Under South African common law, a landlord has the right to take possession of a tenant’s physical, movable property that has been brought onto the leased property if the tenant’s rent is in arrears and until such time as this debt is paid. But what happens if the tenant is a company that has been placed in business rescue?
The landlord’s automatic lien or in legal speak, tacit hypothec, also includes all fruits and crops yielded by the leased property. This right comes into existence the moment the lessor falls into arrears with rental payments and it operates automatically for as long as rent is owed. It is not necessary for it to be written down in the lease agreement or specifically discussed between landlord and tenant, it simply arises by operation of law.
All that a landlord needs to do if he/she wishes to exercise this lien for rental in arrears is to perfect it. This means getting a court order to attach the movable goods present at the leased premises. However, the reach and efficacy of the landlord’s lien has been limited in some ways in situations where a lessee company is placed in business rescue, and the landlord’s claim for arrear rental is affected by the general moratorium in terms of section 133 of the Companies Act.
In the case of Ergomode (Pty) Ltd v Jordaan NO and Others,[1] a landlord rented premises to a company that was eventually placed under business rescue. The landlord was owed arrear rental and so it wished to exercise its lien over assets already present on the leased premises. In order to do so, all the landlord had to do was to institute legal proceedings against the tenant to obtain a perfection or attachment order. However, the law states that no legal proceedings may be instituted against a company in business rescue. Hence, in this case, as the tenant/lessee was in business rescue, the tenant (or rather the business rescue practitioner of the tenant) took that point to say that such perfection was not possible and the lien could thus not be perfected or provide any real security to the landlord.
The matter went to the Supreme Court of Appeal to decide on the perfection of the landlord’s hypothec, among other issues, when a tenant is in business rescue. The Court concluded that a landlord’s hypothec comes into effect the moment rent is in arrears and is enforceable against the debtor immediately.[2]
The landlord’s lien creates a personal right to perfect the hypothec to make it enforceable against third parties. The effect of perfection is that the right is converted to a real right enforceable against all and sundry, and even in liquidation or business rescue. By contrast, the landlord’s unperfected hypothec ranks as a concurrent claim in business rescue proceedings.[3] On that basis, the landlord’s claim to perfect the hypothec was dismissed.
In summary, a landlord is precluded, where the tenant is a company that is in business rescue, from going to court to convert personal rights into real rights for so long as the business rescue proceedings continue. With a business rescue practitioner having the power to suspend obligations under any agreement, landlords may eventfully find themselves no longer having enforceable personal rights. The result is that once a landlord loses possession of the assets of a tenant, by virtue of the suspension of the lease agreement, the hypothec is lost forever.
This article was compiled by Wildu du Plessis and Craig Rushesha.
[1] Ergomode (Pty) Ltd v Jordaan NO and Others (643/2022) [2024] ZASCA 10.
[2] n 2 above at paragraph 34.
[3] n 2 above at paragraph 34-40.