South Africa: COVID-19 and the obligation to pay rent – is there an impossibility to perform and what does that mean for insurers?

The question regarding the obligation to pay rent during the COVID-19 pandemic, and the impact of this obligation on certain business interruption claims has been a central component of many insurers’ investigations over the past year and a half. This article examines a recent High Court judgment that offers significant guidance on this matter.

On 25 August 2021, the Gauteng Local Division of the High Court delivered a judgment in the matter of Freestone Property Investments Proprietary Limited v Remake Consultants CC and Another (2020/29927) [2021] ZAGPJHC 150 (“the judgment”), which offers some significant guidance on the applicability of the doctrine of supervening impossibility of performance in terms of the obligation to pay rent under lease agreements due to COVID-19 and the accompanying government restrictions. A copy of the judgment can be accessed here.

Background

The judgment pertains to an application for summary judgment made by Freestone Property Investment Proprietary Limited (“the lessor”) against Remake Consultants CC (“the lessee”) and Clarke Scott (surety and co-principal debtor for the lessee (collectively referred to as “the defendants”)) in terms of two lease agreements for commercial premises located in a shopping centre in Johannesburg.

On 20 November 2020 and following non-payment of the rental and other charges stipulated in the lease agreements for the period April 2020 to October 2020, the lessor terminated the lease agreements and brought an action against the defendants for ejectment from the leased premises, and payment of the arrear rental and charges, and interest thereon.

The defendants disputed the obligation to pay the rental and charges on the basis of supervening impossibility to perform due to the declaration of the national state of disaster, and the later regulations promulgated under the Disaster Management Act 57 of 2002 which, according to the defendants, rendered both parties’ respective obligations in terms of the lease agreements incapable of performance. In effect, the defendants alleged that they were physically and legally constrained from trading from the leased premises, and on this basis, the defendants contended that the lessor was not entitled to claim the arrear rental and charges, and was furthermore not entitled to terminate the lease agreements consequent on the failure to pay those rentals and charges.

The application of the doctrine of supervening impossibility of performance

The Court was principally tasked with determining whether the doctrine of supervening impossibility of performance finds application in the circumstances. In doing so, the Court  iterated the following principles pertaining to the doctrine of supervening impossibility of performance:

• If performance of an agreement has become impossible through no fault of either party concerned, the obligations under the agreement are generally extinguished.
• The doctrine is however not absolute and may be overridden by the terms of the agreement, and is not available where the impossibility of performance is self-created, or specifically in terms of a lease agreement, when performance is commercially difficult.  
• The application of the doctrine must not be approached from the narrow perspective of whether the lessee was able to perform, but rather by considering the effect of an event on the performance by the lessor and the lessee from a more nuanced perspective.
• The impossibility of performance must be the direct and immediate cause of the failure on the part of the lessee to pay the rentals. Whilst the continued effect of the COVID-19 pandemic may have resulted in a dramatic decline of custom, this does not afford a defence to a lessee when it was in fact able to trade (i.e. such is not the direct and immediate cause).

In applying these principles to the facts at hand, the Court stated that while it can accept, from a more nuanced perspective, that the ‘hard lockdown’ incapacitated both the lessor and the lessee from performing their obligations for a certain period, the Court could not accept that this was justification for the lessee’s failure to make payment of rental and other charges for a protracted period when it was no longer restricted from trading. As such, the Court found that any arguable supervening impossibility did not endure for the entire period to which the arrear rentals and charges related.

Furthermore, the Court stated that while the continued effects of the COVID-19 pandemic may have led to a diminished commercial ability on the part of the lessee, such an inability does not trigger the application of the doctrine of supervening impossibility and does also not excuse the lessee from making rental payments in terms of the lease agreements. In addition, the court expressly stated that the lessee’s decision to not re-commence trading when it was no longer by law restrained from doing so does not constitute a defence. The lessee’s decision to cease trading after the ‘hard lockdown’ and the diminished decline of custom is not a direct and immediate consequence of the COVID-19 pandemic.

In turning to briefly consider the terms and provisions of the lease agreements as against the potential application of the doctrine of supervening impossibility, the Court stated that a term cannot be implied where there are express terms that provide otherwise, but ultimately found that the interpretation of the provisions of the lease agreements, and whether they preclude the operation of the doctrine of supervening impossibility, was to be decided upon by a trial court in due course. 

On this basis, the Court upheld the order for summary judgment insofar as the ejectment of the lessee was concerned in that there was a valid termination of the lease agreements for non-payment of the rental and charges. The Court, however, granted the defendants leave to defend the lessor’s claims for payment of the arrear rental and charges, and interest thereon, on the basis that it appeared prima facie and subject to the trial court’s interpretation of the provisions of the lease agreement, that the defence of supervening impossibility was not unarguable, for at least a limited period of time related to the ‘hard lockdown’.

Concluding remarks

The question of whether, and if so for what period, the obligation to pay rent in terms of a lease agreement remains unabated in the circumstances is a critical question for insurers that have underwritten business interruption policies on a loss of gross rental basis where there is a requirement for the rental paid or payable during the indemnity period to fall short of a standard gross rental figure. The provisions of the relevant policy must be carefully scrutinised as against the facts pertaining to any alleged loss of rental. A careful analysis of the underlying lease agreements must also be conducted to determine whether there is potentially a clause making provision for a remission of rental, or precluding the application of the doctrine of supervening impossibility.

While the outcome of these enquiries are fact specific, the judgment is of paramount importance in understanding the operation of the doctrine of supervening impossibility and when, in the COVID-19 circumstances, it may be arguable for a lessee to legally evade payment of rental, and thus potentially giving rise to a claim for loss of gross rentals on the part of the lessor. 

Should you require further information regarding the judgment and the impact thereof, please contract Ernie van der Vyver or Amelia Costa.