Covid-19 pandemic only essential services such
as grocery stores, medical facilities, pharmacies,
fuel stations and banks can operate during the lockdown.
Big Business
The Covid-19 lockdown is forcing more retailers
into a position where they cannot afford to pay their rentals, which adds to
the pressures being experienced by retail landlords.
The Edcon Group has announced that it can only pay workers’ salaries due to the
impact of Covid-19 on sales, and now peer clothing giant the Foschini Group
plans to stop rental payments as a result of the lockdown as it has had to
close all of its stores in South Africa. During the lockdown the group is
projecting lost turnover exceeding R800 million.
Other retailers, big and small, are also contemplating putting a stop to
rental payments as business has ground to a halt. Most affected businesses
include clothing, footwear and home textile retailers; personal care services
such as hairdressers, health and beauty salons; and restaurants.
Non-payment of rentals could cause the collapse of
malls and severely impact retail property firms. Landlords must pay rates and
taxes and have operational expenses regardless of whether malls operate or not.
Landlords are understandably annoyed and frustrated
and are decrying the stance of corporate tenants as “unlawful”.
The sad truth is that some national retailers are
bigger businesses than the landlords.
What to do?
· Government
departments have announced various measures to alleviate the economic effects
of the lockdown on businesses.
·
Most lease
agreements require tenants to obtain, and keep in place, their own insurance
for their businesses, which normally includes business interruption insurance. Tenants
ought to claim against their insurance first, before refusing to pay rent.
·
Parties and
government should negotiate:
o Payment holidays and/or rental discounts or deferments
for tenants;
o Limitations on the eviction of tenants; and
o The suspension or adjustment to lease agreement
clauses that restrict the designated retail tenants from undertaking reasonable
measures required to protect viability during the national disaster.
Smaller businesses
Restaurants, hairdressing salons and the like have closed
for the foreseeable future and are unable to make payment of their monthly
rental until the virus is contained and business returns to a semblance of
normality. The same applies to service providers like solo professionals and
small professional firms.
The legal issues
In these uncertain times, only time will tell how the
courts will react to any unilateral action taken by tenants.
As a general principle, both in terms of the common
law and in terms of agreements of lease, a failure to pay full rental and
operating costs on time constitutes a breach of the lease, entitling landlords
to cancel the lease, claim arrear rentals and sue for damages, being the rental
for the balance of the lease.
Those smaller businesses that have had to close
their doors must still pay their rental and utilities as most lease agreements contain
clauses limiting the landlord’s liability. At law (and as unfair as this may
seem) a tenant is unlikely have a right to claim a reduction of rental or the
right to withhold the payment of the rental, nor would the tenant have a claim
for damages for loss of earnings.
The lease will contain a clause that peremptorily stipulates that unless otherwise provided in
terms of law, all amounts payable in terms of the agreement shall be payable by
the tenant to the landlord free of deduction, exchange and/or set off.
Leases generally only give you the right to stop or
reduce the amount of rent and outgoings you are paying if you cannot access or
use your premises because they are damaged or destroyed, and not because of the
pandemic.
If a lease becomes impossible to perform because of
COVID-19, the tenant may be able to argue that the lease has been frustrated
and should be ended.
Some tenants choose not to contact their landlords
and elect simply not to pay their rental (whether they can afford to or not). When
law firms and the courts re-open we will see a huge number of demands for
payment and summonses being issued. The courts will have to decide what rights
the tenants may have had, not to pay rental as a result of the lockdown.
Other, perhaps more
sensible tenants will approach their landlords to arrange temporary payment
holidays or deferments of rental. If they can, they should at least pay their
share of the common operating costs. They must certainly check whether their
insurance policy makes provision for Business Interruption and claim on the
policy.
Force majeure
Some lease agreements contain a force majeure
clause (an act of God clause to protect the parties if a segment of the contract
cannot be performed due to causes that are outside the control of the parties,
such as natural disasters). Such a clause may absolve one or both parties to a
contract of all or part performance of their obligations on the occurrence of
certain events which are outside their control.
If a lease has such a clause, it is possible that a
tenant can argue that the COVID-19 pandemic falls within the contract wording,
and that non-performance has been a result of the outbreak.
Despite the fact that a tenant is not
in full occupation of the premises and will not generate an income, there is an
argument to be made that although its human resources are not in occupation of
the premises, its business assets remain in the leased premises and it,
accordingly, still enjoys some use and benefit of the leased premises.
Moreover, as much as this clause may
assist a tenant, the landlord can also rely on the clause to assist it, in its
failure/inability to provide the tenant with full use/use by its human
resources, of the leased premises.
A tenant will ultimately need to
prove that it was unable to pay the rental due, based on little or no turnover due
to the epidemic.
Seek legal advice to see
if you can or should rely on such a clause to avoid paying rental.
