The Impact and Effects of Covid-19 on Commercial Lease Agreements

A major legal consequence of the outbreak of the COVID-19 virus, has been the inability of parties to perform their obligations in terms of commercial lease agreements to which they are a party. This article explores under which circumstances non‑performance may be permitted or excused, either in terms of contractual provisions or under South Africa common law principles.

The relationship between landlord and tenant in a commercial setting, is more than a contractual relationship, both parties’ businesses are related to the performance by the other party of its obligations and the success of the others business. The tenant requires the use and enjoyment of the property for the purposes for which it has been leased.  In turn, the landlord requires the tenant to pay rental and is reliant on the tenant successfully conducting its business to enable the tenant to afford to pay its rent.

Generally, where a party fails to perform material obligations under a contract, such as non-payment of rental, that party will be in breach. The breach will entitle the counterparty to certain remedies, including specific performance and damages or cancellation and damages. The non‑payment of rental should be carefully considered as it constitutes non‑performance on the part of the tenant to comply with its contractual obligations.

Contractual Provisions:  It has become standard practice for commercial lease agreements to contain provisions dealing with an event of force majeure. Force majeure is an unforeseeable event or circumstance, which prevents a party from fulfilling its obligations under a contract. Phrases such as “act of God” or “acts of government” or “events beyond a party’s control” would likely assist in reasoning that the COVID-19 pandemic falls within the force majeure clause.

The objective of a force majeure clause is to afford protection to a party from being liable for damages for breach of contract, provided it can be classified within the definition of force majeure and it suspends the parties’ contractual obligations to one another for a period of time. When determining whether a force majeure clause has been triggered, courts typically examine whether the underlying event qualifies a force majeure under the contract and whether the contract’s performance is rendered impossible.

A commercial lease may also contain a term requiring a tenant to pay rental and other amounts due to the landlord in advance, without deduction or set off. In these circumstances, the tenant will be required to pay such amounts monthly in advance (regardless of any right it may have to claim a remission of rental) and, thereafter, claim any such remitted rental from the landlord.

Common Law Principles: Only in the absence of a force majeure clause in the agreement will the common law position will apply. The principle set out by the common law doctrine of ‘supervening impossibility of performance’ is that each party’s obligation to perform in terms of an agreement, and their respective rights to receive performance under that agreement, will be extinguished in the event that the performance by a party of its obligation becomes objectively impossible as a result of unforeseeable and unavoidable events vis maior (“major force”) or casus fortuitous (“accidental occurrence”) which are not the fault of either party.

Thus, the two requirements for reliance on the principle of supervening impossibility are firstly, performance must have become objectively impossible, meaning that the circumstances must be such that no one could tender performance, and not just one party. Secondly, the impossibility of performance must not have been avoidable or reasonably foreseeable by the party attempting to invoke the principle of supervening impossibility.

Certain commercial tenants were forced to close completely to comply with lockdown legislation, landlords in turn were precluded from allowing the premises to be used for its intended purpose. Appropriately, both parties were unable to comply in consequence of supervening impossibility. This does not have the effect of extinguishing or discharging the lease agreement, but of suspending the obligations thereunder until such time that the intended use of the premises was no longer precluded by operation of law.

It can be argued that tenants who were effectively deprived or who continue to be deprived through vis major or casus fortuitus of the use and enjoyment of the premises ought to be entitled to a remission of rental (either wholly or partially), for the months they were not able to operate their business as a direct and immediate result of the vis major.

Accordingly, to assess whether or not a commercial tenant may legitimately suspend its rental payment and/or claim a remission in rental as a result of the lockdown, each particular case, the relevant facts and remedies should be considered this includes an examination of the terms of the lease agreement, applicability of any common law principles and any official relief measures.