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Thursday Oct 30, 2014

What's involved in lease renewal

A lease clause states that notice of the intention to renew the lease must be given in writing by the tenant, not later than three months before the expiry of the initial period, failing which the renewal option would lapse.

The option to renew is set out in the following terms in the lease:

The tenant shall furthermore have the right to renew this agreement of lease for a further period of, for example, four years. The escalation for the renewal period of four years shall be negotiated by the parties and failing agreement, at an escalation determined by a third party jointly agreed by the tenant and landlord, provided that the escalation for the renewal period shall not be less than 10 percent.

What are the implications of a renewal clause?

  • The right to renew is like any other term of a lease.
  • A renewal clause cannot be separated from the lease.
  • A tenant's right to renew can be exercised even if there is a change of ownership or the landlord is insolvent.
  • In the instance of an insolvent estate, a renewal clause binds a trustee of an insolvent landlord.

    In Shalala and Another v Gelb (1949 AD 851) the court held that:

    A renewal clause could not be separated from the lease itself. The right to renew clause was an inseparable part of the lease. The right to renew in a lease was linked to the tenant's right to occupy. The buyer/ owner who was misled by the seller/previous owner-landlord was bound by a right of renewal.

    The option to renew related to an extension of the tenant's right of occupation to the continuation of the relationship of landlord and tenant.

    What would be the situation if the tenant failed to exercise the renewal option?

    The lease would end at the agreed date of termination and no notice to vacate would be necessary. If the tenant exercises the option after the agreed renewal period, the landlord is within his rights to decline.

    Similarly, if the tenant does not provide the intention to renew the lease in writing, the landlord is not obliged to renew the lease.

    Can the landlord refuse to renew the lease if the tenant complies with the renewal option?

    This would be the case if the tenant was in breach and the renewal clause stated that the tenant had the right to renew the lease for a further four years, notifying the landlord in writing three calendar months before the lease expired of her intention to renew the lease on condition that she did not breach the lease.

    In Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC), the Constitutional Court dismissed Everfresh's appeal with costs against the eviction order granted by the high court.

    The high court was asked to interpret whether the renewal clause gave Everfresh, the tenant, a valid right of renewal or a valid agreement to negotiate. The specific clause was constructed as follows:

    "Provided that the Lessee has faithfully and timeously fulfilled and performed all its obligations under and in terms of this lease, the Lessee shall have the right to renew same for a further period of four years and eleven months commencing on 1st April 2009, such renewal to be upon the same terms and conditions as in this lease contained save that there shall be no further right of renewal, and save that the rentals for the renewal period shall be agreed upon between the Lessor and the Lessee at the time.

    "The said right of renewal is subject to the Lessee giving written notice to the Lessor of its intention so to renew, which notice shall reach the Lessor not less than six (6) calendar months prior to the date of termination of this lease.

    "In the event of no such notice being received by the Lessor, or in the event of notice being duly received but the parties failing to reach agreement in regard to the rentals for the renewal period at least three (3) calendar months prior to the date of termination of this lease, then in either event this right of renewal shall be null and void."

    The high court granted Shoprite the eviction order because the renewal clause did not impose an obligation upon the landlord to negotiate with the tenant regarding rentals for the renewal period and on the basis that the lease had therefore terminated through effluxion of time.

    Dr Sayed Iqbal Mohamed
    Chairman, Organisation of Civic Rights.
    Tenant Issues
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