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Business rescue and landlords: where would you, the landlord, stand should a tenant be placed under business rescue and what you can do

The ‘business rescue procedure’ made possible by the Companies Act for ‘financial distressed’ companies, is likely to be used with increasing frequency in the next year or two. This post explores the relationship between business rescue and landlords, and how you, the landlord, can protect yourself when a tenant is placed under business rescue.

Business rescue: the law

A company may be placed under business rescue by its board of directors should they resolve so, while having reasonable grounds to believe that the company is indeed financially distressed and that there appear to be reasonable prospects of rescuing the company.  Alternatively, any affected person may apply to court to place the business under business rescue.

The business rescue procedure cannot by law be implemented if the company’s finances are in reasonable shape or there is no real prospect of the company being rehabilitated.  Furthermore, the procedure may be cancelled if the requirements set out in the Companies Act relating to such procedures are not strictly complied with.

Nevertheless, the Act places a large amount of power in the hands of the directors of a company to make the decision to place a company under business rescue; a decision that could result in considerable financial repercussions for those who have contracts in place with a company placed under business rescue. Such entities may have no choice, but to accept non-payment or partial payment of the sums owing to them for the rehabilitation period (usually three to nine months).

Business rescue and landlords

Business rescue and landlordsOne of the questions which now arises is, where would you, the landlord, stand should one of your tenants be placed under business rescue?

The relevant clause in the Companies Act is 134(1)(c), which states that “despite any agreement to the contrary no person may exercise any right in respect of any property in the lawful possession of the (rescue) company, irrespective of whether the property is owned by the company except to the extent that the practitioner consents to this in writing”.

Without careful review and amendment of lease agreements, this section may have the effect of leaving you as a landlord without the remedies of eviction or suing for rent, in the event that one of your tenants is placed under business rescue. Typically leases provide for landlords to be able to cancel leases in the event of liquidation of the tenant. In the case of business rescue such a similar clause would not help, because at the date of business rescue the tenant would be in lawful possession and thus s134 of the Act would prevent any rights being exercised in respect of the property.

What you can do

It is therefore imperative that your lease must contain a surgically drafted clause that renders occupation unlawful from the date that a tenant company is placed under business rescue. This is necessary because s134 applies only to lawful possession. If, in terms of your lease agreement, business rescue itself renders possession by a tenant unlawful, then you as a landlord will be free to exercise your rights in respect of their properties. It is thus possible to powerfully mitigate the potentially prejudicial effect of s134 of the Companies Act.

Garth Watson

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