Shepherd Real Estate Investments (Pty) Ltd v Roux Le Roux Motors CC

A commercial lease agreement was concluded on 7 November 2007 between Shepherd Industrial Commercial Real Estate CC (later ceded to the appellant) and the respondent for a petrol station property in Paarl. The lease had an initial term of five years with a renewal period of "5 plus 5 years". The rental at commencement was R18,000 per month, escalating at 8% per annum. The respondent validly exercised the first option to renew for a second five-year term. Clause 6 of the lease provided that for the second renewal period, "the rental and costs shall be mutually agreed upon in writing between the Landlord and the Tenant when the right of renewal is exercised." When the respondent attempted to exercise the second option to renew for a third five-year term, the parties could not agree on the rental. The appellant offered R150,000 per month plus VAT; the respondent contended that a fair rental was 8% escalation on the then prevailing rental. After fruitless negotiations, the appellant applied for ejectment, contending that the lease had expired by effluxion of time. The high court dismissed the application, finding that clause 34 (an arbitration clause) constituted a deadlock-breaking mechanism that should be employed. The appellant appealed.

• Whether a lease renewal clause requiring rental to be 'mutually agreed upon in writing' constitutes a valid and enforceable agreement or is void for vagueness as an 'agreement to agree'
• Whether the arbitration clause in the lease constituted a deadlock-breaking mechanism sufficient to cure the vagueness of the renewal clause
• Whether the arbitration clause survived the termination of the lease agreement by effluxion of time
• Whether the respondent's alternative defences of rectification and tacit term were viable

The appeal was upheld with costs, including those of two counsel. The high court's order dismissing the application was set aside. The respondent was ordered to vacate the property within 14 days, failing which the Sheriff was directed to eject the respondent and all persons in occupation of the property.

A lease renewal clause that requires the rental to be 'mutually agreed upon in writing' between the parties, without more, constitutes an unenforceable 'agreement to agree' and is void for vagueness. Such incompleteness cannot be cured by a general arbitration clause that only provides for resolution of disputes concerning the interpretation and implementation of an existing agreement, as opposed to a specific deadlock-breaking mechanism (such as appointment of an expert to determine the rental). A general arbitration clause does not survive the termination of the agreement by effluxion of time and therefore cannot be invoked to determine terms of a prospective renewal. An arbitrator cannot fill in essential terms that the parties themselves have not agreed upon or impose an ongoing relationship on an unwilling party. The distinction between uncertainty (which may be cured by a deadlock-breaking mechanism) and incompleteness (which renders the agreement unenforceable) is critical.

Ponnan JA noted with approval the principle that courts will not readily import a tacit term into a contract, as courts cannot make contracts for people nor supplement agreements merely because it might be reasonable to do so. The Court observed that a tacit term cannot be imported in respect of any matter to which the parties have applied their minds and for which they have made express provision. The judgment referenced the complex jurisprudential debate in Australia, England, Canada and New Zealand regarding agreements to negotiate in good faith, noting that while the position in Australia after Coal Cliff Collieries may be more flexible, South African law remains consistent with the principle that agreements to agree are unenforceable. The Court noted the principle of approbation and reprobation - that no person can take up two positions inconsistent with one another or 'blow hot and cold'. The judgment affirmed that a person who signs a contractual document thereby signifies assent to its contents and cannot later blame others if the terms turn out unfavourably.

This case is significant in South African contract law as it reaffirms the principle that 'agreements to agree' are void for vagueness and unenforceable. It clarifies the distinction between uncertainty and incompleteness in contract formation. The judgment limits the application of Southernport Developments, establishing that an arbitration clause will not automatically cure vagueness in an agreement where essential terms remain to be agreed upon. The case establishes that: (1) an arbitration clause does not survive the termination of an agreement by effluxion of time; (2) an arbitrator cannot be required to fill in blank terms that the parties themselves have not agreed upon; (3) general arbitration clauses dealing with disputes about interpretation and implementation of existing contracts do not constitute deadlock-breaking mechanisms for determining essential terms of prospective contracts. The judgment reinforces the court's unwillingness to make contracts for parties or supplement agreements merely because it might be reasonable to do so. It also reiterates the principle that a party cannot approbate and reprobate by relying on a contractual term for one purpose while seeking to escape it for another.