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April 24, 2020

Lockdown And Leases: Do Restrictions Reduce Rental? by Zorada Temmingh & Waseem Goolam Hussain


President Cyril Ramaphosa (“the President”) on 23 March 2020 announced a nationwide lockdown (“the lockdown”) to limit the spread of the Covid-19 virus. Everyone, excluding essential service providers, as defined, is subject to the lockdown, from midnight on Thursday, 26 March 2020 to midnight on Thursday, 16 April 2020 (“the lockdown period”).

The Minister of Cooperative Government and Traditional Affairs issued lockdown regulations (“the Regulations”) determining which services are regarded as essential during the lockdown period, including the production, distribution and sale of goods related to food, cleaning and hygiene products, medical products, fuel and basic goods such as airtime and electricity.

This article deals with the effect of this lockdown on Landlords and Tenants in commercial lease agreements, through operation of the force majeure principle.

FORCE MAJEURE

Force majeure refers to any occurrence or situation beyond the control of the parties to a contract which makes performance in terms of the contract impossible. Force majeure is also referred to as a superior force or event beyond the control of the parties, which makes contractual performance between the parties impossible and as a result suspends the ordinary consequences of breach of contract. The effect of force majeure, simply put, is to extinguish between the parties to a contract, in whole or in part. Typical examples of a force majeure include earthquakes, floods and plagues.

In Glencore Grain Africa (Pty) Ltd v Du Plessis NO & others [2007] JOL 21043 (O) the Court accepted the following requirements for force majeure:

  1. Performance must be objectively as opposed to subjectively impossible.
  2. The impossibility must be absolute as opposed to probable.
  3. The impossibility must be absolute as opposed to relative.
  4. The impossibility must be unavoidable by a reasonable person.
  5. The impossibility must not be the fault of either party.
  6. The test is not whether a disaster or event was foreseeable, but if it was foreseeable and avoidable by a reasonable person.

These requirements have been confirmed in a number of cases.

In Unibank Savings and Loans (formerly Community Bank) v Absa Bank 2000 (4) SA 191 (W) and at 198 B to C [also reported at [2000] JOL 7064 (W)Ed] the court states:

A contract is, however, terminated only by objective impossibility (which always or normally has to be

total). Subjective impossibility to receive or make performance at most justifies the other party in

exercising an election to cancel the contract.

At 198DF the court adds:

Impossibility is furthermore not implicit in a change of financial strength or in commercial circumstances which cause compliance with the contractual obligations to be difficult, expensive or unaffordable. Deteriorations of that nature are foreseeable in the business world at the time when the contract is concluded.

In Orda AG v Nuclear Fuels Corporation of South Africa (Pty) Ltd 1994 (4) SA 26 (W) Schutz J states (at …. C to D):

The first question is whether absolute impossibility has been proved. Great difficulty and great expense

in performing do not amount to impossibility.”

In Ntuli v Leong & Another [2008] JOL 21321 (W), the Court said the following at paragraph 31:

In the Concise Oxford Dictionary, the tenth revised edition, the meaning given to the word “impossible” is “not able to occur or be done“.

In MV Snow Crystal, Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal [2008] 3 All SA 255 (SCA) the Court held that:

As a general rule impossibility of performance brought about by vis major or casus fortuitus will excuse performance of a contract. But it will not always do so. In each case it is necessary to ‘look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, to see whether the general rule ought, in the particular circumstances of the case, to be applied.

In the recent case of Frajenron (Pty) Ltd v Metcash Trading Limited and Others (2019) JOL 46364 (GJ) the Court pointed out that the facts of each case must be taken into account: the occurrence of force majeure or casus fortuitus will not automatically excuse contractual non-performance.

THE LOCKDOWN AND LEASE AGREEMENTS

It is common for commercial and residential lease agreements to contain clauses which govern the use and enjoyment of the property. For example, commercial lease agreements may stipulate terms which allow Tenants to only make use of the premises for purposes of running a bar or a restaurant or a professional practice.

