Can a landlord insist on full rent

Can a landlord insist on full rent during the Hard Lockdown Period ? An indicative “half-answer” from the Gauteng High Court

On 25 August 2021, the High Court of South Africa, Gauteng Division, Johannesburg (“High Court“) retraced the development of the legal principle of supervening impossibility of performance from cases decided during the contractual uncertainties of the wars of the early 20^th century (between 1903 and 1919). This time, the High Court was faced with the Covid-19 pandemic related conundrum. It decided that a clause in the lease agreement providing that the tenant shall not be entitled to rent deferral or remission as a result of any cause whatsoever may require a restrictive interpretation resulting in the tenant being entitled to rent remission during the hard lockdown.

What happened?

The judgment which is the subject of this note is Freestone Property Investment (Pty) Ltd vs Remake Consultants CC and Another (2020/29927) [2021] ZAGPJHC 150 (“Freestone Property Judgment“).

Freestone Property Investment Proprietary Limited (“Freestone“) owns The Colony Shopping Centre (“Shopping Centre“) situated in Craighall Park, Johannesburg. Freestone concluded written lease agreements (“Lease Agreement“) with Remake Consultants CC (“Remake“), in terms of which Freestone let certain premises, parking and storeroom to Remake to conduct its business. In November 2020, Freestone terminated the Lease Agreement due non-payment by Remake of rent and related charges.

Clause 22.1 of the Lease Agreement provide as follows–

“The Tenant shall have no claim or right of action of whatsoever nature against the landlord for damages, loss or otherwise, nor shall it be entitled to withhold or defer payment of rent, nor shall the tenant be entitled to a remission of rent, by reason of an overflow of water supply or fire or any leakage or any electrical fault or by reason of the elements of the weather or by reason of the Leased premises or any other part of the Building or Property being in a defective condition or falling into disrepair or any particular repairs not being effected by the Landlord or by reason of there being any defect in the equipment of the Landlord or as a result of any other cause whatsoever.” [Emphasis added.]

On 15 March 2020, the Minister of Co-Operative Governance and Traditional Affairs (“Minister“) declared a national state of disaster in terms of the Disaster Management Act, Act, No. 57 of 2002, as amended (“DMA“) having regard to the potential magnitude and severity of Covid-19.

On 18 March 2020, the Minister made regulations (“Lockdown Regulations“) in terms of the DMA to prevent, alleviate, constrain or minimise the effects of Covid-19.

On 25 March 2020, the Minister amended the Lockdown Regulations and introduced further stringent measures (“Hard Lockdown“) to combat Covid-19. These included restricting the movement of persons between 26 March 2020 and 31 April 2020 (“Hard Lockdown Period“) unless for the purposes of performing essential services, obtaining essential services or goods, collecting social grants or seeking urgent, life-saving or chronic medical attention.

On the date prior to the commencement of the Hard Lockdown, Remake was trading at the Shopping Centre. On 26 March 2020, when the Hard Lockdown Period commenced, Remake ceased trading. On 1 May 2020, after the Hard Lockdown Period had ended, Remake did not commence trading; it only resumed trading in October 2020.

Freestone asked the High Court to issue a judgment (summary judgment) for the eviction of Remake from the Shopping Centre and payment of outstanding rent. The outstanding rent encompassed the period from March 2020 to October 2020; therefore, this included rent for months falling within the Hard Lockdown Period.

In its defence, Remake argued that –because of Covid-19 and the application of the doctrine of supervening impossibility of performance– the obligations of Freestone and Remake, respectively, arising from the Lease Agreement were suspended for the period between March 2020 and June 2020 when Freestone was excused from tendering the occupation of the leased premises and Remake from paying rent. Therefore, Remake reasoned that failure to pay the rent in issue did not entitle Freestone to terminate the Lease Agreement.

The Freestone Judgement arose from a summary judgment application by Freestone. A summary judgment application is an interlocutory (provisional) Court process which affords an applicant (the person approaching a Court for relief) the right to obtain judgment against a respondent (a person against whom relief is sought) summarily (swiftly) without proceeding with the trial. Since this procedure is meant to avoid time wastage, to succeed, Freestone had to demonstrate that Remake had no genuine defence and any defence raised in the trial would be for the purposes of delay.

What did the Court say about the doctrine of supervening impossibility of performance and the termination of the Lease Agreement?

Gilbert AJ said the following regarding the doctrine of impossibility of performance–

