Draft Joint Standard on Outsourcing by Insurers released for public comment
A series of judgments from South Africa’s High Courts, most recently in the Western Cape High Court judgment of Bymyam Trust v The Butcher Shop and Grill CC, offer welcome guidance for landlords and tenants, as well as insurers that are faced with business interruption claims on a gross rental basis of indemnification, following COVID-19 related lockdown restrictions. We examine the recent judgment and discuss the impact it has on landlords, tenants and insurers going forward.
A copy of the Bymyam judgment can be accessed here.
Landlords have grappled with the legal position where a tenant refuses to pay rent, or demands a remission of rent payable, because it was, either wholly or in part, denied beneficial use of and/or access to the leased premises because of COVID-19 and associated lockdown restrictions.
Tenants have argued that by reason of the doctrine of supervening impossibility of performance, if the performance under a lease agreement has become impossible through no fault of either party concerned, the obligations under the agreement are generally extinguished. While South African law is settled on the position that a party cannot claim a remission of rent based on supervening impossibility where it is simply uneconomical or no longer commercially attractive for a party to carry out its payment obligations, the circumstances occasioned by COVID-19 and the accompanying restrictions are more nuanced in that, they often impacted on both the ability of the landlord and the tenant to duly perform. Accordingly, it is arguable that there is an entitlement at common law to a remission of rent. Landlords have often disputed this position based on the terms of the underlying lease agreement, or given that tenants often make commercially driven decisions to cease trading where they are not by law restricted from doing so.
In Freestone Property Investments (Pty) Ltd v Remake Consultants CC, decided in August 2021, the Gauteng Local Division of the High Court found, subject to the terms of the lease agreement, that during the period of the ‘hard’ lockdown (i.e. the period when no businesses were able to operate except for ‘essential services’) a tenant may claim a remission of rental to the extent that it can establish that its beneficial use and occupation was disturbed by lockdown restrictions. However, in the subsequent period of reduced lockdown restrictions, despite continued limitations on capacity, trading hours and the like, there is no entitlement for the tenant to claim an ongoing remission of rental where it was no longer restrained by law from making use of the premises. To learn more about this decision, click here.
The Bymyam judgment is the most recent judicial consideration of the entitlement of a tenant to a rental remission. In examining leading cases on events of supervening impossibility, the court specifically highlighted the following key points:
The ultimate conclusion in the Bymyam judgment was heavily fact driven, and the court iterated that the context of the specific matter where rental remission is claimed must be considered. This includes an examination of the:
These judgments offer guidance to landlords who may wish to claim arrear rental from defaulting tenants where the lease agreement does not permit the tenant to withhold rental payments in the event of a vis major or casus fortuitus, or where the refusal to pay rent extends past the point where the tenant could legally access and use the premises, after the initial ‘hard’ lockdown.
The determination of whether rental did in fact remain payable is also of importance to insurers that have underwritten business interruption insurance on a gross rental basis of indemnification, where there is a requirement for the rental paid or payable during the indemnity period to fall short of the standard gross rental figure. While claims must be considered on a case-by-case basis, these judgments offer direction on when, in the circumstances surrounding COVID-19, it may in fact be arguable for a tenant to legally be excused from the payment of rental, thus potentially giving rise to an insurance claim on the part of the landlord for a loss of gross rental.
For more information regarding these judgments and their impact, please contact a member of the Clyde & Co Insurance team in Johannesburg.