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Can my insolvency lead to termination of my lease?
11 April 2019
 
“I own a few commercial properties that I rent out to businesses. Recently it has come to my attention that one of my longstanding tenants is going under financially. He has nearly two years left on his term. Can I terminate his rental agreement if he becomes insolvent?”

Generally rental agreements will contain a clause that stipulates that the lease agreement will terminate upon the insolvency of the tenant. However, such provisions may not provide the necessary protection if the provisions of the Insolvency Act 24 of 1936 are not properly considered. Section 37 of the Act determines that the liquidation or sequestration of a tenant cannot automatically lead to the termination of a lease agreement. 

It also determines that instead of an automatic cancellation of the lease, the trustee of the insolvent estate (who will be appointed by the Master of the High Court) has the authority to decide, by way of written notice, to either terminate or to continue with the lease. The trustee must do so within three months of being appointed. This means that a landlord may have to wait up to three months before a decision is made by the trustees to continue or terminate the lease. 

If however a rental agreement has specific breach provisions, it may be worthwhile to consider whether the tenant is not in breach and if the rental agreement could be terminated on such grounds before the tenant is declared insolvent. 

However, if this option is not available and the tenant is declared insolvent, the landlord will have no choice but to make contact with the trustee of the insolvent estate and enquire as to whether the lease will continue or not. Fortunately, all rent due under the current lease will be paid as costs of administration and accordingly the landlord will be paid before the secured or preferent creditors of the insolvent estate.

In your situation, it would therefore be prudent to ask your attorney to review the current rental agreement and assist you to navigate the situation correctly with your ‘in trouble’ tenant.