Lease Agreement Cession

This article analyzes the legal risks to lenders and borrowers in guaranteeing rental income under South African law. The legal risk to the borrower of a rental income security assignment granting the lender effective, immediate and unconditional rights is that, if they then sue defaulting tenants, they can sue on the basis that the borrower does not have the power to sue for transferring such rights to the lender in a credit transaction. The borrower should receive a rent recession from the lender so that the borrower can recover his basic income if it is the rental income transferred and he has several tenants. If the borrower does not, he should get the lender`s approval every time (through a rent recession) if he wishes to complain about unpaid rents. This could hinder the borrower`s activity. Where a sale of rental income guarantee is made up so that the borrower`s rights to these rental incomes are at the end of the execution of the document and are transferred without delay and without conditions to the lender, the lender is immediately authorized by these rights. In these circumstances, the borrower`s action against the defaulting tenants can be met by the formidable defence that the borrower was not brought against unpaid rents for transferring such rights to the lender in a loan transaction. Widespread consternation in the residential real estate market was caused by a ruling by the Supreme Court of Appeal Picardi Hotels Ltd against Thekweni Properties in September 2008. The property was then leased to Picardi Hotels. As with mortgage bonds, the mortgage on the property contained a clause in which all rental income from the property was transferred to the bank as an additional guarantee for the loan to Thekweni. When Thekweni sued Properties Picardi Hotels for late payment, Picardi claimed that, since Thekweni had transferred its rights to the bank, it was only the bank that had the right to object. The Supreme Court of Appeal upheld Picardi`s argument and found that Thekweni Properties had indeed lost its right to sue Picardi Hotels for late payment. This result, somewhat surprising, was achieved by the wording of the transfer clause in the mortgage agreement.

The clause provided that “Mortgagor restores, transfers and pays back to the bank all rights, securities and shares of Mortgagor on all rental products and other products of any kind that may result from the assets pledged as an additional guarantee for the due repayment of all amounts that may be owed or claimed to the bank at any time in the form of this loan… , the Court, in particular the use of the current tension and the inclusion of all the elements of an assignment, made it clear that the parties intended to make an unconditional and immediate transfer of the right to rent.

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