Landlords Could Face Technical Difficulties In Suing For Rent

South African law requires that a plaintiff must have legitimate standing before court. This concept (called locus standi) essentially means that the plaintiff must be connected in some way to the matter at hand and must not have given this right to someone else (ceded the right). In most cases the issue of locus standi is fairly straightforward and doesn?t need to be considered. However in others, and most notably with the latest case of Picardi Hotels Ltd v Thekweni Properties (Pty) Ltd ((680/07) [2008] ZASCA 128), this issue can be surprisingly unclear. 

In this matter Picardi bought a property and financed the purchase of the property by obtaining a mortgage bond from Investec. The bond in question included a clause indicating that Investec had the right to recover the rental directly from the tenant if Picardi were to lease the property to any third party. The clause in question reads:

"Should the Bank give its consent to the letting of the mortgaged property, the Mortgagor (landlord/Packardi) cedes, transfers and assigns to the Bank all the Mortgagor?s (landlord/Packardi) rights, title and interest in and to all rentals and other revenues of whatsoever nature, which may accrue from the mortgaged property as additional security for the due repayment by the Mortgagor (landlord/Packardi) of all amounts owing to or claimable by the Bank at any time in terms of this bond,..." (our insertions)

What is particularly noteworthy about this cession is that it is not conditional on the Mortgagor defaulting in terms of the bond repayments, but rather the cession occurs immediately if Picardi leases the property to a third person.

Returning to the facts Picardi duly enters into a lease with Thekwini Properties in terms of its lease agreement and Thekwini duly defaults in terms of the rental that is due. Unsurprisingly Picardi then institutes an action based on the lease agreement to recover the monies due to it and it is at this point that events took a more interesting turn.

Thekwini raised a special plea in its defence (this is a formal document objecting to some aspect of the plaintiff?s case) where they said that the right to sue them had been ceded by Picardi to Investec in terms of clause reproduced above. The Supreme Court of Appeal duly considered this argument and agreed that Picardi had indeed ceded this right to Investec and thus it was only Investec that had the right to sue Thekwini. As a result the action was dismissed with costs.

While the option still remains open for Investec to institute action against Thekwini (provided that the matter hasn't prescribed) this in essence is one of those classic ?technicalities? that are referred to where the merits of the matter were not even considered as the parties before the court were the wrong parties.

While this judgment is intellectually interesting, the real impact of this judgment is potentially much bigger than it would at first appear. In South Africa there are currently hundreds of thousands of properties that have been bought using a mortgage bond to finance the sale and these properties are often then leased out thereafter. If those mortgage bonds contain an unconditional cession of the right to recover the monies (such as in the Picardi case) then literally hundreds of landlords could find themselves in the surprising position of having to either convince the bank to take legal action against the tenant or having to obtain another cession from the bank in order to sue the tenant!

There are two main lessons that we can stand to learn from this judgment. The first is that you should check your bond documents for an unconditional cession before instituting action against a defaulting tenant. The second is that you should, when entering into a bond, try to convince the financial institution that the cession of the right to collect the rental from the tenant should only come into existence if the owner of the property (Morgagor) defaults in its bond payments to the bank (Morgagee).