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PROPERTY: Landlords May Not Sue For Rent

 



Recent Western Cape Business News

Landlords with mortgage bonds registered over their rental properties may have unwittingly surrendered their right to sue defaulting tenants for unpaid rent without even knowing it!

This week, Ian Slot, Managing Director of Seeff Properties Atlantic Seaboard, City Bowl and V&A, warned landlords to carefully check loan agreements on both commercial and residential properties after a Durban court upheld a tenant’s appeal. The tenant claimed that, because his landlord had ceded his rental income to a bank as security for a loan, only the bank had the right to take action against him.

In Picardi Hotels Limited versus Thekweni Properties (680/7) (2008) ZASCA 128, the Supreme Court of Appeal overturned the Durban High Court’s decision that a landlord could sue his tenant for unpaid arrear rentals. Instead, the court ruled that unless otherwise agreed, the landlord had given up his right to sue for unpaid rent by ceding this income to the bank when concluding a mortgage agreement.

The court also ruled that this stood even when a loan agreement stipulated that the bank would suspend its right to act unless the landlord contravened his loan agreement.

Slot suggested property owners look into this possible loophole as a matter of urgency because, given the current economic climate, unpaid rentals could become more common with tenants battling to make ends meet.

Landlords with mortgage bonds registered over the leased property and contemplating legal action to recover arrear rentals would be well advised to check the wording of their loan agreements and, if they contain such a cession, obtain the banks’ written revision of the cession before issuing summons,” he advised.

He added that a landlord could even ask for a written agreement from a bank stating that the bank would re-cede rentals to the landlord on request if he needed to take legal action against a defaulter.

Slot pointed out that, up until now, it was thought that this problem applied to commercial property owners only.

The logical application of a cession of rental income as security for a loan is on commercial mortgage loans as a bank would have considered the projected rental income when assessing a borrowers’ ability to service the loan. When it comes to residential mortgage loans, the projected rental income is generally excluded when assessing serviceability.”

However, James Phillipson of Smith Tabata Buchanan Boyes, warned that “such a cession is included as a term of many residential mortgage loan agreements!"


 
 
 
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