The global economy is wobbling in 2019 giving rise to recession fears." 1
"The bond market is giving ominous warnings about the global economy." 2
"The kwacha depreciated sharply against major currency convertibles." 3
These quotes suggest a weakening global economy plagued by uncertainty, and Zambia is no exception to these fears, with a depreciating kwacha currency, soaring government debt and falling sales. Different sectors of the economy are feeling the effects in their own ways – including landlords whose primary income is from leasing commercial properties such as shopping malls.
It's hardly novel to stress that in this economic environment, tenants are struggling to meet their monthly financial obligations on the premises they rent. With falling demand and sales, and rising energy and fuel costs, monthly defaults on rentals to landlords may become a pervasive feature of Zambia's commercial real estate landscape.
This is more so for tenants whose revenues are denominated in local currency but are leasing commercial premises in shopping malls that charge rent in foreign currencies.
Against this backdrop, a key question is whether the Landlord and Tenant (Business Premises) Act Chapter 193 of the Laws of Zambia, in its current form, provides workable solutions for landlords who are experiencing an increase in defaulting tenants due to unpaid rentals – and with a particular focus on the landlord's option to terminate the lease when they do default.
Terminating a lease under the current law
With a few exceptions, the Landlord and Tenant (Business Premises) Act applies to all tenancies in Zambia when a tenant leases a commercial property. When disputes arise regarding the lease of commercial property, this is the law that one must have recourse to.
In a dispute between a landlord and a tenant over the latter's persistent non-payment of rent, a landlord can have recourse to different avenues, including suing for unpaid rentals. If the landlord has no interest in trying to preserve the commercial relationship with the tenant, they can initiate the process of terminating the lease.
However, when you read the Act, you might conclude that the process of terminating a commercial lease is arduous for a landlord, especially one who's eager to replace a defaulting tenant. How so? Under the Act:
- The notice of termination the landlord must give the tenant has to comply with specific requirements, or else run the risk of being found to be ineffective. Most landlords who do not have legal representation are unaware of the requirements the termination notice must adhere to (as discussed below) and therefore run the risk of having their attempt to terminate the lease challenged.
- The termination notice shall not have effect unless it is given not less than 6 months and not more than 12 months before the date of termination specified therein. Effectively, this means that even where the tenant has been defaulting on payment of rentals, if the landlord wants to terminate the lease, the landlord has to give that tenant another six months on the premises until such time as the notice period expires, so incurring more losses where the tenant continues to default during that notice period.
- The notice shall not have effect unless it gives the tenant an opportunity, within two months after the giving of the notice, to notify the landlord in writing whether or not, at the date of termination, the tenant will be willing to give up possession of the property comprised in the tenancy.
- Finally, the landlord must state the grounds (one specifically prescribed under the Act) on which the landlord will rely to oppose an application a tenant may make to the court for a new tenancy. Even where this is done, the courts have the discretion to grant the new tenancy where the landlord fails to adequately establish the grounds for opposing the tenancy to the satisfaction of the court.
"With falling demand and sales, and rising energy and fuel costs, monthly defaults on rentals to landlords may become a pervasive feature of Zambia's commercial real estate landscape."
From the above, it's clear the Act's protection veers in favor of the tenant's interests when it comes to terminating a commercial lease. The many hoops landlords must jump through to evict tenants not only robs them of months of rental income, given the substantial notice period they are mandated to provide, but also increases their costs, especially if they have to engage lawyers to navigate through the relevant legal architecture to understand their rights.
With the current economic conditions in Zambia, a re-evaluation of the Act is needed to assess whether its current form is appropriate for today's business environment.
What can legislators do?
In cases of persistent breach in payment of rentals by a tenant, legislators can consider making an exception to the requirement to give a lengthy termination notice period.
For example, if it's undisputed that a tenant has not paid rentals for, say, three months consecutively, in the absence of any breach under the lease on the part of the landlord, the landlord should be able to terminate the lease on as little as one month's notice. This effectively gives the tenant four months of a rent-free period without forcing the landlord to endure any more economic strain by having the tenant on the premises for a longer duration during the lengthy notice period.
Furthermore, even where the landlord may be able to sue the tenant for unpaid rentals lost over the lengthy notice period and if successful have recourse to seizing and selling the tenant's goods, the longer the duration of non-payment of rentals whilst the tenant remains in possession, the more the goods the landlord will need to seize to recover the cost of rentals. It's not always the case that a tenant will have sufficient stock to fully compensate the landlord for rentals and costs accumulated in pursuing the debt.
Therefore, the shorter the notice period, the better. By getting a new tenant in the premises quickly, the landlord can also mitigate losses by reducing the number of months they could be without rental income.
As a compromise, legislators may also consider reforming the law so the notice period need not be the standard minimum six months in all cases. The law could be reformed so in a tenant's first four years on a lease, a landlord can require the tenant to leave (for a valid reason, of course) with three months' notice. The fifth year of the lease can have the mandatory notice period increased to five months, and from year six onwards a maximum of six months.
The rationale behind this change is that the longer a tenant stays on a lease, the more inextricably woven the premises becomes with the tenant's business, reputation, modus operandi and overall sustenance. Hence, if a tenant has been on a lease for six years, for example, they are rewarded with a longer notice period than a tenant in occupation for a lesser period, not least because of the greater effort the former tenant will have to exert to disentangle itself from the leased premises than the latter tenant.
This is just one alternative.
What is the landlord's perspective?
You can't have a strong real estate market if the global economy is failing. Consequently, the legislature in a challenging economy must be seen to be doing as much as possible to ensure all parties that can be negatively affected by the economy are adequately covered. In its current form, the Landlord and Tenant (Business Premises) Act does not provide administratively and economically workable solutions for landlords experiencing an increase in defaulting tenants due to unpaid rentals.
Indeed, from a landlord's perspective, a prolonged relationship with defaulting tenants will inevitably have trickle-down effects that could see landlords forced to downsize workforces to keep their own businesses afloat, or have landlords themselves defaulting on their financial obligations to lenders who could have financed the construction of premises, so running the risk of losing the premises altogether.
This is an important issue. More can and should be done to address it.
"In its current form, the Landlord and Tenant (Business Premises) Act does not provide workable solutions for landlords experiencing an increase in defaulting tenants."