Large SA companies are not paying full rent. What will happen to small businesses who refuse?
- Large retailers like Truworths, Pepkor and Foschini are refusing to pay full rental as their shops stay closed.
- Smaller companies may be doing the same, and a lawyer expects that a huge number of demands for payment and summonses will be issued after the lockdown.
- However, it still remains to be seen how the courts will react to any unilateral action taken by tenants.
- For more stories, go to Business Insider's home page.
Since the start of the national lockdown, some of the country’s largest retailers – including The Foschini Group, Truworths and Pepkor and others – have stopped paying rent to landlords, after taking legal advice. Even Dis-Chem, which is trading through the lockdown, is only paying a part of its rent.
The companies are still in talks with mall owners about whether they will pay anything for April - at this stage, it looks as if the large clothing retailers may only pay 20% of their rent.
These big, countrywide companies have enormous muscle, which they can flex during negotiations. They also have large legal teams, who can argue their case.
But what if your company is much smaller? What sort of legal ramifications will your business face if you stop paying?
As a general principle, both in terms of the common law and in terms of agreements of lease, a failure to pay full rental and operating costs on time constitutes a breach of the lease, entitling landlords to cancel the lease, claim arrear rentals and sue for damages (being the rental for the balance of the lease), says Roy Bregman, director of Bregman Moodley Attorneys.
Businesses that have had to close their doors must still pay their rental and utilities as most lease agreements contain clauses limiting the landlord’s liability. “At law (and as unfair as this may seem) a tenant is unlikely have a right to claim a reduction of rental or the right to withhold the payment of the rental, nor would the tenant have a claim for damages for loss of earnings.”
Leases generally only give you the right to stop or reduce the amount of rent and outgoings you are paying if you cannot access or use your premises because they are damaged or destroyed, and not because of the pandemic.
But if a lease becomes impossible to perform because of Covid-19, your business may be able to argue that the lease has been frustrated and should be ended, says Bregman.
“When law firms and the courts re-open we will see a huge number of demands for payment and summonses being issued. The courts will have to decide what rights the tenants may have had, not to pay rental as a result of the lockdown.”
He advises businesses to approach their landlords to arrange temporary payment holidays or deferments of rental.
“If they can, they should at least pay their share of the common operating costs. They must certainly check whether their insurance policy makes provision for Business Interruption and claim on the policy.”
What about force majeure?
Some lease agreements contain a force majeure clause (an act of God clause to protect the parties if a segment of the contract cannot be performed due to causes that are outside the control of the parties, such as natural disasters). Such a clause may absolve one or both parties to a contract of all or part performance of their obligations on the occurrence of certain events which are outside their control, says Bregman.
If a lease has such a clause, it is possible that a tenant can argue that the Covid-19 pandemic falls within the contract wording, and that non-performance has been a result of the outbreak.
A tenant will ultimately need to prove that it was unable to pay the rental due, based on little or no turnover due to the pandemic.
“In these uncertain times, only time will tell how the courts will react to any unilateral action taken by tenants,” says Bregman.
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