Covid-19 Lockdown | Lease and Employment Contracts

Covid-19 lockdown lease and employment contracts: do I still have to comply with my obligations?

While the lockdown period has undoubtedly affected our everyday lives, it will also have an impact on our contractual obligations to perform.

In this note, MAURICE PHILLIPS│WISENBERG attorneys will attempt to guide you through these unprecedented times on how the “lockdown” period will affect the obligations of parties to perform in terms of their employment contracts and lease agreements.

Force Majeure or Vis Major Resulting in Supervening Impossibility of Performance

While it is uncertain how the courts will treat Covid-19 in future disputes, it is likely the event will be classified as a vis major or a force majeure resulting in supervening impossibility of performance.

It is important to remember when it comes to contractual obligations, the first step is to be guided by the terms of the specific contract itself. Parties are free to regulate contractual obligations in a way they deem fit. Some contracts will include a force majeure or vis major clause, which regulates the relationship between the parties in circumstances such as the current lockdown. However, in the absence of such a clause, the general rules in terms of the common law will apply as set out below.

Vis major refers to an “Act of God” or an extraordinary event beyond the control of parties impacting a party’s ability to perform in terms of its contractual implications.  In such instances a party is completely or in part excused from its obligations to perform in terms of its contractual obligations. Past examples of vis major included war and natural disasters. The general rule is that if one party is unable to fulfill its obligation due to a vis major, the corresponding party is also released from its obligations.

Since the lockdown is a temporary event, contracting parties will be temporarily or partially released from their obligations until they are permitted to perform again.

So how will this apply to employment contracts and lease agreements?

Employment Contracts

While our President Cyril Ramaphosa and the South African Government have appealed to all South African businesses to continue paying their staff during the duration of the national lockdown period, the reality is most businesses have shut their doors and will struggle to pay their staff.

The important question is whether employers are still legally obligated to pay their staff during the lockdown period, if their businesses are closed and their employees are not working from home.

In the situation, in which we currently find ourselves, where the South African Government has declared a lockdown, which we regard as a vis major or force majeure event, employees are essentially restricted to their places of residence and unable to tender their services.

Applying the general common law rule applicable where an objective cause results in a temporary supervening impossibility, an employer is excused from payment of employee remuneration until the impossibility of performance terminates.

However, where employees can work from home, they are entitled to be compensated. This, however, does not mean that employers must pay employees their full salary, if employees are unable to tender their full service. A part or reduced payment of an employee’s salary will suffice in these circumstances.

To mitigate the effects of the “no work no pay” situation, the National Government has set up the Temporary Employee/Employer Relief Fund. This fund is available to small businesses and employers who are unable to pay their employees a full salary during this period.

Lease Agreements

The first step in assessing the implications of a vis major event on a lease agreement is to determine whether there are any provisions in the agreement that deal with force majeure or vis major. Lease agreements often regulate force majeure events and the impact thereof. The effect of such provisions depends on the specific wording.

In the absence of a vis major or force majeure clause, a tenant may be entitled to a partial or total remission of rental where the tenant has been denied either entire or partial use of the hired property. This is more likely to affect commercial landlords and tenants, who are unable to provide access or make use of their commercial space for the lockdown period. The lockdown does not entitle residential tenants to a reduction in rental, as they are still fully able to utilise the space for which it was let.

The current situation arising from the lockdown is unprecedented and financially distressing, and therefore we are advising our clients to take a pragmatic approach and negotiate with landlord/tenants to consider the following options:

  • Agree suitable payment holidays;
  • Consider adding arrear rental to the end of the lease term, alternatively staggered/ instalment payments to be paid in addition to the following months rental after the lockdown;
  • Negotiate conversion of periodic rental to turnover rental;
  • Agree specified landlord’s operating costs to be paid by the tenant;
  • In the case of commercial leases, the landlord should also check whether tenants have insurance policies which make provision for business interruption arising specifically from incidents such as the Corona virus pandemic.

It is essential to record all amendments to lease agreements and employment contracts in writing to avoid future uncertainty.

Please note the above is the general legal position and it is imperative that each matter be assessed on a case by case basis. In this regard, we suggest that sound legal advice and guidance is obtained.

The offices of MAURICE PHILLIPS | WISENBERG attorneys are closed for the lockdown period, however, our attorneys and their assistants are active remotely and available to assist you with any queries or disputes. Please refer to our website for our attorneys’ contact details.

Article written by: Anouk Heyns, Gabi Tadmor and Rushni Ebrahim