Mlungisi Ndodana Sontsele v 140 Main Street Properties CC and Another

A notarial lease agreement was concluded on 29 June 2004 between Mr Sontsele (lessor) as registered owner of Erf 83, Flagstaff, and 140 Main Street Properties CC (lessee). The lease commenced on 1 July 2004 and was due to terminate on 31 May 2014. The lessee had an option to renew for two further periods of 9 years and 11 months each, exercisable by giving at least six months' written notice. The renewal was subject to the same terms and conditions, save that rental would be determined by agreement based on prevailing market rentals. If parties could not agree on rental, it would be determined by a suitably qualified person appointed by the President of the Cape of Good Hope Estate Agents Board. On 8 August 2013, the lessee exercised its option to renew but did not propose a rental amount. The parties failed to reach agreement on rental before the expiry of the initial lease period on 31 May 2014. The lessee remained in occupation, paying what it unilaterally determined to be market-related rent (R14,000 per month from June 2014, increased to R15,120 from June 2015). The lessor rejected these amounts. When negotiations failed, the lessor's attorney on 31 July 2015 contended that the agreement had expired on 31 May 2014 and gave notice terminating the month-to-month tenancy. The lessee's attorney on 6 August 2015 for the first time suggested referral to a third party in terms of clause 2.2.3.

• Whether a lease agreement with an option to renew was successfully renewed when the parties failed to agree on rental before the expiry of the initial lease period
• Whether the failure to invoke the clause providing for rental to be fixed by a third party before expiry of the lease prevented renewal
• Whether such a clause could be invoked after the expiry of the initial lease period
• What are the essential requirements for a valid lease agreement to come into existence

The appeal was upheld with costs, including those of two counsel. The order of the court below was set aside and replaced with: (i) The application succeeds with costs; (ii) It is declared that the notarial agreement of lease entered into between the parties on 29 June 2004 terminated by effluxion of time on 31 May 2014; (iii) The first respondent is ordered to vacate the property described as Erf 83, Flagstaff within two (2) months from the date of the granting of the order.

The binding legal principles established are: (1) Agreement on rental is an essential element of a lease contract, and until such agreement has been reached, no lease is concluded; (2) The exercise of an option to renew by giving notice is merely notice of a desire to negotiate and does not, without more, bring a contract of lease into existence; (3) Where a lease agreement provides for rental to be determined by a third party in the event parties cannot agree, that mechanism must be invoked before the expiry of the initial lease period; (4) Clauses providing for third-party determination of terms do not survive the termination of the lease agreement and cannot be invoked after the lease has terminated by effluxion of time; (5) The essentials of a contract of lease are that there must be an ascertained thing and a fixed rental at which the lessee is to have use and enjoyment of that thing.

The court noted that it was unnecessary to consider whether, properly construed, clause 2.2.3 (the third-party determination clause) was capable of creating legally enforceable obligations, given the conclusion that the clause could not be invoked after the agreement had terminated. The court also observed, citing Biloden Properties v Wilson, that some duty to act in good faith may be cast upon the lessor during renewal negotiations, but stated that the exact nature and extent of such duty, if it exists at all, are impossible to define, and it was not necessary to determine this in the present case.

This case clarifies important principles regarding lease renewal options in South African law. It establishes that an option to renew a lease does not automatically create a new lease merely by giving notice - all essential terms, particularly rental, must be agreed upon or determined before a new lease comes into existence. The judgment affirms that where a lease agreement provides a mechanism for third-party determination of rental in the event parties cannot agree, that mechanism must be invoked before the expiry of the initial lease period. Clauses providing for third-party determination do not survive the termination of the agreement and cannot be invoked after the lease has lapsed by effluxion of time. The case reinforces the principle that agreement on rental is an essential element of a lease contract, and provides important guidance on the interpretation and operation of renewal clauses in commercial leases.