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Lease agreement & liquidation process

30 Apr 2014

In the event of liquidation, the liquidator inherits the lease agreement and will perform the insolvent’s obligations in terms of the agreement.

Following the insolvency of a lessee, the establishment of the community of creditors does not terminate the continuing operation of the lease, according to Jocelyn Evans, associate at Norton Rose Fulbright South Africa.

Following the insolvency of a lessee, the establishment of the community of creditors does not terminate the continuing operation of the lease, according to Jocelyn Evans, associate at Norton Rose Fulbright South Africa.

She explains that the rights and obligations of the parties to the agreement are not altered or suspended noting that the Supreme Court of Appeal recently confirmed this common law principle.

After liquidation proceedings have commenced, the liquidator inherits the lease agreement (or any other contract), steps into the shoes of the insolvent, the lease agreement continues and the liquidator is expected to perform the insolvent’s obligations in terms of the lease agreement. 

Once appointed, the liquidator may elect to abide by the agreement or terminate it, depending on what would be most beneficial to the creditors. 

If the liquidator does elect to terminate the agreement, the other contracting party cannot force the liquidator to perform in terms of the agreement and instead has a monetary claim against the insolvent estate as a concurrent creditor, she says.

The court also dealt with a lessor’s right to cancel a lease agreement when the lessee is liquidated. 

Making reference to the court, Evans says the facts of the case are important. In 2006, Ellerine Brothers leased a property to Toits Motor Group (TMG), which concluded a sub-lease agreement with McCarthy. 

Problems arose in 2009 when TMG did not pay the rent due. On 21 January 2009, Ellerine Brothers gave notice to TMG in terms of the lease agreement to remedy the breach and make payment of the outstanding amount within 7 days or the lease agreement would be cancelled. 

On 21 January 2009, and during the 7 day period, an application for the liquidation of TMG was lodged with the high court. TMG did not make payment and on 27 January 2009, Ellerine Brothers cancelled the lease agreement in writing with immediate effect. 

The commencement date of the winding up of TMG was, in keeping with the Companies Act, 21 January 2009. In June 2009, once the liquidator had been appointed, he elected to abide by the lease agreement and ceded the right to claim payment from the sub-lessee, McCarthy, to Ellerine Brothers payments due to Ellerine Brothers under the lease agreement. McCarthy did not pay and Ellerine Brothers sued McCarthy for payment.

McCarthy’s defence to the claim for payment was that the sub-lease was validly cancelled on 27 January 2009 when Ellerine Brothers advised TMG that it had elected to cancel the lease agreement. 

In response, Ellerine Brothers argued that it had lost its right to cancel the lease agreement when winding up proceedings commenced on 21 January 2009, and because of this, it was prevented from claiming any performance from TMG until the liquidator had elected to abide by the lease agreement. 

The court disagreed with Ellerine Brothers. The insolvency of the lessee and the establishment of the community of creditors do not terminate the continuous operation of the lease agreement. The lease agreement is inherited by the liquidator. 

It was not a question of whether an accrued right survived the establishment of the community of creditors or whether Ellerine Brothers had a right to cancel which only matured after liquidation proceedings commenced. 

Instead the issue was whether Ellerine Brothers had an effective and enforceable right to cancel when it did, she points out.

The court found that it had because the lease agreement was still in existence when the notice of cancellation was sent on 27 January 2009.

McCarthy could not be held liable for any payment as Ellerine Brothers had validly terminated the lease with TMG and with it, the sub-lease was also terminated, she adds.

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