An essential element of lease agreements is that Tenants have a right to beneficial and undisturbed occupation of the premises.

The lockdown Regulations have the effect of preventing a person not performing an essential service from beneficial use and enjoyment of the business premises, for example, by prohibiting the sale of alcohol in a bar, thereby making it impossible to use the premises as agreed between the Landlord and the Tenant. Full beneficial occupation of business premises is prevented, because certain businesses may not operate. However, the business may still be utilising the premises to store its assets, including technological infrastructure which could enable certain businesses to operate remotely – a factor that must be taken into consideration when determining to what extent the Tenant is entitled to a remission of rent.

The lockdown as it affects a non-essential business undoubtedly constitutes force majeure, making it objectively impossible for the business to operate from its rented premises as intended by the lease.

In a case where it is objectively impossible for businesses to operate during the lockdown period, the principle as laid down in MV Snow Crystal, Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal, referred to above, must be followed and one must consider all relevant factors: the nature of the contract, the nature of the parties’ reciprocal obligations, and the extent to which the impossibility affects rights and obligations of both parties.

REMISSION OF RENTAL

Tenants who do not fall in the exempted categories are prohibited to trade during the lockdown period. If a Tenant relies on force majeure to claim a remission of rent, the first question is whether the contract governs the situation specifically or generally.

In De Beers Consolidated Mines, Limited v The United Mines Bultfontein Limited (1899-1904) 9 HCG 59 the lease stipulated that the lessees would pay the rent monthly in advance, “without any deduction or abatement whatsoever”. The Landlord instituted a claim for the payment of rent to which the lessees pleaded exemption on the ground that they had been deprived of beneficial enjoyment and occupation of the premises by force majeure (a war at that time). The High Court of Griqualand held that the lessees, by the terms of their lease, contracted themselves out of the benefits reserved to them by the common law, and that they must pay the rent demanded of them.

If the lease does not deal with a situation of force majeure, the general principles apply and one must consider the nature of the parties’ reciprocal obligations and the extent to which the impossibility affects those rights and obligations.

Remission of rent will depend on factors such as the following:

  1. Does the contract specifically deal with a force majeure event, for example a provision excluding reliance by the Tenant on a force majeure event to claim a remission of rent?

 

  1. The extent to which the force majeure event affects the Tenant’s ability to use the premises for the intended purpose: Is the loss total or does the Tenant retain some measure of use of the premises?

 

  1. How does the force majeure event affect the Landlord’s reciprocal obligations under the lease, for example the duty to pay property taxes or levies and to maintain insurance?

 

  1. Is the loss to some extent attributable to acts or omissions of the Tenant – did the Tenant take reasonable steps to mitigate the loss?

In Morris v Mappin & Webb, Ltd 1903 TS 244 the Supreme Court of the Transvaal held that when it is clear from a contract of lease that the parties contemplated that the leased premises should be used for a certain purpose, and the lessee, through no fault of his own and owing to force majeure (in this case, a war), suffers a total or partial deprivation of beneficial occupation for that purpose, he is entitled to a remission of rent proportional to the extent of deprivation.

The Court held further that where the lessee was largely deprived of beneficial occupation, but nevertheless had exercised a right of renewal, with full knowledge that the force majeure was still in effect, the lessee is not entitled to remission.

CONCLUSION

The lockdown as it affects non-essential businesses constitutes a force majeure event. The force majeure event is a ground for remission of rental, unless the lease agreement in question excludes reliance on force majeure to claim a remission. The impact of the force majeure event on the reciprocal rights and obligations of the parties to a particular lease must be considered in detail.

It is of the utmost importance that parties to a lease agreement communicate and negotiate in good faith about the extent of a remission that would be proportional to the extent of the Tenant’s loss of occupation and inability to operate a business from the premises during the lockdown. The agreement reached should be reduced to writing.

Please contact the Cluver Markotter commercial department for enquiries about the lockdown and its effect on leases and other commercial agreements.