Landlord’s Tacit Hypothec Vs Tenant’s Sequestration – Landlord & Tenant – Leases

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.