Lease agreements under lockdown

Hopefully this article will provide some clarity.

Lease agreement

The starting point of any contractual dispute resolution should always be the terms of the agreement. Many articles in the media and internet lately refer to the term’s vis maior/ vis major/ casus fortuitis/ act of God/Force majeure and the like.

All these terms refer to an event beyond the control of the contracting parties that make it impossible to perform. In certain cases, it may result in lawful non-payment or suspension of payment of amounts due in terms of the lease agreement.

The first question to be answered is whether the agreement contains a clause regulating the parties’ obligations in the event of Vis Maior. If so, the terms of the agreement enjoy preference. Normally such terms will regulate the payment of rent and other obligations.

If no such clause exists, the Common Law applies. In such case our case law refers to a supervening impossibility which render the fulfillment of contractual obligations impossible and which release the lessee from payment. However, there is a long list of requirements before a party can rely on this defense. The most important are:

• The impossibility must be objective;

• The impossibility must be absolute as opposed to probable;

• The impossibility must be absolute as opposed to relative (meaning if something can be done in general, the party seeking to escape liability will not succeed);

• The impossibility must be unavoidable by the reasonable person;

• The impossibility must not be the fault of either party;

• The fact that a disaster was foreseeable does not necessarily mean that it ought to be foreseen or that it was avoidable by a reasonable person. Circumstances in each case will dictate the answer to this requirement;

It is important to realise that each case which involves these requirements should be considered on its own facts and merits. The list is infinite and subject to development as our Courts consider disputes of this nature. There is no doubt that a dispute like this will soon end up in court as a result of the Covid-19 pandemic.

Covid-19 pandemic

Natural disasters, strike actions or act of the State were all in the past accepted as events which constitutes force majeure. It therefor follows that the announcement of a lockdown and subsequent regulations by the Government, created circumstances that can be described as a supervening impossibility (force majeure).

In certain cases it may result that a party is released to fulfill his contractual obligations due to impossibility. It is important to realise that our Common Law prescribes that not all force majeures excuse a party’s inability to perform.

How does it apply to lease agreements 

The application of the above principles differs between commercial and residential lease agreements.

As discussed, the terms of the lease agreement will prevail if it contains a clause regulating a force majeure event. If no such clause exists, the common law applies.

Extreme care should be taken before one decide not to pay rent in terms of a residential lease. Other than in the case of commercial property, a lessee of a residential property enjoys beneficial occupation of the property during the lockdown. He also has access to utility services and has the infrastructure to pay.

We are of the opinion that a residential tenant will not be easily allowed to invoke the defense of force majeure in order to escape the payment of rent. Although the regulations prohibit eviction during the lockdown, legal process will continue after the lockdown and non-payment of rent may result in breach of contract and the subsequent cancellation of the lease agreement.

A landlord may also be entitled to claim damages in addition to arrears in rent.

Steps to be taken

It is clear that the Covid -19 pandemic as well as the lockdown will have severe implications for the South African economy. Many people will lose their jobs and the overall growth of the economy is predicted to be at a negative rate. It is therefore absolutely necessary for tenants to anticipate the payment of rent. If one is in a position where payment is impossible, the landlord should be contacted immediately in order to mitigate the effect of no payment.

Steps that can be taken include:

• Be completely honest with your landlord. Do not neglect payment if you have reserve funds available;

• Provide proof if you lost your job;

• Negotiate amended terms. Rent amounts can be reduced or split into future payments;

• Offer to pay utility services and property taxes;

• Negotiate cancellation of the agreement without penalty.

Remember, in many residential leases the landlord is dependent on the rental amounts to ensure his well-being or the landlord has a bond to pay in respect of the property. The lessee should take this into consideration when he approaches the landlord.

For residential lease agreements no hard and fast rule exists. Every agreement should be considered on the written document and circumstances. Parties are encouraged to engage into negotiation or mediation in order to resolve disputes during this uncertain period. The courts will no doubt be overburdened once the lockdown passes and alternative dispute resolution will serve parties well.

Author:
GJ Kruger, Director Commercial litigation, Kruger & Bekker Inc. (Middelburg).

Disclaimer: The above opinion is not extensive and legal advise should be obtained since the terms of every lease agreement and the merits of every case may differ. The article serves informative purposes only.