Introduction
When a business runs into financial trouble and stops paying rent, it sets off a legal battle over who gets paid first when the company goes broke. On one side, you have the landlord who owns the building. On the other side, you have the banks that lent the business money, and the liquidator whose job it is to sell off whatever is left to pay everyone back.
In Zimbabwean law, this situation creates a major clash between an ancient legal rule that protects landlords and modern written laws that govern business failure.
The Landlord’s Secret Weapon: The “Tacit Hypothec”
Under Roman Dutch common law which forms the foundation of Zimbabwe’s legal system a landlord has an automatic legal right called a tacit hypothec.
The word “tacit” means silent or unwritten, and “hypothec” is an old legal word for a claim over property. The moment a tenant falls behind on rent, the landlord automatically gets an unwritten legal claim over everything the tenant brought into the building. This includes office furniture, manufacturing machinery, computer equipment, inventory sitting on the shelves even property belonging to third parties.
The beauty of this rule for landlords is that it happens automatically. He/she does not need to sign a special agreement or get a court order for the right to exist.
However, there is a massive catch. This legal claim is extremely fragile. It only lasts as long as the items remain inside the rented building. If a desperate tenant sneaks into the property at midnight, loads the machinery onto a truck and drives it away before the landlord gets a court order to lock down the property, the landlord’s automatic claim vanishes immediately.
What Happens When the Business Goes Into Liquidation?
When a struggling company officially goes bankrupt and enters liquidation (or gets placed under corporate rescue), the normal rules freeze. This freeze is known in legal terms as a concursus creditorum – a gathering of creditors.
Once liquidation starts, two major things happen to the landlord’s claim:
1.The Good News
The landlord no longer needs to rush to court to grab the items. The law steps in and automatically recognizes that the landlord has a special “preferent” (preferred) claim over the physical items left inside the building.
2.The Bad News
The written law, known as the Insolvency Act, puts a strict cap on how much money the landlord can claim using this special status.
While the landlord might be owed two years of unpaid rent, the law usually cuts off their preferred status at just three months of arrear rent for monthly leases. Any unpaid rent beyond that three-month limit gets pushed down to the very bottom of the pile, turning it into a basic, unsecured claim that rarely gets paid out.
Landlords vs. Banks: Who Gets Paid First?
The real drama happens when a bank is also trying to recover money from the exact same failing business. Banks usually protect their loans by registering a security interest over the company’s assets, often through a General Notarial Bond.
So, if a liquidator sells off the tenant’s remaining machinery, who gets the cash first the landlord or the bank?
- If the bank registered a specific charge on a specific piece of equipment: For example, if the bank financed a specific printing press and registered a specific legal claim over that exact machine, the bank usually wins. They get paid first from the sale of that machine.
- If the bank only has a general claim over all company assets: A general bond gives the bank a sweeping claim over the company’s goods in general, but it doesn’t attach to specific physical items until a court enforces it. In this case, the landlord wins over those specific items sitting in the building, up to that three-month statutory cap.
When business owners know their company is about to collapse, some try to clear out the building in secret before the liquidator or the landlord can stop them.
When this happens, the liquidator has the legal power to track down those stolen or hidden assets and force the directors to bring them back. But this creates a final legal trap for the landlord: because those goods were physically removed before the official liquidation began, court rulings suggest the landlord loses their automatic claim over them. Even if the liquidator brings the assets back, the proceeds from selling them go into a general bucket for all creditors, rather than directly to the landlord.
The Takeaway
For businesses, landlords, and lenders in Zimbabwe, understanding these rules is critical:
- Landlords cannot afford to sit back and wait while rent arrears stack up. If a tenant is falling behind, the landlord must act fast to get a court order attaching the goods before the tenant moves them or files for bankruptcy.
- Banks need to know that a general loan agreement is not bulletproof. If their client defaults on rent, the landlord can jump ahead of the bank in line to take those physical assets.