It is important for tenants to remember that the liquidation of a Company does not automatically terminate a lease in terms of which that Company is a tenant. Landlords also need to remember that liquidation does not immediately give them the right to terminate a lease.
How a lease is effected by liquidation often depends on whether, at the time of (or prior to) the application for liquidation, the Company (as the tenant) is in breach of its obligations in terms of the lease or not.
When The Tenant Is In Breach
If a tenant is in breach of its obligations prior to any liquidation application being issued, a landlord has the right to call on the tenant to remedy the breach (in terms of the lease). It is usually the case that, in terms of a lease, the tenant is provided a specific period of time to remedy a breach (referred to here as “the breach remedy period”). If the liquidation application then proceeds within the breach remedy period, and the liquidator fails to remedy the breach of the insolvent tenant within this period, then the landlord retains the right to cancel the lease. This cancellation results in the landlord being able to re-let their premises and further in their having a monetary claim against the insolvent estate of the Company, as a concurrent creditor, for damages or unpaid rental (as the case may be). A “concurrent creditor” refers to a creditor who does not hold any security for the debt owed to them and stand at the end of the queue when it comes to possibly receiving anything from the insolvent estate.
When The Tenant Is Not In Breach
If the tenant is not in breach of the lease at the time of its liquidation application, only the liquidator can elect to cancel the lease. The landlord does not have the right to cancel the lease or re-let the premises and has to wait for the liquidator to decide to exercise their election. The landlord will still, however, have a claim against the estate.
As always, it is important to consult a liquidation specialist – whether you are a tenant or a landlord in the liquidation process – before making any decisions regarding a lease.