A boost for landlords

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

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.