COVID-19: Force majeure and the effect it has on rental contracts

COVID-19 will have far-reaching ramifications for South Africa (SA). In order to ‘flatten the curve’, the President, Cyril Ramaphosa, duly advised by his cabinet, declared a total lockdown in order to prevent the spread of COVID-19. The regulations were set up to keep citizens at home and safe for at least 21 days in order to prevent the uncontrolled spread of the virus. If citizens did not heed the call, the pandemic could reach proportions that the South African health system would not be able to contain and in turn, not be able to treat those infected. Italy, Spain, and Iran are examples where the pandemic ravaged the population. As a result, most shops except supermarkets, pharmacies, and spaza shops selling food and necessities remained closed during this period (see GN R450 GG43208/6-4-2020).

Force majeure

Vis maior means a superior power or force, which cannot be resisted or controlled. Casus fortuitus (a class of vis maior) is an exceptional or extraordinary occurrence not reasonably foreseeable. Thus to constitute force majeure (vis maior or casus fortuitous) the occurrence must be uncontrollable and unforeseen. Examples of vis maior are earthquakes, fire, locusts, plague, abnormal weather conditions (abnormal storms, floods, frost, snow, heat, drought). For a natural phenomenon to be vis maior it must be of a magnitude, which could not reasonably have been foreseen or guarded against. What is unforeseen will depend on the norms of experience in the locality in which the hired property was situated at the time the parties contracted (HR Hahlo and E Khan The Union of South Africa: The development of its laws and Constitution (Cape Town: Juta 1960). It follows that a lessee who leases a premises, well knowing that vis maior may make it impossible for the lessee to enjoy beneficial occupation and the lessee will not be entitled to claim remission of rent.

The impact of the pandemic will have long-lasting effects on the systems that keep our economies running. Globally, the COVID-19 virus has affected schools, churches, mosques, and businesses being closed down and inevitably affecting contractual obligations nationally and internationally.

South African law

The court in Peters, Flamman, and Co v Kokstad Municipality 1919 AD 427 held that ‘[i]f a person is prevented from performing his contract by vis major or casus fortuitous … he is discharged from liability’. The terms force majeure, vis maior and casus fortuitus are used interchangeably and refer to an extraordinary event or circumstance beyond the control of the parties, including a so-called ‘act of God’.

South African law is, however, quite strict in the sense that it does not excuse the performance of a contract in all cases of force majeure (see Glencore Grain Africa (Pty) Ltd v Du Plessis NO and Others[2007] JOL 21043 (O)).

There are certain conditions that must be fulfilled in order for a force majeure to trigger the type of impossibility that extinguishes a party’s contractual obligations. These include –

  • the impossibility must be objectively impossible;
  • it must be absolute as opposed to probable;
  • it must be absolute as opposed to relative, in other words, if it relates to something that can, in general, be done, but the one-party seeking to escape liability cannot personally perform, such party remains liable in the contract;
  • the impossibility must be unavoidable by a reasonable person;
  • it must not be the fault of either party; and
  • the mere fact that a disaster or event was foreseeable, does not necessarily mean that it ought to have been foreseeable or that it is avoidable by a reasonable person.

If the performance of a contract was at its inception objectively impossible, then the contract is void. The only relief available is restitution (see  Wilson v Smith and Another 1956 (1) SA 393 (W) and Bekker, NO v Duvenhage 1977 (3) SA 884 (E)).

Circumstances falling within the ambit

There are specific circumstances that need to be met for force majeure to be relied on to suspend obligations under a contract. Businesses should be careful to not simply rely on force majeure to escape their contractual obligations. Doing so could result in specific performance or damages claims being brought against that party.

In the case of Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal 2008 (4) SA 111 (SCA), the court held that one must look to the ‘nature of the contract, the relation to the parties, the circumstances of the case and the nature of the impossibility involved by the defendant’ to see whether the contract should be discharged.

Having regard to the above, it appears that a force majeure event must be a legal or physical restraint and not merely an economic one.

In order to avoid the potential ambiguity of the common law in these circumstances, most well-advised contracts contain a force majeure clause, which deals with the consequences of an event causing performance to become impossible. Parties to an agreement must ensure that force majeureis not only included as a clause in the agreement but must make certain that the clause is extensive. The risk of a poorly drafted clause is that parties are bound to the agreement and will not be able to escape its obligations, alternatively, will be forced to rely on the common law principle of impossibility which has strict requirements.

In the case of Airports Company of SA Limited v BP Southern Africa (Pty) Limited and Others [2015] JOL 34127 (GJ), the court held that as the parties had made provision for this contractually, the consequences stipulated in the contract would take precedence over the common law. A contract can thus specify a list of excluded events, or contain a closed list of events that would trigger the force majeure clause and extinguish the parties’ obligations under the contract. Well-drafted clauses also generally contain time limits during which, a party unable to perform pursuant to force majeure can be excused from performance, stipulating that after the impossibility has prevailed for a certain period. The remaining contracting parties would, notwithstanding the presence of force majeure be entitled to cancel the contract.

Application to present circumstances

If the lockdown makes the performance of obligations under a commercial contract impossible this is an ‘Act of State’ and would fall under the South African common law understanding of force majeure. The South African government declared a state of national disaster on 15 March, giving the national executive certain powers to implement regulations in an effort to curtail the spread of COVID-19. In the instance where companies had the foresight to include a force majeure clause with general terms such as ‘disease’ or ‘illness’ or more specific terms such are ‘epidemic’ or ‘pandemic’, it is possible that COVID-19 has already triggered this clause.

