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Rental deposits and tenants in arrears

MAIN IMAGE: Riette Bornman, attorney, notary public and conveyancer with STBB.

The current lockdown has many tenants at their wits end as to how they are going to meet their rental obligations for April due to lack of income. Some landlords may demand the release of their deposits held in trust by the rental agency. Rental agents take note this is dangerous territory. Riette Bornman, attorney, notary public and conveyancer with STBB explains further.

Landlords and tenants often find themselves overwhelmed during this trying time where economic uncertainty is rampant.

Luckily, both the Common Law and the Rental Housing Act, are crystal clear on the matter of rental deposits.

Section 5 of the Rental Housing Act sets out the point of departure for all matters relating to deposits. Section 5(3)(d) of the Rental Housing Act, determines as follows:

“the deposit contemplated in paragraph (c)must be invested by the landlord in an interest-bearing account with a financial institution and the landlord must, subject to paragraph (g) pay the tenant interest at the rate applicable to such account which may not be less than the rate applicable to a savings account with a financial institution. and the tenant may during the period of the lease request the landlord to provide him or her with written proof in respect of interest accrued on such deposit, and the landlord must provide such proof on request (…)”

The point of departure is therefore, that a deposit must remain invested for the duration of the lease agreement, interest accruing to the tenant.

Situation 1 – Tenant can’t pay April’s rent

“My landlord has requested a release of the one month deposit I am holding in the Trust Account. This is because the tenant does not want to pay the full rent for April, only pay for services, as he does not know when his next paycheck will be.”

Although most people in difficult situations are now aware of and quick to rely on the principles of vis major and force majeure (also referred to sometimes as ‘acts of God’), these terms must be understood correctly and not used out of context.  These terms refer to clauses, contained in some agreements, whereby unforeseen events, which render performance objectively impossible, extinguish a party’s contractual obligations.  However, a party can only avail themselves to these terms if the agreement contains such clauses.  Should the agreement not contain such clauses, parties are left to the common law and even then, the terms of the agreement will supercede the common law.  So the first point of call would be to have a look at the terms of the agreement.

In this situation, we are dealing specifically with a residential lease agreement and as such it should be noted that commercial lease agreements are not included in this discussion.

Should the tenant not pay the full rent for April, this would constitute a breach of the lease agreement and the terms of the lease agreement (usually contained in a breach clause) will determine the appropriate response by the landlord.  Most lease agreements provide for notice to be given to the tenant, providing a date by which the tenant must remedy the breach, failing which the landlord can cancel the agreement. Many lease agreements also provide for penalty clauses, should the rental not be paid timeously, and such provisions must also be taken into account.

In the situation at hand, the tenant would most likely state that he was unable to pay the month’s rent due to supervening impossibility.  The onus would then be on the tenant to prove that there was in fact objective impossibility.  The courts have held on many occasions over the years, that such impossibility must be objective and thereby absolute.  It cannot be subjective or linked to the tenant’s personal circumstances.  The test is whether any person would find it absolutely impossible to pay this month’s rent.  The courts expect parties to spare no effort in ensuring that contractual obligations are performed.  The fact that performance will inconvenience them or put them in a financial predicament, does not suffice as objective impossibility.

The court held in Unibank Savings and Loans Ltd (formerly Community Bank) v ABSA Bank Ltd 2000 (4) SA 191 (W),

‘Impossibility is furthermore not implicit in a change of financial strength or in commercial circumstances which cause compliance with the contractual obligations to be difficult, expensive or unaffordable.’

The tenant will therefore, in all likelihood be unsuccessful in his/her reliance on supervening impossibility in this situation.

However, this does not allow the landlord or rental agent to release the deposit prior to the termination of the lease agreement without the parties agreeing thereto.

Taking the common law and typical contractual clauses into account, in terms of the landlord and the tenant, the deposit cannot be released during the period of the lease agreement. The rental agent, can furthermore, under no circumstances, pay the deposit out to the landlord, as this will be a breach of the agent’s fiduciary duties in terms of the Consumer Protection Act.

Get the parties talking

The rental agent is encouraged to scrutinize the terms of the lease agreement and to facilitate mediation between the parties.  During these trying times where performance can become difficult, both parties to lease agreements, will undoubtedly be affected.

Parties are to be motivated to negotiate possible solutions such as a payment plan for April’s rent if liquidity is an issue on the tenant’s part.  Keep in mind that the tenant must be aware that he is not entitled to such renegotiation, but in the spirit of reasonableness and compassion, the landlord has agreed to enter into such negotiations in order to avoid legal proceedings and find an amicable solution.  Any variation of the original agreement must always be in writing.

Should the parties not be able to reach an amicable resolution to the issue, the landlord must follow the terms of the agreement.

Situation 2 – Tenant is already in arrears with rent

“I have a client who has a tenant that has not paid rent since July. This has ended up in court every month since to get them out. On Thursday – just before lockdown – was the last court appearance and the case was postponed till May. My seller (I have an offer on this property with the note that the transaction can only proceed once the tenant has vacated the property) is R200 000 out of pocket at this point. He cannot pay that bond anymore as he has no money left in his savings. The purchaser cannot continue with his plans. My commission is frozen. PLEASE HELP US – we don’t know where to turn to anymore.”

The case above is one of the unfortunate cases where people seem to gain advantage out of a situation such as this.

In this particular case, the COVID-19 situation is not your determining factor, but rather an extra component which further complicates an already complicated situation.

At the core of this matter lies the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act, commonly referred to as the PIE Act.

The objective of this Act is to provide for the prohibition of unlawful eviction and to provide for procedures for the eviction of unlawful occupiers. The Act serves as a rigorous set of rules that must be adhered to before eviction is granted by a court. The Act provides extreme protection to unlawful occupiers of land and extra protective measures are in place in order to ensure that vulnerable tenants, such as the elderly, disabled parties, children and households headed by women, are afforded adequate protection. A court has a discretion whether to grant eviction and must consider whether it is just and equitable to do so in the particular circumstances.

In the above case, I would advise the landlord to consult his/her attorney attending to the litigation in this matter on the merits of the case in light of the specific terms of the lease agreement and the eviction proceedings thus far. The commission and the like will form part of the court proceedings and the costs awarded by the court.

Editor’s note: Every case and situation will be different. It is important that estate and rental agents get the proper legal advice if unsure about the right course of action to follow.

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