Busi­ness res­cue sets chal­lenge

Com­mer­cial land­lords may have to deal with a new in­dus­try to re­struc­ture leases

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - RAEL LE­VITT

COM­MER­CIAL prop­erty own­ers, who are still reel­ing from the Con­sumer Pro­tec­tion Act’s au­thor­ity to ter­mi­nate lease agree­ments with in­di­vid­u­als, now need to brush up quickly on Chap­ter 6 of the new Com­pa­nies Act whereby a busi­ness res­cue prac­ti­tioner can sus­pend a lease agree­ment.

The in­crease in busi­ness res­cue by com­mer­cial tenants makes it vi­tal to know what hap­pens to a com­mer­cial lease when the ten­ant goes into busi­ness res­cue. Un­for­tu­nately this adds strain to land­lords, and although busi­ness res­cue is new and untested, SA may soon see tenants with heavy lease com­mit­ments go­ing into busi­ness res­cue in or­der to re­struc­ture their lease agree­ments.

The is­sue of in­sol­vency and leases is not new to com­mer­cial own­ers and many land­lords have lost tenants through com­pa­nies go­ing into liq­ui­da­tion. How­ever, busi­ness res­cue may spawn a new in­dus­try of lease re­struc­tur­ing. Steadily in­creas­ing busi­ness res­cue, cou­pled with the eco­nomic down­turn, the cur­rent lack of credit and soft­ness in con­sumer and busi­ness spend­ing, pose chal­lenges for land­lords of com­mer­cial tenants.

Cor­po­ra­tions are suc­cumb­ing to the pres­sure of cred­i­tors and the reper­cus­sions of ex­ces­sive debt.

The num­ber of cor­po­ra­tions en­ter­ing into busi­ness res­cue is in­creas­ing, with more than 175 com­pa­nies hav­ing ap­plied al­ready.

The busi­ness res­cue of tenants has con­se­quences with re­spect to the abil­ity of land­lords to en­sure pay­ment of rent and re­cov­ery of ar­rears, get pos­ses­sion of de­faulted leased premises and in­sti­tute and con­tinue le­gal pro­ceed­ings in re­la­tion to any breaches of the lease by the in­sol­vent tenants.

Busi­ness res­cue means pro­ceed­ings to fa­cil­i­tate the re­ha­bil­i­ta­tion of a com­pany that is fi­nan­cially dis­tressed by pro­vid­ing for the tem­po­rary su­per­vi­sion of the com­pany, and of the man­age­ment of its af­fairs, busi­ness and prop­erty, in­clud­ing a tem­po­rary mora­to­rium on the rights of claimants against the com­pany or in re­spect of prop­erty in its pos­ses­sion.

A busi­ness res­cue prac­ti­tioner must de­velop and im­ple­ment a plan to res­cue the com­pany by re­struc­tur­ing its af­fairs, busi­ness, prop­erty, debt and other li­a­bil­i­ties and its eq­uity in a man­ner that max­imises the like­li­hood of the com­pany con­tin­u­ing in ex­is­tence on a sol­vent ba­sis, or re­sults in a bet­ter re­turn for the com­pany’s cred­i­tors or share­hold­ers than from the im­me­di­ate liq­ui­da­tion of the com­pany.

A land­lord is an af­fected party in a busi­ness res­cue and can re­ject and can­cel the com­pany’s lease but dis­tressed com­pa­nies may use busi­ness res­cue tem­po­rar­ily to sus­pend le­gal ac­tion, pay­ments and use the new leg­is­la­tion as a tool to rene­go­ti­ate lease terms.

Even though rentals are only one of the costs of do­ing busi­ness, com­mer­cial prop­erty tenants who get into fi­nan­cial trou­ble seem al­ways to put rent re­lief near the top of things to ad­dress.

Com­mer­cial prop­erty man­agers and own­ers need to deal with the prob­lem of a re­tail, in­dus­trial or of­fice ten­ant who is strug­gling fi­nan­cially.

There is no right decision when it comes to the ques­tion of whether or not to even con­sider rene­go­ti­at­ing a com­mer­cial lease.

Some land­lords are of the ba­sic be­lief that the busi­ness prob­lems of the ten­ant are ex­clu­sively their own, and that’s en­tirely de­fen­si­ble. Oth­ers con­sider a wider range of as­pects of the busi­ness re­la­tion­ship and seek the ne­go­ti­at­ing ta­ble, with a solid un­der­stand­ing of what is pos­si­ble and what is pru­dent. When a ten­ant goes into busi- ness res­cue the land­lord should re­quest the busi­ness res­cue plan that il­lus­trates the plan for get­ting their busi­ness back to prof­itabil­ity. If the plan in­cludes a low­er­ing of rent or an eas­ing of terms, land­lords will have to make the dif­fi­cult decision whether they are pre­pared to ac­cept this or go through the cost and risk of find­ing new tenants. If the busi­ness res­cue fails a com­pany will go into final liq­ui­da­tion and this will be far more oner­ous for a land­lord.

In the UK leas­ing bro­kers who re­struc­ture ex­ist­ing lease agree­ments have be­come a grow­ing sec­tor of the mar­ket.

We may start see­ing this in SA. We may start see­ing an in­crease in com­mer­cial tenants look­ing to lower their oc­cu­pancy costs through lease rene­go­ti­a­tions, as changes in the econ­omy have chal­lenged com­pa­nies to change their busi­ness op­er­a­tions and re­flect on ways to cut costs. In a tight econ­omy land­lords may have to work with their tenants and al­low them to pay re­duced rent in or­der to avoid a va­cancy. In or­der for a land­lord to de­ter­mine if a com­mer­cial ten­ant is vi­able, tenants must be trans­par­ent and re­la­tion­ships are im­por­tant. Land­lords will have to as­sess the sit­u­a­tion, and work with the ten­ant, but be­cause land­lords are be­ing bur­dened with re­quests from tenants, cou­pled with their own cash flow and lender is­sues, ne­go­ti­a­tions are not go­ing to be easy.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.