It is important to ensure that the force majeure clause has indeed been triggered, before making such a declaration to the other contracting party. This is because the un-evidenced declaration of a force majeure could lead to a breach of contract, or in the case where it appears that the party no longer intends to perform its duties under the contract, it could lead to repudiation of the contract. This is especially pertinent in the case of lease agreements, in the absence of a force majeure clause specifically allowing for the termination of a lease, a lessee cannot invoke COVID-19 to escape their obligation to pay rent. In the event that a company fears that it may struggle to make rental payments in upcoming months, a renegotiation of the lease agreement should rather be considered – especially if the alternative is not being able to pay rent at all.

The agreement that does not contain a force majeure clause

If the agreement does not contain a force majeure clause in a contract or if a force majeure clause does not describe the potential unforeseen event contemplated in such a clause, then the contracting party may be able to rely on the common law principle of ‘supervening impossibility of performance’ to suspend their obligations under the contract provided that it has become objectively impossible for them to perform under the contract as a result of an unforeseeable or unavoidable event.

In the case of Bischofberger v Van Eyk 1981 (2) SA 607 (W), the court held that when it has to decide on the effect of the impossibility of performance on a contract, the court should first have regard to the general rule that impossibility of performance does in general excuse performance of the contract but does not in all cases and must look at the nature of impossibility to see whether the general rule ought in a particular case apply.

In the case of Oerlikon South Africa (Pty) Ltd v Johannesburg City Council 1970 (3) SA 579 (A) at 585 the court held that if performance of a contract becomes impossible through no fault of the debtor, the obligation is extinguished unless the debtor agreed to accept the risk of impossibility.

It may also be imperative that the force majeure clause should be detailed and specifically list the force majeure events that the parties agree will suspend the performance of the contract (such as the pandemic).

As far as the partial impossibility of performance is concerned, South African law sets out that the creditor has a choice between accepting partial or defective performance or to regard the contract as canceled (see Bedford v Uys 1971 (1) SA 549 (C) and Joubert v Bester 1977 (4) SA 560 (T)).

Remedies in the event of a force majeure

The consequences of the parties – where a valid force majeure event has occurred – will depend on the nature of the affected parties’ obligation under the contract, as well as the consequences and remedies expressly contemplated by the force majeure provision.

Contractual remedies for force majeure includes the extension of time to perform those obligations or suspensions of contractual performance for the duration of the force majeure event.

If the force majeure extends over a longer period, some provisions may entitle a party to terminate the contract.

Onus of proof

In the case of Grobbelaar, NO v Bosch 1964 (3) SA 687 (E), it was held that the party relying on the impossibility presumably bears the onus to show that the impossibility was not caused by his fault.

In the case of a lease, the onus of providing proof that they have not had beneficial occupation because of vis maior rests on a lessee. A lessee who alleges the leased premises were destroyed through vis maior must prove how the destruction occurred and that it was not caused through the fault of their own. Any lessee who claims remission of rent, because vis maior caused him to vacate the premises must prove –

  • they were compelled to do so, for example, the occupation was prohibited by the legislative act (health regulations) or they were deported; and
  • they had reasonable grounds for doing so for example, the pandemic.

To be entitled to remission of rent, loss of beneficial occupation must be the direct and immediate result of the vis maior, not merely indirectly or remotely connected therewith. A lessee who conducted a business will not be entitled to remission where it has caused a drop in their trade.

If a property is destroyed by vis maior, the lessee is entitled to a total remission of rent from the date of destruction. The same applies if the vis maior compels the lessee to vacate the premises or prevents them from using the premises for the purpose for which the premises was let. However, if despite the vis maior, the lessee makes use of the premises, they must compensate the lessor therefor.

If vis maior reduces a lessee’s use and enjoyment of property let to them, they are entitled to a remission of rent proportionate to the loss sustained by them, but only if the loss is substantial. In assessing, reduced use, and enjoyment of a lessee’s profit the whole property must be taken into account. A lessee who is prevented by vis maior from using the premises for the purpose for which they were let is entitled to a remission of rent, although he could have used the premises for some other purpose because he was not obliged to do so (WE Cooper Landlord and Tenant (Cape Town: Juta 1994) at p 205).

A lessee who has paid rent in advance and is thereafter deprived of beneficial occupation by vis maior is entitled to a remission of rent proportionate to the period of their loss of occupation.

Conclusion

When President Ramaphosa announced the two-week extension of the original lockdown to halt the spread of COVID-19, he appealed to businesses in SA to pay suppliers and in the interests of the country’s economy not to opt for force majeure. He said: ‘I would like to call on all businesses to continue to pay their suppliers, to the extent that they can, to ensure that those suppliers can also continue to operate and pay their staff and suppliers’. He added: ‘I would like to appeal to all large businesses not to resort to force majeure and stop paying their suppliers and their rental commitments, as such practice has a domino effect on all businesses dependent on that chain.’

Credit to: 

Mohammed Moolla BProc (UKZN) is a senior magistrate at the Wynberg Magistrate’s Court in Cape Town.

This article was first published in De Rebus in 2020 (July) DR 13.