Commercial landlords can usually enforce the
powerful remedies in their leases if the tenant
should breach the lease, especially where certain
statutory protections, such as those of the Consumer
Protection Act, are inapplicable. The prospective
business tenant must therefore read and understand
these clauses carefully before signing the lease.
3.The Right of Renewal:
A right of renewal at the end of the term of the lease
is an obvious benefit to tenants, since it allows them
to remain on the property without incurring the
costs of moving.
However, although many leases offer such a right,
on careful analysis the lease term may merely say the
parties will negotiate the future rental “in good faith”.
If they can’t agree on the future rental, the lease ends.
The courts have held that a term requiring “good
faith” negotiation on future rental is unenforceable.
Moreover, the landlord can always demand terms the
tenant can’t accept, rendering such clauses virtually
useless.
Take the recent judgment in the case of Everfresh
Market Virginia (Pty) Ltd v ShopriteCheckers (Pty)
Ltd 2012 (1) SA 256 (CC).
There, the tenant was given the option to renew
the lease on the same terms and conditions, subject
to agreement being reached on the rental.
However, the landlord, who did not want the lease
renewed, refused to negotiate on the rental for the
renewal period. Seeing that the landlord was opposed
to the renewal, the tenant remained in occupation,
alleging that it had unilaterally, but validly renewed
the lease.
The tenant alternatively alleged that the landlord
had no right to evict it, because the renewal clause
required it to make efforts in good faith to reach an
agreement on rental.
Subsequently, the landlord obtained an eviction
order in the High Court, which held that an option to
renew a lease on terms to be agreed is unenforceable.
The Supreme Court of Appeal agreed and dismissed
the tenant’s appeal, as did the Constitutional Court.
A more appropriate option is to give the tenant the
right of renewal, with the future rental to be based
on objective standards, and not solely under the
landlord’s control.
Typical terms which have been held to be
acceptable, include those which provide for an
increase based on a set percentage of the existing
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Commercial Handbook 2016
rental, or a deadlock-breaking mechanism, providing
for the calculation of a fair market value by an
independent person if the parties cannot agree.
Since the costs of hiring an independent person
to determine fair market value may sometimes be
excessive, I’d recommend a fixed escalation amount.
As is always the case, the most effective way
to obtain legal power is not by litigation, but by
preparing legal documents that properly protect your
rights. In very few areas will this be more important
than in lease negotiations.
RESOURCES
Marlon Shevelew and Associates
www.reimag.co.za