Can the landlord terminate the lease during the business rescue?
With businesses entering business rescue, we debunk a few myths about business rescue and the landlord’s rights.
Firstly, what is Business Rescue…
Business Rescue aims to rehabilitate financially distressed companies by providing temporary supervision of the management, a temporary moratorium on the rights of the claimants, and the development and implementation of a business rescue plan.
The landlord can terminate the lease during the business rescue, but with specific conditions to consider:
Legal Proceedings Moratorium
Business rescue imposes a moratorium on legal proceedings against the tenant. Cancellation of a lease is not considered an enforcement action and can be done unilaterally by the landlord.
Business Rescue Practitioner’s Role
They have the authority to suspend certain obligations, including rental payments. If this occurs it might complicate the landlord’s ability to cancel the lease.
Court Rulings
South African courts have clarified that cancellation of a lease does not constitute an enforcement action prohibited by the Companies Act. Landlords retain the right to cancel the lease in case of breach by the tenant, provided that the business rescue practitioner has not suspended the tenant’s obligations
The common law right is that the landlord is entitled to sell the tenant’s assets and claim unpaid rent with specific conditions
- Concurrent Claims – This means that rent ranks equally with other creditors, which influences the likelihood of the amount recovered.
- Moratorium on Legal Action – The landlord cannot take immediate action to recover the arrear rent without the consent of the court or business rescue practitioner.
- Business Rescue Plan – this regulates how creditors, including landlords, will be paid. The plan must be approved by the creditors and may include provision of payment of the arrears.
- Landlord’s Hypothec – To enforce this right, the landlord must obtain approval from the court.
The Companies Act 71 of 2008 focuses on providing efficient rescue to financially distressed companies.
Definitions of Financial Distress
A company is considered financially distressed if it is unlikely to pay its debts as they become due within the next six months or if its business is likely to become insolvent within the next six months.