Lease agreements – holding over and the risk of prescription

(Article by Justine Krige*)

Litigation over lease agreements is all too common in South Africa. It often ensues when tenants refuse to vacate leased premises, despite outstanding rental payments and the subsequent cancellation of the lease agreement by the landlord.

In SA law landlords have a three year period in which to institute a claim against a tenant for any amounts owing (including damages and outstanding rental payments). After that period the landlord’s claim prescribes, that is, it is no longer enforceable. The crucial question is this: From which date does prescription start running, particularly in cases where a tenant remains in occupation of leased premises, despite the cancellation of the lease agreement? An additional layer of complexity arises in cases where the tenant remains in occupation of the leased premises in spite of it having been cancelled and continues to pay rental to the landlord. How does this affect prescription?

The issue of Monyetla Property Holdings v IMM Graduate School of Marketing was recently considered by the Supreme Court of Appeal (SCA) in Monyetla Property Holdings v IMM Graduate School of Marketing (20023/2014) [2015] ZASCA 32 (25 March 2015). In Monyetla, the SCA dealt with the principle that there is a distinction between the concept of a debt “arising” and a debt “becoming due” and that a debt is only due, owing or payable for purposes of prescription, “when the entire set of facts which the creditor must prove to succeed with his claim against the debtor is in place: when everything has happened which would entitle the creditor to institute action”.

In the case of a lease agreement, the general rule is that where a party breaches the agreement, the other party is entitled to claim damages to place it in the position that it would have been had the other party properly and timeously performed its obligations. Where the landlord has cancelled the lease agreement as a result of the non-performance of the tenant, damages are calculated based on the rental that would have been paid by the tenant to the landlord, had the lease agreement run its full term, less any amounts received (subject of course to the landlord taking steps to mitigate the loss by, for example, trying to get another tenant).

Importantly, in Monyetla the SCA held that the prescription period runs from the date of cancellation of the lease agreement despite the fact that a tenant remains in occupation of the leased premises and continues to pay rental under a clause in the lease agreement that obliges it to do so if the cancellation is disputed. In this regard, the SCA held that “continued occupation of the premises is irrelevant to a claim for damages arising from cancelling a lease due to the tenant’s breach”.

Lease agreements often contain a “holding over” clause, that is, a provision that says that if the landlord cancels the lease agreement, and the tenant disputes the right to cancel and remains in occupation of the property, the tenant will, pending the determination of that dispute by litigation or otherwise, continue to pay to the landlord an amount equivalent to the monthly rental. What Monyetla makes clear is that landlords have three years from the date of cancellation of the lease agreement to claim damages, not three years from the date on which the tenant stops paying.

The lesson in Monyetla is that landlords must be mindful that the start of the prescription period for a damages claim is the date of the cancellation of the lease agreement, and that prescription continues to run from this date despite the fact that the tenant may remain in occupation of the premises, in some cases even paying rental (or a reduced rental) while they remain in occupation. So landlords must sue tenants as soon as possible after they have cancelled the agreement.

*Justine Krige is a senior associate in the corporate and commercial practice at Cliffe Dekker Hofmeyr.

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