Where parties fail to timeously reach an agreement on the rental for a renewal period and they do not invoke a clause providing for the rental to be fixed by a third party, this will result in the lapse of the lease agreement by the effluxion of time. This was confirmed in the Supreme Court of Appeal ("SCA") judgment in Mlungisi Ndodana Sontsele v 140 Main Street Properties CC and Another, which was delivered on 7 July 2020.
The judgment concerned a notarial agreement of lease concluded on 29 June 2004 between Mr Sontsele together with his mother and the lessee, 140 Main Street Properties CC.
The lease agreement included the following terms:
- commencement on 1 July 2004 and termination on 31 May 2014;
- an option to renew the agreement for two further periods of
nine years and 11 months each, subject to:
- for each renewal, the lessee must give at least six months' notice in writing before the expiry of the initial lease or of the expiry date of each successive renewal period, whichever applies;
- the same terms and conditions of the agreement will apply to all renewal periods, save that the rental consideration will be determined by agreement between the parties based on the prevailing market rentals applicable to the property; and
- in the event of the parties not being able to agree on the commencement rental for any of the option periods, the rental will be determined by a suitably qualified person appointed by the President of the Cape of Good Hope Estate Agents Board.
On 8 August 2013 the lessee seemed to exercise its right to renew the lease after the first renewal period. However, the "renewal" notice didn't specify the commencement rental for the renewal period.
Despite the fact that the rental had not been fixed between the parties, the lessee remained in occupation of the property after 31 May 2014 and applied an approximately 20% increase to the rental amount paid in the first rental period.
The adjusted rental was not satisfactory to the lessor and negotiations between the parties failed to reach an amicable outcome. On 31 July 2015, the lessor's attorneys informed the lessee that its renewal notice did not include an offer for the rental payable during the extended period of the lease and that prior to the expiry of the initial term, the parties did not agree on any rental amount nor was the agreement amended in any document signed by both parties recording what rental would be payable during the extended lease. In addition, no referral was made for the determination of the rental by the Cape of Good Hope Estate Agents Board. The lessor therefore contended that there was no extension of the agreement into a second term and the agreement had expired on 31 May 2014.
The lessor thereafter approached the High Court for an order:
- confirming the termination of the notarial agreement of lease, with the effective date of termination being 31 May 2014;
- declaring that the notarial agreement of lease was not renewed for a further period of nine years and 11 months; and
- directing the lessee to vacate the property within two months from the date of the granting of the order.
The SCA held that, although the lessee had complied with its obligation to give its notice of renewal within six months of the expiry of the initial term, this notice was not sufficient to bring the extension of the lease into existence. The SCA reiterated that agreement on the rental is an essential element of a lease and until such agreement has been reached, no lease is concluded.
Furthermore, when the parties failed to reach agreement on the rental, the lessee did not attempt to have the rental issue determined by the Cape of Good Hope Estate Agents Board, until after the agreement had terminated by effluxion of time.
The SCA declared that the notarial agreement of lease had terminated by effluxion of time on 31 May 2014 and ordered the lessee to vacate the property within two months. Therefore, when negotiating a renewal period, tenants and landlords alike ought to be cognisant of the need to timeously reach an agreement on the rental which will apply for the renewal period, failing which the agreement will terminate by effluxion of time.
Originally published 14 July 2020.
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