Article by Dr. Jan – Harm Swanepoel
1. The Current Situation of Uncertainty
The COVID-19 pandemic is having a serious impact on our way of life in South Africa. Forced quarantines and self-isolation have swept across South Africa in an attempt to curb the spread of COVID-19. This virus has seen businesses shut down and people endeavor to carry on their work from home where possible. This has an enormous effect on the ability of businesses as well as citizens to ensure that there is sufficient cash flow available to meet their financial obligations. One of the most important financial obligations that looms large for businesses and citizens is the payment of rental, whether it be the rental for a home, factory or office space. In this uncertain situation, landlords and tenants must take the time to evaluate their lease agreements so that they can be in a position to adapt and best secure their respective interests going forward.
2. The Effect of a Pandemic on a Lease Agreement
During a volatile situation such as this COVID-19 pandemic, it becomes vital for landlords and tenants to review their lease agreements in order to ascertain their rights and obligations under the lease and if there are any terms in the lease agreement that change the functioning of those rights and obligations in extraordinary situations.
Lease agreements will usually contain a clause that is known as a force majeure clause, sometimes also referred to as an “act of God” clause. The purpose of this clause is to protect the parties to the lease agreement by stating that any breach of the lease agreement that has resulted from an extraordinary situation that is beyond the control of the parties will not be considered a breach of the lease agreement.
Depending on the drafting of the clause, it may provide for the suspension of any obligations under the lease agreement or for the relaxation of the obligations owed by the parties to one another. A force majeure clause may also list examples of what will be considered a force majeure, such as war, natural disasters and strikes.
However, these clauses are often drafted so as to include instances that are not expressly mentioned in the clause, such as a viral pandemic. The COVID-19 pandemic and the government measures currently in place could trigger a force majeure clause in a lease agreement.
The most critical obligation that could be affected by the COVID-19 pandemic is the obligation to pay monthly rental. The measures implemented by government could result in tenants being unable to pay their rental on time in accordance with their lease agreements. Late payment or no payment of rental will then negatively affect the landlord who uses that rental to pay necessary costs and fees in relation to the property in question.
Not all lease agreements will contain a force majeure clause, or one that covers a variety of events or circumstance. In these instances, parties may be able to rely on the common law principle of ‘supervening impossibility of performance’ to suspend their obligations under the agreement, if it has become objectively impossible for them to perform under the agreement as a result of an unforeseeable and unavoidable event.
3. What should Landlords and Tenants do?
Both landlords and Tenants must consult their lease agreements to determine what their rights and obligations under the lease agreement are and if there is a force majeure clause in the lease agreement. If there is such a clause in the lease agreement, then it must be determined what effect that clause will have on their rights and obligations.
Landlords of commercial properties should consult with their tenants to determine if the tenants are required to have, or happen to have, a business interruption insurance policy that may be used to cover the rental payments for the premises and how such policy can assist in paying the rental in respect of the premises until the COVID-19 pandemic subsides.
Landlords of both commercial and residential properties will obviously consider actions for eviction or the recovery of monies in respect of tenants that have not paid their rental. However, this remedy may be a drastic step which will may not serve either party’s interests in this situation. Another course of action in this situation would be for landlords to negotiate with tenants regarding their financial means to pay rental with the possibility of either a reduction in rental or a forgiveness of the rental by the landlord during this uncertain period.
Should any landlord or tenant require assistance, advice or an opinion relating to the interpretation of their lease agreements as well as assistance with negotiating with their landlord or tenant, please contact us.