LETTING
Tenant Insolvency
If properties are sub-let, the lease can be
cancelled if the tenant declares insolvency
T
here are cases that differ from
commercial property management to
residential letting, in that there tends
to be more sub-leases in commercial property
than in residential rentals.
It often happens that one company will rent
a whole building and then sub-let portions
of the space they have signed for. It must be
remembered in these cases that the entity
responsible for the rent is the company that
signed the original lease with the landlord.
But what happens in cases where the
company holding the lease goes bankrupt?
Most commercial leases will be held
by a juristic person (a company or a close
corporation). If the company were to go under,
the liquidator steps in and performs the duties
of the tenant, and must collect rent from sublets as well as paying rental to the landlord.
If the business going under applies for
business rescue, then they will be protected and
have time to unwind to sort out their financial
problems. This can include cancelling the lease.
What many landlords don’t realise is that,
if the liquidator cancels the lease, the landlord
joins the line of creditors with concurrent
claims against the first tenant for the loss in
rent. However, if the lease stays in place, then
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all rights and obligations regarding that lease,
and the insolvent tenant stay in place.
Furthermore, the landlord cannot force the
liquidator to fulfil the contractual obligations
of the lease, such as paying the rent or
maintaining the property.
The landlord cannot force
the liquidator to fulfil the
contractual obligations of
the lease, such as paying
the rent or maintaining
the property
It makes sense then that the liquidator will
cancel the lease, as this reduces the burden
on the liquidator to get payments out to the
creditors.
The sub-tenant does not have any more rights
to the property than the tenant and in cases
where the main tenant is declared insolvent, the
lease can be cancelled with no repercussions on
either the landlord or liquidator’s part. Once
the main lease is cancelled, so too, is the subtenant’s lease.
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