Law and regulation of rental agreements in South Africa during Covid-19

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

The COVID-19 Block Exemption For The Retail Property Sector, 2020 issued by the Department of Trade and Industry provides that designated retail lessees and lessors in the retail sector, under certain circumstances, may enter into agreements relating to payment holidays and/or rental discounts for lessees as a result of COVID-19. Such provisions are usually restricted under the Competition Act, 1998. Any other type of lessee will have to negotiate any rent reduction with its lessor should the rental payable be based on a base cost. Any rental which is linked to the lessee’s turnover will in any event be reduced as a result of the current lockdown in South Africa which has forced all businesses, other than essential services, to close therefore having an impact on turnover.

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

A 21-day national lockdown between the 27th of March 2020 to the 16th of April 2020 was declared by the President of South Africa. Regulations have been issued in this regard which provide that all businesses and other entities shall cease to operate during the lockdown period other than those which provide essential goods and services. A lessee which provides an essential service that decides to close its leased space may negotiate a rent reduction as a result of COVID-19 with the lessor of the leased premises subject to any regulations which the South Africa’s Government may put in place and the terms of its lease agreement.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

This will need to be negotiated with the lessor. It is also advisable that the lessee refers to the provisions of its lease agreement with the lessor to see if there are any provisions which would excuse it from fulfilling it obligations under the lease agreement as a result of an unforeseen circumstance which is beyond its control such as COVID-19. 

4. What kind of security is generally provided by a tenant in connection with a lease, a bank guarantee, a deposit or otherwise?

The provisions of a lease agreement may include provisions that a lessee must provide a bank guarantee or deposit to secure its obligations under the lease agreement during the term of the lease. In addition, the specific circumstances under which the lessor would be allowed to draw down on the deposit or bank guarantee will be specified in the lease agreement and may include, amongst other things, the payment of rent, electricity charges, and any other liability for which the lessee is responsible. Should a deposit or bank guarantee be used by the lessor for the payment of a lessee’s obligations under a lease agreement the lessee will usually be obliged to reinstate the deposit or bank guarantee as stipulated in the lease agreement.

Yes, subject to the provisions of its lease agreement, common law and/or government regulations. The lessee may consider the termination of the lease if they are able to prove specific elements either under the force majeure clause stipulated in its lease agreement or the common law principle of supervening impossibility of performance. Outside of the provisions of the lessee’s lease agreement, the lessee may engage the lessor to negotiate various options to minimise the negative financial impact of COVID-19 and the current lockdown within the parameters of the regulations imposed by Government. These options may include: the utilisation of any deposit or bank guarantee held by the lessor towards the payment of rent and other charges which the lessee is liable for under the lease agreement, negotiating a reduction of rent or payment holiday, or negotiating an extension of the lease term for the period which the lessee was not able to pay rent as result of COVID-19. In addition, corporate lessees should check whether their business insurance policy makes provision for business interruption in order to mitigate any losses resulting from the impact of COVID-19. Regulations have been issued by the Government providing that eviction procedures are not considered to be essential and are therefore suspended for the current lockdown period. In other words, a lessor may not institute eviction procedures during the lockdown period as a result of the lessee’s non-performance of its obligations under a lease agreement. This however does not excuse the lessee from performing its obligations under any lease agreement. Communication with the lessor is encouraged should a lessee realise that performance under the lease agreement may not be possible as a result of COVID- 19. Legal advice should be sought to explore the lessees legal options under a lease agreement as a result of COVID-19 as the regulations issued by Government are continually evolving to contain and minimise the economic and social impact of COVID-19. 

Portrait ofKagiso Mahlangu
Kagiso Mahlangu
Partner
Johannesburg
Karabo Manhe