We all know that lease agreements do not simply fall out of thin air, and that they are usually the product of a period of negotiation between the parties. The question which often arises is whether such correspondence, on its own, can be said to constitute a lease agreement irrespective of whether the final comprehensive lease agreement has been signed or not. This question again came to the fore in the recent decision of a full bench of the Western Cape High Court in the matter of Bartie N.O. vs Fraaikem Pharmacy (Pty) Ltd.
The facts of the case were as follows:
- The Landlord previously concluded a lease agreement with Fraaiuitsig for it to conduct a pharmaceutical business, which lease was to endure for a period of 5 years, commencing 1 June 2014 and terminating on 31 May 2019, whereafter Fraaiuitsig would have the right to renew the lease agreement for a further period of 5 years, after giving 6 months’ written notice of its intention to renew the lease agreement.
- In July 2017, Fraaiuitsig notified the Landlord that it intended to sell the business of the pharmacy as a going concern to Fraaikem. In accordance with the provisions of clause 6 of the lease agreement, which prohibited any cession or assignment of the lease agreement, or subletting of the leased premises without the Landlord’s prior written consent, it requested the Landlord’s consent for the proposed sale. In August 2017, the Landlord advised Fraaiuitsig that it consents to the sale of the business, but that the lease agreement with Fraaiuitsig remains in place until the expiry date of 31 May 2019, and that, in the intervening period, Fraaiuitsig could sublet the leased premises to Fraaikem.
- From August 2017, however, and despite its notification to the contrary, the Landlord sent the monthly rental invoices directly to Fraaikem, who duly made payment of such rental invoices.
- On 3 December 2018 (i.e. 3 days late) Fraaikem sent an email to the Landlord to inform it of Fraaikem’s intention to renew the lease agreement, and requesting that the renewed lease agreement should be between Fraaikem and the Landlord.
- The Landlord only responded thereto on 23 May 2019, when its financial assistant advised Fraaikem that she wishes to draft the new lease agreement, and therefore requested copies of the company registration documents and identity documents of directors.
- The requested information was duly provided by Fraaikem, and on 27 May 2019 the same financial assistant sent an email to Fraaikem, attaching a so-called “renewal agreement” for Fraaikem’s attention and signature. The lease agreement annexed to the email stated that it was between the Landlord and Fraaikem, commencing on 1 June 2019.
- On 28 June 2019, however, the Landlord addressed a letter to both Fraaiuitsig and Fraaikem, giving Fraaikem notice to vacate the leased premises by 31 July 2019, on the basis that Fraaiuitsig had not exercised the right to renew the lease agreement and that, accordingly, Fraaikem was occupying the premises without a lease agreement.
- On the same day, Fraaikem attempted to deliver a signed copy of the lease agreement to the Landlord, which the Landlord refused to accept.
- When Fraaikem refused to vacate the leased premises, the Landlord approached the High Court for an eviction order. The Application was dismissed, and the Landlord lodged an appeal to a full bench of the Court.
The Landlord argued in short that Fraaikem could not exercise the right of renewal, because it was not a party to the initial lease agreement. Furthermore, it argued that the exercise of the renewal was done 3 days late, and was therefore invalid. Fraaikem, on the other hand, argued that during August 2017, the lease agreement had been ceded to it by Fraaiuitsig, and that the Landlord had consented to such cession through its conduct. The basis for this contention is first that, after the sale of the business, all future rent invoices were sent by the Landlord to Fraaikem and not to Fraaiuitsig, secondly that Fraaikem had been making all rental payments thereafter, which payments had been accepted by the Landlord, and thirdly, it relies on the renewal agreement provided by the Landlord, as well as the preceding emails. Furthermore, Fraaikem argued that the initial lease agreement had been renewed between it and the Landlord, alternatively that a new lease agreement had been concluded between it and the Landlord on 27 May 2019.
The court referred to a decision by the Appellate Division (as it then was) in 1924 which states the following: “The law does not concern itself with the working of the minds of parties to a contract, but with the external manifestation of their minds.” In short, in what is known as the “doctrine of quasi-mutual assent” a person cannot escape from an apparent agreement merely because his or her subjective intention differed from the apparent agreement. The court, therefore, held that the decisive question is whether the Landlord led Fraaikem, as a reasonable party, to believe that its declared intention, as embodied in the renewal agreement and surrounding correspondence, represented its actual intention.
The court held that the terms of the lease agreement clearly contained a valid offer for the renewal of the lease agreement which the tenant, at the appropriate time, could either accept or decline. Fraaikem’s email of 3 December 2018 constituted a counteroffer to the right of renewal contained in the initial lease agreement, as it sought to introduce new parties to the lease agreement. The Landlord’s email of 27 May 2019 constituted an acceptance of that counteroffer, being a clear and unambiguous acceptance of the requests made by Fraaikem in its email of 3 December 2018.
Accordingly, the court held that it was reasonable for Fraaikem to rely on the employee’s email and presentation of the renewal agreement, as an indication of the Landlord’s intention to conclude an agreement with it on the terms as proposed. Accordingly, the renewal agreement that was annexed to the email, in and of itself, gave rise to an enforceable contract between the parties.
As far as the Landlord’s argument that the notice to renew was given out of time is concerned, the court held that, by virtue of the Landlord’s failure to object to the late notice, it had condoned same, and accordingly could not, after it had concluded the lease agreement, object to such late notice. Accordingly, the appeal was also dismissed.
This case once again highlights the following important aspects:
- Whenever a tenant takes any action in accordance with an agreement of lease but does so late, careful consideration must be given as to whether such late action is to be condoned, or not. Once the late action has been condoned, it is very difficult to go back and insist on timeous compliance.
- Even if no lease agreement has been signed, it might still be that a valid and binding lease agreement came into existence between the parties. It is to be remembered that lease agreements might take different forms, i.e. written, oral or tacit, in which case an agreement is inferred from the conduct of the parties.
- When negotiations are continuing, the correspondence between the parties should make that fact clear and should indicate that any acceptance is still, for example, subject to board approval, or whatever other conditions may be attached to the conclusion of the agreement.
Landlords are therefore advised to carefully consider the responses that they provide to current and prospective tenants and the impressions that may be made by such communication.