Business rescue poses risks for landlord and property investor

Posted On Monday, 25 August 2014 16:27 Published by
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Business rescue process poses risks for landlord and property investor. 

Neil Gopal

Questions are being raised about the efficacy of SA's three-year old business rescue legislation, and the South African Property Owners' Association (SAPOA) has added its voice to the debate to spotlight critical risks from the perspective of property owners and investors.

"SAPOA believes that the commercial and industrial property industry has been and continues to be negatively affected by business rescue processes," says SAPOA CEO Neil Gopal.

Business rescue legislation in the Companies Act allows financially distressed companies to place themselves in business rescue. After that, no legal action can be taken against the company and a practitioner is appointed to develop a business rescue plan, which creditors vote on.

If creditors veto the plan, the company goes into liquidation. But landlords unlike other creditors cannot prevent a tenant in business rescue from continuing to occupy leased space.

"Most other creditors can refuse to provide services to a company in business rescue. However, the law does not give the landlord such rights - and the landlord must allow the tenant to remain in the leased premises during the business rescue process, without any security of being paid its rental and utilities," says Desiree Nafte, chair of the SAPOA Legal Committee.

"Indeed, the landlord is in an impossible situation."

She adds that with economic slowdown in SA, the number of companies going into business rescue will likely escalate in the short- to medium-term.

A recent case in point is Ellerines, the furniture retailer, which went into business rescue in early August.

"Ellerines' businesses include not only the furniture retailer but also Dial A Bed, Wetherlys and Furniture City, impacting shopping centre owners and investors throughout SA," she says.

Gopal points to the ranking of claims as an ongoing concern for SAPOA.

"Ranking of claims means that the secured creditors in most cases get paid in full. Banks are a good example. However, for other creditors – landlords included - then have to compromise on remaining claims," he explains.

For example, damages claims for future loss of rental is restricted and paid at the dividend pay-out ratio. "That could be as low as 20 cents on the rand," he adds.

SAPOA is in good company in terms of its concerns around loopholes in business rescue legislation.

Other bodies scrutinising the issue include the Department of Trade and Industry, the Special Committee on Company Law chaired by Michael Katz and the Companies and Intellectual Property Commission.

Almost 1,400 companies have started business rescue proceedings since 2011, but reports have put the success rate at as little as 12%.

"It is obvious that the business rescue process does not work in the South African context and needs some serious reconsideration," says Gopal.

In this regard, SAPOA, representing some 1250 companies in SA, is calling on Minister Rob Davies to meet with the property industry in order for the industry to express their concerns.

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