A landlord who has multiple commercial properties, which are rented out to businesses, has one longstanding tenant who is going under financially and has two years left on the rental agreement. Is the law cut and dry, allowing the landlord to terminate the tenant’s lease if the business becomes insolvent?
In general, rental agreements will contain a clause that stipulates that the lease agreement will terminate upon the insolvency of the tenant. However, such provisions may not provide the necessary protection if the provisions of the Insolvency Act 24 of 1936 are not properly considered. Section 37 of the Act determines that the liquidation or sequestration of a tenant cannot automatically lead to the termination of a lease agreement.
It also determines that instead of automatic cancellation of the lease, the trustee of the insolvent estate (who will be appointed by the Master of the High Court) has the authority to decide, by way of written notice, to either terminate or to continue with the lease. The trustee must do so within three months of being appointed. This means that a landlord may have to wait up to three months before a decision is made by the trustees to continue or terminate the lease.
If, however, a rental agreement has specific breach provisions, it may be worthwhile to consider whether the tenant is not in breach and if the rental agreement could be terminated on such grounds before the tenant is declared insolvent.
However, if this option is not available and the tenant is declared insolvent, the landlord will have no choice but to make contact with the trustee of the insolvent estate and enquire as to whether the lease will continue or not. Fortunately, all rent due under the current lease will be paid as costs of administration and the landlord will be paid before the secured or preferent creditors of the insolvent estate.
There are multiple scenarios like this which will dramatically impact your business whether you are the tenant or landlord. Having CMM Attorneys’ specialists in commercial property law by your side from the moment of negotiating a lease agreement, allows peace of mind whether you are a tenant or a landlord in any future scenario. Let CMM Attorneys do the heavy lifting for you and know your interests will always be protected. Get in touch with us here.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)