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Late exercising of an option to renew a lease – when will a court refuse eviction?

Late exercising of an option to renew a lease – when will a court refuse eviction?

As a general proposition, agreements concluded between parties will be enforced by the courts, unless certain exceptions exist. One such exception is when the agreement is against public policy, for example when I contract with a hitman to kill someone – quite clearly, the courts will refuse to enforce such an agreement.

Generally, when a tenant has the right to renew its lease agreement, that right is to be exercised by a specific date, most often six months prior to lease expiry. If it is not exercised timeously, the right of renewal lapses, and the landlord will not be obliged to entertain any renewal. Absent the conclusion of a new lease agreement, the tenant will then have to vacate the leased premises at the expiry of the initial lease period.

The recently delivered judgment of the learned Judge Davis in the Western Cape High Court in the matter of Beadica 231 CC & Others v Trustees of Oregon Trust, seems to turn this conventional wisdom on its head, and serves as a warning to landlords specifically, and contracting parties in general.

The facts are fairly simple: Beadica and three other entities all concluded, at substantially the same time, separate franchise and lease agreements with Oregon, pursuant to a BEE-restructuring of Oregon’s business. Beadica concluded a franchise agreement with Oregon, which would run for a period of ten years, with business to be conducted from the leased premises, and also concluded a lease agreement with Oregon, for an initial period of five years, and with a right of renewal for a further five years, so as to run, in total, for the same period as the franchise agreement. The rent for the renewal period was to be negotiated, and, failing agreement, would be determined by an expert. Beadica had to exercise its right to renew the lease by 31 January 2016, with lease expiry being 31 July 2016. Beadica, however, due to an oversight, failed to timeously advise Oregon that it intended renewing the lease, and only notified Oregon during March 2016, i.e. more than a month late, that it was exercising its right of renewal. Oregon never replied, and, a week before lease expiry, notified Beadica that it had to vacate the premises, as the lease was reaching its termination date.

Beadica approached the court for an order confirming that the right of renewal had been validly exercised, even though it was exercised late, whilst Oregon counter-applied for an eviction order.

The court adopted an interesting approach: it held that, even though on a strict (and in our view, normal) interpretation of the lease agreement, the right of renewal had lapsed, and Beadica had to be evicted from the premises, in the circumstances of this case, such an interpretation would operate unjustly. The court referred to a judgment of the Constitutional Court where it was held that “honouring a contract cannot be a matter of each side pursuing his or her own self-interest…without regard to the other party’s interest”. The court therefore held that the right of renewal had been validly exercised, and that the landlord may not take steps to evict the tenant before the extended lease expiry of 31 July 2021, unless the tenant breached the lease in such a way as to justify cancellation thereof.

The court made it clear that this does not mean that the courts will dispose of the certainties of legal rules in every case, and that this case was judged on its merits.

What is clear from this case, however, is that courts are increasingly willing to refuse to enforce agreed terms between parties, where the court is of the view that such enforcement would be unjust or unfair.

Landlords therefore would do well to ensure that, where leases are concluded, they are not coupled with other agreements which could impact on the enforcement of the leases. An example would be where an acknowledgment of debt is signed, for arrear rent to be paid off over a period which extends beyond the lease period.