Author: Hopewell Sathekge – Director
The relief announced for retail tenants to offset the financial impact of the Covid-19 lockdown [Relief offered to retail tenants by property industry] will be in place once landlords and tenants agree on new payment terms. In discussing payment terms, a holistic view of the entire lease agreement should be taken.
To qualify for the relief package, retail tenants must be in good standing at the end of February 2020. In reviewing lease agreements to determine if tenants are in good standing, it may be worthwhile for both landlords and tenants to take note of a recent Supreme Court of Appeal (SCA) judgment that was handed down on 25 March 2020.
In the matter of Hugo, Kirsten & Kirsten (Pty) Ltd v Collotype Labels (Pty) Ltd (323/2019) [2020] ZASCA 21, the SCA found that a clause in a lease agreement providing for the negotiation of a new lease on expiry of a current lease was unenforceable, but the unenforceability of such a clause does not have the effect of invalidating the entire agreement.
Hugo, Kirsten & Kirsten (landlord) let premises to Collotype Labels (tenant) for a period of 10 years and 3 months, with the “first option” to lease the premises for a further period of 10 years. The so-called option was subject to the tenant fulfilling its obligations in terms of the lease, renewing the lease, and a new agreement – acceptable to the landlord – being negotiated.
In the court where the matter was first heard, the tenant alleged that the entire lease agreement was invalid, because the “first option” clause was void and could not be severed from the rest of the agreement. In handing down judgement in favour of the tenant, the presiding officer took the view that the first option clause was void for vagueness, because the exercise of the option was dependent on the acceptance of the renewal by the landlord. The court further found that the option clause was an essential term of the lease and for that reason, it was not severable from the remainder of the lease, with the result that the whole lease agreement was void.
The landlord turned to the SCA to appeal the judgment. In passing judgment, in favour of the landlord, the SCA made the point that the landlord and tenant did not intend to have an option despite labelling their clause as such. The SCA compared the clause to a right of pre-emption, giving the tenant the right to a preference over other potential tenants.
Considering that the clause referred to a new lease agreement being negotiated, the SCA held that an agreement that parties will negotiate to conclude another agreement in the future is not enforceable simply because it is in the absolute discretion of both parties to agree or disagree.
Having declared that the clause labelled an option was not enforceable, the SCA had to decide on the effect of the unenforceable nature of the clause on the entire lease agreement. The SCA held that the clause was not a material term, because the principal purpose of the agreement was to establish a lease for a period of 10 years and 3 months and the clause was incidental to that purpose. On that basis, the SCA upheld the application by the landlord against the tenant.
The relief package being offered is aimed at opening negotiation discussions by all parties concerned. When such discussions are taking place, a holistic view needs to be taken and the SCA judgment discussed above will hopefully assist such discussions should similar issues arise during the negotiations.
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