SA's new property law shocker
If you think land grab law looks ugly, look at what new Companies law will do to your property "investments". Full details

One of the biggest selling points of commercial property investments is the steady, growing income stream that accompanies a water-tight lease. But a looming new law could change that, with property owners set to have vastly diminished rights.

The draft Companies Bill looks "scary", say senior figures in the real estate sector.

If the law is passed in its current form, you will have to draw up radically different lease agreements and take many extra steps, at huge cost, to safeguard yourself - or you run the risk of effectively having a commercial squatter.

That, in turn, could lead to your own financial woes.

The South African Property Owners Association (Sapoa), which represents the country's bigger landlords and real estate service providers, this week sounded the alarm about worrying provisions in the draft legislation.

In a media statement, it announced that in its present form the Bill could have a "widely negative impact on property owners, developers and managers".

Sapoa, usually conservative in its statements, even warned that the law will be "economically destructive".

Issues highlighted by Dinga Nkwashu, chair of Sapoa's legal committee, in a public statement included that property management fees and rental can be frozen during company rescue processes.

In addition, the tenant cannot be evicted or sued for outstanding rental.

The three main rescue scenarios, which could leave a landlord and service providers in a serious financial fix, include:

1. The temporary supervision of a company's affairs, including its fixed property;

2. A temporary moratorium on the rights of claimants, including landlords and property managers; and

3. The implementation of an action plan to rehabilitate the company.

Sapoa has made contact with the architects of the legislation, at the Department of Trade & Industry, to emphasise the problem areas. It hopes our law-makers will see their members' collective point-of-view and make big changes once they realise the implications for property owners and commerce in general.

Failing that, court action may be necessary, with some legal experts of the firm belief that the draft legislation does not comply with the Constitution.

Delving into the detail

Sapoa told the lawmakers that the net effect of the introduction of the chapter on business rescue, in the Companies Act, is that it will repeal and replace in its entirety the current Companies Act chapter (X1V) which deals with judicial management.

Property owners will be affected where tenants are subject to a business rescue and property management companies in cases where their client, the property-owning company, is subject to a business rescue.

"The implication thereof is that for the period in which the business in question will be subject to business rescue claims for the payment of rental and or professional management fees will be frozen."

In addition, the member company may be "saddled with a situation where it has a tenant who could not only pay its rental or a client who cannot pay professional management fees but cannot be evicted or sued due to the fact that a moratorium is placed on all claims against the client company until the business rescue process is finalised".

The business rescue provisions, say Sapoa's legal fundis, are "at odds with the law of contract in that the lease contract or professional services that would have been concluded between members and the tenant in distress is completely disregarded".

Sars, property owners out of the loop

Intriguingly, the ranking of claims by creditors has shifted to the extent that even the South African Revenue Service (Sars) is no longer a party that has preferential treatment. Property owners are at the bottom of the heap, barring shareholders, along with other unsecured and secured creditors for any supply made before the business rescue proceeding began.

Employees are first in the ranking, which suggests unions will not oppose business rescue steps that will effectively put property rental payments on hold.

Second in the queue for claims are secured creditors for any supply made after the business rescue proceedings began and then unsecured creditors for any supply made after business rescue proceedings kicked off.

So, creditors involved with the business before it becomes subject to a rescue have a lower ranking than those who arrive on the scene afterwards.

As Sapoa emphasised to the Department of Trade & Industry, property owners will not be able to rely on the landlord's hypothec - a legal term for the right a landlord has over the stock and goods of a tenant.

Where a business rescue fails, a creditor could be left with a "huge bill of unpaid rental or professional fees that may not be recovered at all on the eventual liquidation of the distressed company".

Future options for landlords

The picture doesn't look particularly rosy either for tenants who have no intention of abusing legal loopholes to get out of paying the rent.

Sapoa's legal boffins say that if the Bill goes ahead, these are the types of measures a property owner will have to resort to in order to safeguard their financial interests:

  • Register a special notarial bond over the tenant's movable goods. These would have to be assets with serial or registration numbers. Then, as soon as a tenant goes into arrears, a summons must be issued. "Based on the summons proceedings which are commenced, and provided that a special notarial bond was already registered prior in time/at the commencement of the lease, the sheriff can immediately be approached in order for the special notarial bond to be perfected," Sapoa told the government.
  • Cash deposits. Instead of a bank guarantee, which would be frozen as soon as the business rescue process starts, landlords should take cash deposits, says Sapoa. "The landlord would however then have to make arrangements for the deposits to be invested to earn interest...as required in terms of the Estate Agency Affairs Act," says Sapoa.
  • Registering a second bond over the immovable of sureties/directors. You could register a second bond over the immovable property of those who rent from you, with the "causa for the bond" suretyship and the bond amount capped at a figure equal to six moths' rent.
  • Fast lease cancellation. Landlords should take action as soon as a tenant is in arrears, with rentals not allowed to be more than one month in arrears. "The landlord must then take a quick decision to either cancel the lease and realise security or participate in possible business rescue proceedings."
  • A new risk management approach. "At the stage when the lease is approved, a proper financial investigation/risk assessment must be done. The landlord must reassess the tenant's financial position on a regular/annual basis and a scorecard must be developed that focuses on risk analysis," is the message Sapoa has put out to its members.

Lawyers who have scrutinised the Bill say it would be straightforward for a company to get a court order to give it the status of a business in rescue.

The legislation, if passed, would have implications for direct commercial, industrial and retail property investors as well as those investing through listed funds as the underlying entities would be subject to the new provisions.

While it will not be impossible for landlords to safeguard their interests, it will be more complex and costly. Tenants, meanwhile, can expect to have these costs passed onto them and face additional financial scrutiny and red tape if the Act goes ahead in its current form

Article by: Jackie Cameron - www.realestateweb.co.za