The Supreme Court of Appeal held in March 2020 that an invalid clause in a lease does not necessarily result in the unenforceability of the entire agreement.
Two parties entered into an agreement in terms of which the lessor let the premises to the lessee for a period of ten years and three months. The contentious clause of the agreement which led the parties to litigation was clause 3:
‘The lessee has a first option to lease the premises for a further period of 10 years, subject to the following:
3.1 The lessee fulfilled his obligations in terms of this contract;
3.2 That the lessee renew the lease by giving written notice to the lessor of an intention to do so 6 (six) months in advance;
3.3 A new rental agreement, acceptable to the lessor be negotiated.’
Some seven and a half years into the lease, the lessee abandoned the lease and failed to pay rent since that date. The lessor terminated the lease and claimed damages arising from the lessee’s breach.
In considering this appeal the court had to determine whether clause 3 was invalid and, if so, whether that had the effect of rendering the entire agreement unenforceable.
It was alleged by the lessee that the ‘option’ in clause 3 was a material term and a finding that it was invalid would cause the entire lease to be invalid.
Clause 3 grants the lessee a ‘first option’ to lease the premises ‘for a further period of 10 years’, but that ‘right’ is made subject to three conditions.
The court held that when clause 3 is considered in context and the lease holistically, it is clear that what the parties intended was not an option, despite the use of the word ‘option’ in the clause. Instead, they put in place a mechanism to regulate the negotiation of a new lease shortly before the expiry of the current lease – giving the lessee a right to a preference over other potential lessees.
What this means is that the effect of clause 3 is that if the lessee wished to continue in occupation of the premises after the expiry of the lease, and it gave notice timeously, the lessor would not let the premises to anyone else unless the negotiations for a new lease were unfruitful.
The court then considered the effect of clause 3.3, which referred to a new lease agreement being negotiated that was acceptable to the lessor. Our law clearly provides that ‘an agreement that the parties will negotiate to conclude another agreement is not enforceable, because of the absolute discretion vested in the parties to agree or disagree’. Clause 3 was thus found to be invalid.
Having found that clause 3 is invalid, the court had to consider the effect of that finding on the lease agreement as a whole.
It was held that when the lease agreement is interpreted in context and holistically, it is clear that clause 3 is not a material term. The principal purpose of the agreement was to establish a lease that was to endure for ten years and three months. Clause 3 is merely incidental to that purpose, providing a mere mechanism for possible negotiations to conclude a new lease.
The invalidity of clause 3 did not result in the invalidity of the entire lease. It is not an ‘option’ upon which the validity of the entire lease agreement is dependant.