Long Leases, Insolvency & Mortgage Bonds [2026]

When the LESSOR is insolvent — why registration matters most

The sequestration of the lessor’s estate is the clearest practical illustration of why registration of a long lease is so important. When the lessor is declared insolvent, a trustee is appointed to administer the insolvent estate. That trustee — who steps into the lessor’s shoes to deal with the property — is precisely the type of party that section 1(2) of the Formalities in Respect of Leases of Land Act 18 of 1969 has in mind when it refers to “successors under onerous title” and “creditors” of the lessor. The trustee takes the lessor’s assets for the benefit of creditors who gave value, and is squarely within the protected class.

The consequence of this classification is significant:

• Registered long lease: Because a long lease subtracts from the lessor’s dominium, registration gives it the force of a limited real right that runs with the land and binds all successors and creditors for the full term — so a registered long lease binds the trustee for the entire registered term. The trustee cannot simply ignore the lease when realising the property for the benefit of creditors. The only qualification is priority: a prior-ranking registered mortgage bond over the leased property takes precedence over a later-registered lease in the insolvency distribution (see below on mortgage bonds).
• Unregistered long lease: An unregistered long lease is valid against the trustee for at most ten years from the date the lease was entered into — no more (unless the trustee or creditors had actual knowledge of the lease at the time they acquired their interest). This is the ten-year rule of s 1(2) of the Formalities Act, discussed fully in the guide on the 10-year rule and the knowledge doctrine. If the lease has already run for more than ten years by the time the lessor is sequestrated, and it is unregistered and the trustee had no prior knowledge of it, the trustee can disregard the lease entirely.

This asymmetry is the sharpest practical reason to register a long lease. A lessee who enters into a twenty-year commercial lease with a landlord in financial difficulty, and who fails to register the lease notarially, may find that the trustee treats the lease as unenforceable against the insolvent estate once more than ten years have elapsed. The lessee’s remedy at that point is limited to a concurrent (unsecured) claim for damages — not continued occupation.

The Formalities Act itself provides the anchor for this analysis. The provision at issue draws the line at ten years, protects creditors and successors under onerous title beyond that point, and treats registration as the remedy:

The mortgage bond priority question

Where the leased property is subject to a registered mortgage bond that was registered before the long lease, the mortgagee (typically a bank) has a prior-ranking real right over the property. If the lessor is sequestrated and the mortgagee enforces its bond — whether in the insolvency distribution or by foreclosure — the registered long lease is subsequent to the mortgage bond in the real-right queue. The practical result is that on a sale in execution under the bond, the purchaser takes the property free of the long lease (which ranks behind the bond), and the lessee’s recourse is again limited to a concurrent claim against the insolvent estate for loss of the lease.

The converse also applies: a long lease registered before the mortgage bond ranks ahead of that bond. A mortgagee who takes a bond over property already subject to a registered long lease takes with notice of the lease (the registration is a public record) and is bound by it for the full term. Lessees who are asked by their landlord to subordinate their registered lease to a new mortgage bond should take independent legal advice before agreeing — a subordination agreement can move the lease behind the bond and expose the lessee to the risk described above.

For the registration process that creates this priority, see the guide to registering a notarial lease.

When the LESSEE is insolvent (s 37)

The sequestration of the lessee’s estate operates very differently from the lessor’s insolvency. The key point — which many lessors misunderstand — is that the lease does not automatically come to an end when the lessee is sequestrated. Section 37(1) of the Insolvency Act 24 of 1936 states this plainly:

The scheme that s 37 creates can be summarised as follows:

The trustee’s election to continue or determine

On appointment, the trustee inherits the lessee’s contractual position. The trustee must decide whether the lease is an asset worth preserving (for example, because the lessee’s business has value as a going concern, or because the lease can be ceded to a third party at a premium) or a liability better ended. Section 37(2) sets a three-month deadline for that election:

In other words, the trustee’s silence for three months is treated as a decision to end the lease. The lessor therefore cannot simply assume the lease continues while waiting indefinitely for the trustee to engage — once the three months have expired without written notification of an intention to continue, the lease is deemed determined.

