Ellerine Brothers (Pty) Ltd v McCarthy Ltd – 2014 (4) SA 22 (SCA)
The global COVID-19 pandemic has had and continues to have far-reaching financial ramifications on many individuals and businesses alike, and this is particularly prevalent in the already frail South African economy. The knock-on effects of a 12-month National State of Disaster, coupled with the crippling Regulations that have been implemented pursuant to the Disaster Management Act 57 of 2002, are now being felt harder than ever. The result and the reality of all of this are that a number of businesses simply cannot afford to keep their doors open, and, by implication, cannot afford to meet their monthly rental obligations, and as a consequence, many of these businesses are facing liquidation.
What does this mean for landlords?
In answering such a question, and generally most questions emanating from a written lease, the starting point is the express provisions of the lease agreement. By its very nature, a lease agreement contemplates reciprocal obligations of the landlord and tenant. One of the primary obligations of a landlord is to make the property available to the tenant and to not unlawfully interfere with the tenant’s use of the property. In turn, one of the primary obligations of a tenant is to pay the landlord the agreed monthly rental. If the tenant fails to pay the agreed monthly rental, and in the absence of a lawful reason for such failure, then the tenant will be in breach of its obligations in terms of the lease. The landlord may then, depending on the wording of the lease, call upon the tenant to remedy the breach within a specified time period. If the tenant fails to remedy its breach within the specified time period, the landlord may then elect to cancel the lease and request that the tenant vacates the leased property. To the extent that the landlord is owed arrear rental, it may also elect to liquidate the tenant as a means to recovering any amounts that are owed to it.
It might also happen that the tenant, knowing that it is in breach of its rental obligations, and anticipating that the landlord might seek to take steps to cancel the lease agreement and evict the tenant, apply for its own liquidation in the hope of avoiding or delaying such cancellation or eviction by the landlord. If the tenant elects to follow this path, is the landlord then prevented from cancelling the lease and asking for the tenant’s eviction, or is the landlord then bound to the lease pending the decision of the liquidator?
This is the question that came before the Supreme Court of Appeal (“SCA”) in the matter of Ellerine Brothers (Pty) Ltd v McCarthy Ltd 2014 (4) SA 22 (SCA). In this matter, the SCA was asked to consider the validity of the cancellation of a lease agreement where a letter of demand was delivered, in accordance with the lex commissoria of the lease, before the commencement of liquidation proceedings of the tenant, but where the specified time period to remedy the breach had not yet expired when those proceedings commenced and cancellation of the lease then followed after commencement of liquidation proceedings. Put simply, the question to be determined was whether the right to cancel was lost because of the liquidation of the tenant.
Firstly, it is perhaps relevant to the note that the SCA, in relying on a number of earlier cases, confirmed that the insolvency of the tenant did not terminate the lease and the liquidator ‘stepped into the shoes’ the tenant. The SCA went further to hold that once appointed, the liquidator has an election to either continue with the lease or not, and should he (the liquidator) decide to continue with the lease, he is then required to notify the landlord in writing, within 3 months of his appointment, of his decision.
Secondly, and more to the point, the SCA held that the common law position has essentially remained unchanged and the landlord is accordingly not prevented from exercising its right to cancel a lease agreement, pursuant to a breach by the tenant, which became enforceable after the commencement of liquidation proceedings of the tenant. In giving greater clarity to this, the SCA went on to say that it is unhelpful to speak of an ‘accrued right to cancel’ which survives the liquidation, or of a right to cancel, which only matures after the liquidation. The issue, so it was held, was simply whether there was an effective and enforceable right at the critical time (i.e. the time of the cancellation). In this case, it was held that the landlord had obtained such a right prior to the commencement of liquidation proceedings of the tenant and its cancellation post-commencement was valid, and the appeal was accordingly dismissed.
In summary, if the landlord sends a letter of demand before liquidation proceedings commence, the landlord will retain the right to cancel the lease after such commencement. However, if the landlord does not send the necessary letter of demand before liquidation proceedings commence, then the landlord will be at the mercy of the liquidator, who will have an election (to be exercised within 3 months of being appointed) to either cancel the lease agreement or continue with it.