ARTICLE
30 January 2023

Landlord's Tacit Hypothec Vs Tenant's Sequestration

BI
Barnard Inc.

Contributor

Barnard Inc is a full-service commercial law firm, with services covering corporate and compliance, intellectual property, construction, mining and engineering, property, fiduciary services commercial litigation, M&A, restructuring, insurance, and family law. Our attorneys advise listed and private companies, individuals, and local and foreign organisations across South Africa, Africa and internationally.
Would a Landlord be able to exercise its tacit hypothec over the movables of a non-paying Tenant in the event the Tenant is sequestrated?
South Africa Real Estate and Construction
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The Landlord's tacit hypothec forms part of a real security in favour of the Landlord in the event the tenant falls behind with its monthly rent under a lease agreement ("agreement"). This security right covers the moveable property of the tenant present on the leased premises. The Landlord's hypothec forms part of our law (South African) and does not need to be agreed between the parties, for example in the lease agreement. But what options are available to a Landlord when its non-paying tenant is placed under sequestration?

Although one might think that a lease agreement will be automatically terminated at sequestration, that is not the case. Unless the trustee of the tenant's insolvent estate, and within 3 months of the sequestration, informs the Landlord that it will continue with the lease agreement, the lease agreement will only automatically terminate at the end of such 3 months. Should the lease agreement not be terminated by the trustee of the insolvent estate, then the rent, for the period after sequestration will form part of the costs of sequestration.

It is important to note that the Landlord's hypothec will only come into effect when the tenant falls into arrears with their rent - however in order to enforce the hypothec, the hypothec must be perfected. A Landlord can perfect its hypothec through attachment (without removing the movables) in the form of an urgent ex parte court order, or by way of an interdict in the form of an automatic rental interdict summons. In both instances the tenant will not be allowed to remove the movables from the leased premises for as long as the rent is outstanding, should the tenant remove the movables whilst under attachment it will come down to a criminal offense and the Landlord will be able to act accordingly. Without perfection of the Landlord's hypothec the movables may be removed from the property by the tenant freely, and without consequence.

Fortunately, the Insolvency Act recognise the Landlord's hypothec as a security for unpaid rent. The Landlord will also be regarded as a preferent and secured creditor of the insolvent tenant's estate and will have a right to receive payment from the proceeds after the costs of the Administrator was paid but before the rest of the creditors are paid. The Landlord should keep in mind that unfortunately its preference does not necessarily extend to all proceeds of the sale of the moveable property. The Insolvency Act further limits the amount of the secured claim of the Landlord and the secured claim of the Landlord may not be more than the outstanding rent for three, six, nine or fifteen months depending on how the payment for rent was structured in the agreement. Any amount in excess of these limits will be unsecured.

The question is whether it is necessary to perfect the hypothec prior to the insolvency of the tenant in order for the Landlord to enjoy a preferent right during the sequestration proceedings. The answer is simple - perfection of the hypothec is not required prior to sequestration in order for the Landlord to be a preference secured creditor as confirmed in the case of Holderness N. O. v Maxwell.

Therefore, a Landlord will be able to exercise its tacit hypothec against an unpaid tenant who has been sequestrated whether or not the hypothec has been perfected.

It is advisable that a Landlord in a similar situation as described above appoint an attorney for legal guidance and to make sure that its claim has indeed been instituted against the insolvent estate of the non-paying tenant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
30 January 2023

Landlord's Tacit Hypothec Vs Tenant's Sequestration

South Africa Real Estate and Construction

Contributor

Barnard Inc is a full-service commercial law firm, with services covering corporate and compliance, intellectual property, construction, mining and engineering, property, fiduciary services commercial litigation, M&A, restructuring, insurance, and family law. Our attorneys advise listed and private companies, individuals, and local and foreign organisations across South Africa, Africa and internationally.
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