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November 1, 2018
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December 4, 2018

Take care when renewing a lease agreement

Introduction

When a lease agreement expires, it is common that parties do not enter into a new written lease agreement, but simply renew and thereby extend the current lease for a further period.

In the recent Constitutional Court case of Mokone v Tassos Properties CC and Another [2017] ZACC 25 (“Mokone”) the court considered whether the renewal of a lease agreement also renewed the lessee’s right to buy the property if the lessor decided to sell it (a right of pre-emption), even though the renewal did not refer to the right of pre-emption.

The facts

In March 2004 Tassos Properties CC (“Tassos”) entered into a written lease agreement with Mokone. The agreement made provision for Mokone to lease a premises from Tassos at a monthly rental of R4 500.00. The initial lease period was for one year, which was renewable for a further period of one year, the rental price to be agreed upon. After the initial lease period lapsed, a handwritten note was made on the front page of the original lease agreement which read: “3/5/06 extend till 31/5/2014 and monthly rental R5 500.00”.

In July 2009 Tassos entered into a sale agreement with Blue Canyon CC (“Blue Canyon”). Subsequently, during March 2010, the property was transferred to Blue Canyon. In January 2012 Mokone notified Tassos in writing that she would be exercising her right of pre-emption and tendered payment for the amount that Blue Canyon had purchased the property for. Tassos refused, on the basis that the right of pre-emption had not been extended when the lease was extended and was therefore, unenforceable.

In April 2012 Mokone instituted action against Tassos and Blue Canyon to set aside the sale and transfer of the leased premises. She further sought an order enforcing a sale of the property to her, contending that the note on the original lease agreement that extended the lease had also extended the clause containing the right of pre-emption.

The outcome

Before the Mokone case our courts applied the principle that when parties simply agree to extend a lease agreement, all the terms incidental to (forming part of) the contractual relationship between lessor and tenant are renewed. The terms that are collateral to and independent of the relationship are not renewed, unless the parties’ intention to renew such terms are clear. A right of pre-emption right is independent of a lease agreement and this right must be expressly renewed by the parties.

The Constitutional Court took issue with the approach that our courts have hitherto adopted and stated that this approach unduly favours lessors. The majority held that it was unreasonable to expect lay people to be able to draw a distinction between terms that are incidental to (form part of) the lease agreement and those that are collateral to and independent of the lease agreement.

The court held that when lay people use the words “we agree that this lease be extended” they generally intend to extend all the terms of the written lease agreement.  Therefore, the entire contract had been extended, including the right of pre-emption.

When renewing a lease, it is important therefore that the parties make clear their intention to renew all the terms of the lease, including terms that are collateral to and do not necessarily form part of the lease, such as a right of pre-emption for the lessee. If this is not their intention the right of pre-emption should be specifically excluded from the renewal.