Landlords - Managing your tenant's liquidation

In these hard times, you may well be faced with a situation where your tenant is liquidated (“sequestrated” in the case of an individual or trust, “liquidated” or “wound up” in the case of a company).  If that happens, what are your rights and how do you manage them?
 
A recent Supreme Court of Appeal decision illustrates the principles involved.
 
The landlord, the lease and the sub-lease   
 

• A tenant had installed a sub-tenant in a portion of leased business premises,

• Stressed financially, the tenant breached its lease by failing to pay its rental on time,

• On 16 January the landlord gave notice to the tenant to remedy the breach within 7 days or face cancellation of the lease,

• Although the tenant was finally liquidated only on 27 February, the effectivedate of a company’s liquidation is always retroactively backdated to a “deemed” date of liquidation.  That “deemed” date is the date the application for liquidation is lodged with the Court, and in this case it was 21 January – therefore the landlord’s 7 day notice period had not expired at the effective date of liquidation,

• On 27 January (i.e. 6 days after effective date of liquidation), the landlord delivered to the tenant a letter cancelling the agreement,

• The liquidator of the tenant then tried to enforce the lease against the sub-tenant, arguing that the lease remained in force because the purported cancellation was only made after date of liquidation and was therefore invalid.

 
The liquidator and the law

• At date of liquidation the “hand of the law” is laid upon the estate of the insolvent or company and the rights of all parties are “frozen”,

• In regard to leases, the liquidator of a liquidated tenant has the right to make an election – either continue with the lease or cancel it and leave the landlord with a concurrent claim for damages,

• Should the liquidator elect to continue with the lease, he/she “steps into the shoes” of the tenant, and has no greater rights in terms of the lease than the tenant had,

• The result - all rental for the post-liquidation period is payable by the liquidator to the landlord as a cost of liquidation, and – crucially in this case – “the terms of the lease remain in place and the liquidator must comply with it”.  The liquidator is “obliged to perform whatever is required of the insolvent in terms of the contract, including unfulfilled past obligations of the insolvent”,

• Thus, held the Court, “The issue is simply whether there was an effective and enforceable right at the critical time – the time of the cancellation”.  In this case, the landlord had a clear, enforceable right to cancel the lease when it did, and the cancellation was accordingly valid against the liquidator.

Landlords:  Taking timeous action to protect your rights in the event of any default by your tenant is critical.  Note that any provision in your lease for it to be terminated automatically on liquidation is void. Take advice - at the first sign of financial stress in your tenant - on how to best protect your rights.
 
Sub-tenants:  Your rights are subject to those of the main tenant, so if the landlord cancels the main lease, your sub-lease ends as well.  Again, take advice on protecting your rights if the tenant shows any signs of financial stress.

Bisset Boehmke McBlain Attorneys

2 July 2014