Rent during the sequestration period ranks as a cost of sequestration

Section 37(3) provides that rent from the date of sequestration until determination or cession of the lease by the trustee is included in the costs of sequestration. This gives the lessor a preferent ranking for that post-sequestration rent: it is paid ahead of concurrent creditors in the distribution of the insolvent estate (though still behind secured creditors with registered security). A lessor should therefore make prompt contact with the trustee after sequestration to protect this preference.

Anti-forfeiture: sequestration clauses are void (s 37(5))

Lessors sometimes attempt to protect themselves by inserting a clause that automatically terminates or varies the lease if the lessee is sequestrated. Section 37(5) renders such clauses null and void:

The first limb of s 37(5) is the anti-forfeiture rule: a clause that purports to end or alter the lease merely upon sequestration is of no effect. The trustee steps into the lessee’s position under the surviving lease and makes the election under s 37(1) and (2) as described above.

The second limb preserves legitimately protective clauses: a restriction oncession or transfer of the lessee’s rights under the lease (so the trustee cannot cede to a third party without the lessor’s consent), or a clause providing for termination on the death of the lessee or successor in title (as opposed to sequestration), is valid and binds the trustee.

In practice, a lessor whose tenant has been sequestrated should:

• Write to the trustee immediately — identify the lease, the outstanding rent, and the s 37(3) preferent claim for post-sequestration rent.
• Monitor the three-month period — if no written notification of an intention to continue is received within three months of the trustee’s appointment, the lease is deemed determined (s 37(2)) and the lessor can treat the premises as available for re-letting.
• Prove a claim for pre-sequestration arrears — these rank as concurrent claims (subject to s 85 hypothec, below) unless there is other security.
• Do not rely on an automatic-termination clause — it is void under s 37(5) and acting on it risks a dispute with the trustee.

The landlord’s tacit hypothec (s 85)

South African common law gives a lessor a tacit (legal) hypothec over the movable property of the lessee that is brought onto the leased premises (invecta et illata — things introduced and carried in). This hypothec secures the lessor’s claim for arrear rent. In the context of the lessee’s insolvency, s 85 of the Insolvency Act regulates how that hypothec operates against the insolvent estate.

Section 85(1) first clarifies that most tacit and legal hypothecs do not confer preference in insolvency — but the landlord’s legal hypothec is expressly preserved. Section 85(2) then quantifies the preference:

The practical operation of the hypothec is as follows:

• What the hypothec covers: Only movable property on the leased premises that belongs to the lessee (invecta et illata). The hypothec does not extend to property that the lessee has removed from the premises, nor to third-party property on the premises (for example, goods belonging to a sub-lessee or to a supplier who has retained title).
• What the hypothec secures: Arrear rent calculated in respect of the period immediately before and up to the date of sequestration, subject to the time caps in s 85(2). For a monthly tenancy the cap is three months’ arrear rent; for a quarterly tenancy, six months; for a half-yearly tenancy, nine months; and for any other interval (including annual), fifteen months.
• The preference: The lessor’s claim (up to the cap) is paid in priority to the claims of concurrent (unsecured) creditors from the proceeds of the articles subject to the hypothec. It ranks below a prior special mortgage bond or pledge over the same movables.
• Delivering the property to the trustee: Section 47 of the Insolvency Act provides that a lessor who delivers property subject to the hypothec to the trustee (on request) does not lose the hypothec, provided the lessor notifies the trustee in writing of the hypothec claim at the time of delivery and subsequently proves the claim against the estate.

A lessor with a substantial arrear-rent claim should, immediately on the lessee’s sequestration, take legal advice on the extent of the hypothec, identify the movables on the premises, and ensure a claim is proved timeously at the creditors’ meeting under s 44 of the Insolvency Act. Delay can result in the trustee disposing of the assets before the lessor’s preference is secured.

For a broader overview of the insolvency framework, see also the guide on the ten-year rule and the knowledge doctrine (which explains who qualifies as a “successor under onerous title” and how the registration or knowledge requirement operates) and the guide to registering a notarial lease (which explains how to obtain the protection of registration in the first place).