Tenants win new rights

Landlords in trouble after judgment gives tenants new powers over property they don't own

A supreme court of appeal decision on a 1658 Dutch law has curtailed landlords' powers over the properties they have rented out.

The judgment gives a tenant a lien over a landlord's property it has improved. It empowers the tenant to remain in occupation until it and its landlord have settled any dispute about compensation for the improvements.

Article 10 of the placaat, passed by the Estates of Holland, provides that a tenant of rural property who made improvements could only be compensated for them if the landlord gave it consent and it had vacated the property. This has usually been applied to urban property as well. But landlords have always had a lien - known as landlord's prior hypothec - allowing them to hold on to the furniture and equipment in the premises until their tenants have paid all their rent.

But in a judgment in Business Aviation Corporation (Pty) and Another vs Rand Airport Holdings (Pty) handed down on May 30, the court says that article 10 does not apply to urban property. The tenant in the case paid R7 750/month to the landlord, but was sub letting the property at R42 000/month. The court said the tenant had an enrichment lien entitling it to remain in occupation of the leased property after the lease had ended, until the amount of its claim for the improvements it had made to the property had been determined and paid.

"The tenant will be entitled to compensation even if those improvements were made without the landlord's permission," says Samantha Wirthel, director of law firm Bell Dewar & Hall. "And improvements are not just physical changes to the property." They can include sub letting at a higher price.

She says a provision in leases is vital to deal with improvements made by the tenant in such a way that the tenant's right to an enrichment lien after termination of the lease is excluded, even in the event of a subsequent oral lease.

David Green, CEO of Pace, the commercial property brokers, says: "The implications of the judgment are wide-ranging and serious. For instance, most industrial leases leave the maintenance of the property to the tenants. If tenants now start demanding compensation for keeping the property in good condition - and refuse to move out until they get it - some landlords could be in serious trouble.

"If the landlord in that case doesn't appeal to the constitutional court, then the next case in which the quantum is big enough probably will," says Green.

Ken Reynolds, divisional director of Nedbank Corporate, SA's biggest mortgage lender to commercial property, agrees with Green. "Many of the biggest properties are rented out on fully repairing leases in which tenants are completely responsible for every aspect of the property. They make capital improvements to the property over years."

Green and Wirthel say that existing clauses in some leases do limit the damage by prohibiting tenants from making any improvements without the permission of the landlord.

"It is not enough merely to provide that the tenant may not make any improvements without the landlord's written notice," says Wirthel. "Or to provide that if the tenant does make improvements without the landlord's consent, it shall not be entitled to any compensation for it.

"In addition, the tenant should waive any right it may have to an enrichment lien for improvements it may make either with or without the landlord's consent," she adds. "And the tenant should also waive any right to bring any claim whatsoever that it may have for compensation for improvements before it has vacated the leased premises. It is also clear that landlords should neither enter into oral leases at the outset nor allow tenants to remain in occupation on the basis of an oral lease after termination of an initial written lease."

Says Green: "What this also shows is that it's time to clear out some of these ancient laws that have been gathering dust in our law books."

Article by: Ian Fife - http://free.financialmail.co.za