June 8, 2021

Commercial LeasePack :UPDATE

Almost every tenant would like its lease to include a clause giving it the option to renew.
This is particularly true in a retail environment where a considerable portion of a tenant’s
goodwill may be tied to the location of the premises.

But labelling a clause as an ‘option to renew’ does not make it so. Strictly speaking, an
option to renew is an agreement all of its own. It gives the holder of the option the right,
but not the obligation, to lease the premises in question for a further agreed period at
an agreed rental.

Once we understand that an option to renew is an agreement all of its own, it stands to
reason that an option to renew must contain all of the essential ingredients for an
agreement of lease: that is to say, agreement on who the landlord is, who the tenant is,
what premises are being leased and crucially, what the rental will be.
It is in respect of the rental that many so-called renewal options fall flat and, upon closer
inspection, reveal themselves not to be enforceable options at all.

Shepherd Real Estate Investments (Pty) Ltd v Roux Le Roux Motors

As this recent judgment 1 of the Supreme Court of Appeal has reminded us, our law of
landlord and tenant requires that there should be agreement on the rental payable in
respect of the premises before it may be said that the parties have reached a binding
agreement. What is required is either an actual rental or a definite method of establishing
that rental independently of the parties.

In this case, the landlord had concluded an agreement of lease with the tenant in respect
of a commercial property in Paarl that was occupied by the tenant for the purposes of
conducting the business of a petrol station. The case centred around the interpretation
of a renewal clause:
“Such renewal for the…renewal period, shall be on terms and conditions in compliance
with the Landlord’s then standard letting policy, except that there shall be no right of
further renewal and that the rental and costs shall be mutually agreed upon in writing
between the Landlord and the Tenant when the right of renewal is exercised.”
The tenant attempted to exercise its right of renewal but the parties were unable to agree
on the rental payable for the renewal period. The landlord subsequently applied to Court
for the eviction of the tenant from the premises.

 

A renewal clause is not a legally enforceable obligation

In finding for the landlord, the Supreme Court of Appeal characterized the renewal clause
as a ‘mere agreement to agree’ rather than a clause containing legally enforceable
obligations and reiterated the long-standing position that our Courts will not enforce
such an ‘agreement’. In the result, an order was granted evicting the tenant from the
premises.

Thus, while most tenants are happy to find that their lease contains a clause to the
following effect: ‘the tenant shall have the option, by notice in writing to the landlord to
renew this agreement for a further period of X years, at an agreed rental’, they should
most assuredly not be. This is a mere agreement to agree on the rental payable and not
enforceable against the landlord.

To put it differently, if the landlord and the tenant do not agree on the rental payable for
the renewal period, the tenant has no right to remain in the premises, even if it may have
exercised what it understood to be its ‘option’.

There is little advantage for landlords to grant an option to renew
Why then are so-called options to renew so often couched in non-binding language? The
answer, in part, is that there is often little advantage to a landlord in granting a tenant
a binding option to renew, unless the rental payable in respect of the option period is a
market-related rental at the time that the option is exercised

 

Conclusion

The clause that comes the closest to satisfying the needs of both landlord and tenant is
a clause that contains a binding option to renew but at a market-related rental to be
determined by an independent industry expert.
Subscribers to the TPN Commercial LeasePack have access to an Option to Renew in the
form of an Addendum to the standard Lease Agreement which provides for a marketrelated rental to be determined by an agent or valuer appointed by the landlord, and
which contains added protection for the landlord.

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