“The doctrine of supervening impossibility performance is firmly entrenched in our law. If performance of a contract has become impossible through no fault of the party concerned, the obligations under the contract are generally extinguished. But the doctrine is not absolute. For example, the doctrine may be overridden by the terms or the implications of the agreement in regard to which the defence is invoked and is not available where the impossibility of performance is self-created.” [Emphasis added];
“It is over-simplistic to analyse the predicament of commercial lessees under the ‘hard lockdown’ solely from the perspective that it was the lessees that were unable to perform. Lessors too may have been unable to perform. An argument that a lessee’s obligation to make payment is not rendered impossible by the ‘hard lockdown’ as the lockdown did not prevent the lessee from making payment as banking facilities remained available, misses the point. An assessment of whether there was impossibility of performance should not be approached from the narrow perspective that performance in the form of payment always remained possible and therefore there is no room for the operation of the doctrine“; [Emphasis added]
A tenant’s commercial inability or diminished commercial ability to pay rent because of an inability to trade during the Hard Lockdown Period does not excuse the tenant from paying rent. “Our law is settled that a vis major or casus fortuitus that it (sic) makes it uneconomical or no longer commercially attractive for a party to carry out its payment obligations cannot constitute a basis to be excused from performance.”;
“[T]hat the declaration of the state of disaster and the continued effect of the Covid‑19 pandemic may have resulted in a dramatic decline of custom through the shopping centre in which the leased premises were situated, does not afford a defence to the first defendant as lessee.”; [Emphasis added]
“[T]he first defendant [Remake] cannot legally justify its failure to make payment of rentals and other charges for the protracted period of March to October 2020. Whatever restrictions there may have been that prevented the plaintiff [Freestone] and the first defendant [Remake] from performing their respective obligations for the period of the ‘hard lockdown’ until 30 April 2020, those restrictions did not persist until October 2020. From 1 May 2020, the lockdown regulations were progressively eased. Any supervening impossibility of performance did not endure for the entire period corresponding to the first defendant’s non-payment of rentals.”; [Emphasis added] and
“The first defendant’s [Remake’s] decision not to open its doors for business after the [Lockdown] [R]egulations were eased sufficiently to legally permit it to recommence trading also does not constitute a defence. The first defendant’s decision to keep its doors closed is not because the prevailing regulations prevented it from trading. The first defendant’s decision to cease trading is not a direct consequence of a force majeure.“. [Emphasis added]

Gilbert JA decided in favour of Freestone that Remake had no genuine defence to the summary judgment application for the eviction of Remake from the leased premises. He decided that the termination of the Lease Agreement by Freestone was lawful because the rent in arrears extended to the period beyond the Hard Lockdown Period. He said–

“Whatever the defence the first defendant may have that it was excused from paying rentals for the period of the ‘hard lockdown’, that impossibility of performance does not relate to the full period for which it did not make payment.” [Emphasis added]

What did the Court say about the argument by Freestone that through clause 22.1 of the Lease Agreement, Remake contracted to pay rent notwithstanding any supervening impossibility of performance (the Hard Lockdown)?

Gilbert JA decided that the question whether clause 22.1 of the Lease Agreement precluded Remake from invoking the principle of supervening impossibility of performance and therefore being excused from paying rent during the Hard Lockdown Period required assessment by a Court in a trial because Freestone was also unable to tender to Remake lawful occupation of the leased premises during the Hard Lockdown Period. He then granted Remake an opportunity to defend its position in a trial in Court. In the course of this aspect of the judgment, Gilbert AJ said –

“The operation of the doctrine [of supervening impossibility of performance] has been explained on the basis of a term that is implied into the contract that if performance becomes impossible, the contract shall not remain binding.”;
“…[W]here the parties have expressly in their written agreement stipulated for what will happen in the event of supervening impossibility of performance, there can be no room for an implied term that the parties are excused from performance. This explains why the doctrine of impossibility of performance cannot apply if the contract provides otherwise. A term cannot be implied where there are express terms that provide otherwise. A term is implied in an agreement for the very reason that the parties failed to agree expressly thereon.”; [Emphasis added]
“But irrespective of whether the jurisprudential basis of the doctrine is an implied term, our law undoubtedly allows for parties to contractually regulate the position should there be supervening impossibility of performance.“; [Emphasis added]
a more restrictive interpretation of clause 22.1 of the Lease Agreement may be required because the Lease Agreement is reciprocal and the Hard Lockdown made it impossible for both Freestone and Remake to perform their contractual obligations; and
based on the expansive approach regarding the admissibility of extrinsic evidence of context and purpose in the interpretation of legal documents recently adopted by The Constitutional Court of South Africa in University of Johannesburg v Auckland Park Theological Seminary and another [2021] ZACC 13 and The Supreme Court of Appeal of South African in Capitec Bank Holdings Ltd and another v Coral Lagoon Investments 194 (Pty) Ltd and others [2021] ZASCA 99, the interpretation of clause 22.1 of the Lease Agreement may result in Freestone not being permitted to claim rent from Remake for a period for which Freestone was, because of the Hard-Lockdown, unable to tender lawful occupation of the leased premises.

What does this mean for me?

The majority of disputes relating to the impact of Covid-19 on lease agreement based on the inability to trade during the Hard-Lockdown Period have been resolves. However, there are disputes winding their way through settlement discussions or Courts. Therefore, the following lessons from the Freestone Judgment are worth noting –

if you signed an agreement (including a lease agreement) before the advent of Covid-19 and are now realising that the economic benefits are not what they were projected to be (because foot traffic or spending in malls have suddenly diminished), you cannot use Covid-19 as an excuse for not complying with the agreement;
if you fail to take advantage of the relaxation of the Lockdown Regulations and decide not to render contractual performance when such is not completely prohibited by the Lockdown Regulations, Covid-19 will not be a useful excuse. In the Freestone Judgment, Gilbert JA decided that Remake could not rely on the supervening impossibility of performance for its decision not to commence trading on 1 May 2020 when the Hard Lockdown Period ceased and only resuming trade in October 2020; and
based on, first; the approach to interpretation of legal documents recently adopted by the Constitutional Court and the Supreme Court of Appeal and, second; that lease agreements are reciprocal, landlords may be unable to demand payment of rent during the period when they could not, because of the Hard Lockdown, make the lease premises available to the tenant. Gilbert AJ could not definitively decide this point because he referred it to trial; however, his inclination is clear that similar clauses may require restrictive interpretation.