legal update
Lease renewal clauses: Landlords and tenants beware The drafting of renewal clauses in leases continues to cause problems for landlords and tenants By Ben Strauss, Director at Cliffe Dekker Hofmeyr
SS Ben Strauss is a Director in CDH’s Tax and Exchange Control and Corporate and Commercial practice areas. He focuses on corporate tax, capital transfer taxes, corporate restructuring, exchange control, employee incentive schemes, public benefit organisations, venture capital, commercial real estate and general commercial work, including mid-tier mergers and acquisitions. His clients range from start-ups to multinational companies across a variety of sectors, including information technology, mining and minerals, oil and gas, financial services and private equity. e: ben.strauss@cdhlegal.com t: +27 (0)21 405 6063 f: +27 (0)21 481 5204
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uch a clause was again the subject The lease also contained matter of a recent case in the an arbitration clause Supreme Court of Appeal (SCA), The tenant validly exercised the option Shepherd Real Estate Investments (Pty) during the initial term, and the lease was Ltd v Roux Le Roux Motors CC (1318/2018) renewed for a further five-year term. [2019] ZASCA 178 (2 December 2019). However, when the tenant tried to The facts of the case were that the exercise the second option to renew for a parties had entered into a lease in relation third five-year term, the landlord said that it to petrol station premises in Paarl. The was amenable to the proposed renewal at lease started on 1 December 2007 and an agreed rental of R150 000 per month, was to endure for an initial term of five plus value-added tax. In response, the tenant years, with a renewal period of “5 plus contended that a fair rental was an 8% per 5 years”. year escalation on the then-prevailing rental. The rental at commencement The tenant also proposed that the was R18 000 per month, matter be referred to arbitration. escalating at 8% per The landlord rejected that year over the initial contention and proposal, “[A]lthough the position in relation term. As to the clause and proceeded with an to ‘agreements to negotiate in good faith’ remains a complex one in Australia dealing with the application to evict the in the light of Coal Cliff Collieries, courts determination of the tenant as it considered there, like other comparable jurisdictions, terms that would the lease to have will not enforce ‘an agreement to apply on renewal of expired due to the agree’. That accords as well with the lease agreement, effluxion of time. the position in our law.” it is worthwhile quoting The landlord argued the relevant text as that the rental amount for provisions along the same the renewal period was neither lines are contained in many leases: determined nor determinable; that “[The] renewal for the second lease the relevant provision of the renewal clause renewal period shall be on terms and was“an agreement to agree”and, accordingly, conditions in compliance with the was void for vagueness; and that there was Landlord’s then-standard letting policy, no obligation on the parties to negotiate in except that there shall be no right of further good faith or to reach an agreement on a renewal and that the rental and costs shall rental amount that is objectively reasonable. be mutually agreed upon in writing The tenant argued that the renewal between the Landlord and the Tenant provision did not reflect the intention of when the right of renewal is exercised.” the parties and that the provision should
SOUTH AFRICAN PROPERTY REVIEW – FEBRUARY/MARCH 2020
