We are living in unprecedented times. The Covid-19 virus (“the virus”) or pandemic will have long lasting effects on our economy and business dealings.
The effect that the Covid-19 virus (“the virus”) will have on commercial lease agreements can be found in our common law or an attempt is made in our law to deal with situations which are out of our control, these situations are known as “force majeure”.
Many of our commercial lease agreements have become impossible to perform at this stage and have left both the lessor and lessee in an uncomfortable position. This article will briefly look at the effects of the virus on a commercial lease agreement which does not contain a force majeure clause.
In an ideal contractual relationship there must be performance, and performance must always be reciprocal. Once both parties have performed the contract is fulfilled and contracts are automatically terminated.
We currently find ourselves in a situation where performance has become impossible without the fault of any of the parties, this situation is known as “force majeure” or as the media calls it an Act of God.
An agreement must have a force majeure clause in order for the lessee or lessor to rely on the provision. The clauses are often drafted widely to cater for different events and include a “catch all phrase,” despite an agreement containing this type of provision it will not mean it is automatically applicable to each and every agreement.
The lessee and lessor must determine whether the clause extends to the virus and will be applicable to their situation. If the clause is applicable to their situation the lessee would then need to show that a reduction in the rental or partial payment of the rental is justified and directly linked to the virus.
As this virus is unprecedented the majority of commercial lease agreements will not have specified clauses pertaining to it. The result is that the common law principle of supervening impossibility of performance will assist parties where the force majeure clause is non- existent.
The principle of ‘supervening impossibility of performance’ means that the situation must be objectively impossible and not merely cause an inconvenience in the performance of a party’s obligations.
In order to rely on supervening impossibility of performance the guidelines are as follows:
· after the conclusion of the agreement the impossibility to perform must occur;
· the event resulting in the impossibility must be unavoidable;
· the event cannot merely have made performance more burdensome or economically difficult and it must be impossible
Should the criteria above be achieved the result is that the agreements will be suspended until performance becomes possible.
The law of contract allows parties to re-negotiate the terms of the agreements as long as they are legal and binding. Should the lockdown continue indefinitely we would encourage parties to receive expert legal advice on the specific terms of their agreements in order to find a solution for all parties.
This article should not be construed as legal advice and has been produced for marketing purposes.
This article was written by M Van Heerden Attorneys, Notaries and Conveyancers.
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