Warning to all landlords: Perfect or suffer the consequences

Does a landlord have an automatic right of retention/ lien over the movables of the lessee that can be exercised to off-set arrear rental? The Supreme Court of Appeal in the recent case of Ergomode (Pty) Ltd v Jordaan NO and Others (643/2022) [2024] ZASCA 10 (29 January 2024) laid down the law in an area of the law where many landlords have resorted to self-help for many years.

The Facts

In this case, Ergomode Proprietary Limited (“Ergomode”) entered into a lease agreement with Sakhile Contract Mining Proprietary Limited (“Sakhile”), in which it was agreed that Sakhile would occupy a portion of Ergomode’s property to carry on business as a coal washing plant. During the lease period, Sakhile began experiencing financial difficulty, resulting in the company falling behind in rent in the sum of R18,2 million by August of 2020.

 In October of the same year, Sakhile was placed into business rescue, with the lease agreement between Sakhile and Ergomode being suspended by the BRPs in February 2021. Ergomode lodged a claim in the amount of ZAR18,2 million however the BRPs accepted the claim in the amount ZAR12,8 million due to damages suffered by Sakhile through the removal of filter press by one of Ergomode’s related entities, Filtaquip Proprietary Limited. Furthermore, Ergomode purported to have security for its claim in the form of a tacit hypothec, which the BRPs refused to recognise on the basis that it was not perfected prior to the company being placed into business rescue.

The BRPs sought a number of extensions for the publication date of Sakhile’s business rescue plan, which was published on 15 March 2021. The business rescue plan was ultimately adopted on 30 March 2021 and Ergomode participated in the meeting. Subsequent to the adoption of the plan and over a month later, Ergomode made application to the High Court requesting an order to made setting aside Sakihle’s business rescue plan as well as to have its tacit hypothec perfected.

Ergomode’s case was dismissed by the High Court, which resulted in the appeal to the Supreme Court of Appeal. The SCA upheld the decision of the High Court. The discussion below will only deal with the dismissal of Ergomode’s relief sought in relation to the perfection of the tacit hypothec.

Discussion

A landlord’s tacit hypothec is a form of real security created through common law which entitles landlord’s whose tenants are in rental arrears, to collect movable property of the tenant to cover any and all outstanding rent owing to them. Although all landlords are entitled to enforce this hypothec, it cannot be on a self-help basis, and a landlord must apply to the court for an order enforcing their hypothec over the movable property of the tenant, and a sheriff must then be dispatched to attach the property of the tenant. In legal terms, this process of enforcement by the landlord of their hypothec is called perfection, and perfection enables a landlord to have a real and enforceable right against a tenant. Therefore, without perfection, the landlord’s hypothec is merely an idea to a legal remedy the landlord could potentially be entitled to claim in a situation in which rental income is in arrears. It is only on perfection thereof that the landlord will have an enforceable right in terms of law.

But what happens if you try to enforce this right while your tenant, such is Sakhile, is placed under business rescue?  In this instance, the Companies Act will come into play, specifically section 133. In terms of this section, once a company (such as Sakhile) is placed under business rescue proceedings, a temporary moratorium (postponement) is placed on any proceedings brought against the company. There is a caveat to this however, in that legal proceedings may be brought against the company under business rescue if the consent is obtained from either the business rescue practitioner or the court before instituting proceedings.

In the current case Ergomode did not receive the consent of either of the above, therefore making their appeal contentious at best. In their appeal, Ergomode attempted to argue that the moratorium placed on Sakhile only applied to their claim for rental arrears prior to business rescue proceedings, and not their claim for rental arrears after Sakhile was placed in business rescue.  Ergomode further argued that rental arrears accrued subsequent to the business rescue plan could be claimed on the basis of damages and did not require the process to be followed in terms of the Companies Act (i.e requesting consent from the business rescue practitioner and or court prior to bringing the proceedings).

The Supreme Court of Appeal did not agree with this, and reinforced the practice that should a landlord not perfect its rights prior to business rescue proceedings taking place, such rights will not be a real and enforceable means of security which can be relied on by the landlord to claim rental arrears.