A boost for land­lords

Pro­posed amend­ment to the Com­pa­nies Act could ef­fec­tively over­turn high court rul­ing re­gard­ing busi­ness res­cue

Financial Mail - - DIAMONDS & DOGS - Ann Crotty

Nearly two years ago, in No­vem­ber 2016, the high court in Pre­to­ria re­jected an ap­pli­ca­tion from the SA Prop­erty Own­ers’ As­so­ci­a­tion to amend the Com­pa­nies Act to give land­lords pref­er­ence over other cred­i­tors in busi­ness res­cue pro­ceed­ings.

Now, the first sub­stan­tial amend­ments to the Com­pa­nies Act since it was im­ple­mented in 2011, re­leased for com­ment at the end of Septem­ber, in­clude a pro­posal that would give land­lords the very rights that were strongly re­jected by the high court.

In a nut­shell, that high court ac­tion was geared at en­sur­ing that rental costs — of­ten in­clud­ing rates, wa­ter and elec­tric­ity — in­curred when a com­pany is in busi­ness res­cue are cov­ered ahead of the claims of other cred­i­tors.

But if the new Com­pa­nies Act amend­ments are ac­cepted, it could up-end the busi­ness res­cue process, in­tro­duced in 2011.

“This opens the door to all the other sup­pli­ers who will de­mand the same sort of pref­er­en­tial rights,” says one leg­is­la­tor. For one thing, he ar­gues, the pro­posed amend­ment would en­sure land­lords leapfrog all other cred­i­tors when a com­pany hits the skids.

“It raises the is­sue of moral haz­ard and en­cour­ages land­lords to en­ter into con­tracts with du­bi­ous ten­ants,” he says.

The prop­erty in­dus­try, which be­lieves busi­ness res­cue is a “dis­as­ter for land­lords”, is over­joyed.

Marc Wainer, out­go­ing chair of prop­erty com­pany Re­de­fine, says that un­like other sup­pli­ers, land­lords do not have a choice about con­tin­u­ing to sup­ply a busi­ness that has been put into busi­ness res­cue.

Wainer says that be­cause land­lords are forced to pay rates, wa­ter and elec­tric­ity dur­ing busi­ness res­cue, this jus­ti­fies them hav­ing rights over other cred­i­tors.

Madelein Burger, a part­ner at law firm Webber Wentzel, says the amend­ment is the re­sult of plenty of lob­by­ing.

“It is only fair that land­lords be pro­tected,” she says. “A busi­ness, even if un­der busi­ness res­cue, needs premises to trade from, and un­scrupu­lous busi­ness res­cue prac­ti­tion­ers would sus­pend pay­ments to land­lords, sit in the premises, op­er­ate the busi­ness and then turn a com­pany over to liq­ui­da­tion but pay their own fees, partly out of what was due to the land­lord.”

Burger says the pro­posed amend­ment is a re­flec­tion of what al­ready hap­pens when land­lords deal with eth­i­cal busi­ness res­cue prac­ti­tion­ers, who gen­er­ally pay land­lords any­way. “A land­lord has pro­tec­tion in the case of a liq­ui­da­tion. We be­lieved it was an over­sight that this pro­tec­tion was not in­cluded in the orig­i­nal Com­pa­nies Act for busi­ness res­cue cases.”

Still, in his stri­dent 2016 high court rul­ing, act­ing judge Cor­rie van der Westhuizen said costs in­curred by the land­lord dur­ing the busi­ness res­cue process were the re­sult of a lease agree­ment that ex­isted be­tween the land­lord and the busi­ness.

“Those costs do not con­sti­tute, by any in­ter­pre­ta­tion, costs aris­ing out of the busi­ness res­cue pro­ceed­ings … To hold that such costs con­sti­tute post-com­mence­ment fi­nanc­ing would el­e­vate an obli­ga­tion [in­curred] prior to com­mence­ment of busi­ness res­cue pro­ceed­ings to a pref­er­ence over other cred­i­tors not pro­vided or con­tem­plated by the pro­vi­sions of sec­tion 135 of the act,” he said.

Hans Klop­per, na­tional head of busi­ness re­struc­tur­ing at BDO, says the pro­posed amend­ment would cer­tainly im­prove the stand­ing of land­lords. How­ever, in a com­ment on the 2016 court rul­ing, Klop­per said ear­lier this year that if the busi­ness res­cue prac­ti­tioner or the com­pany did not pay rent in terms of a lease af­ter the com­mence­ment of busi­ness res­cue pro­ceed­ings, “there is noth­ing that pre­vents the land­lord from pur­su­ing his claim for rent and is­su­ing pa­pers for an au­to­matic rent in­ter­dict” against the com­pany.

This means, Klop­per ar­gued, it is un­nec­es­sary to treat the land­lord as a “su­per pref­er­ent” — the ef­fect of the pro­posed amend­ment.

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