Rental Increase: Agreeing to an Agreement to Agree? Rather not.

With Easter having come and gone, the world’s most beloved rabbit has since hopped off to find a warm and comfortable spot to settle down for Winter. Unfortunately for the rest of us, our tasks aren’t confined to a single day in the year. Whilst digging deeper into the duvet may be the preferred choice for most, the combined demands of clients, kids and creditors ensures that hibernation is not an option. An added curse of Winter can be found in the form of Eskom. If you are in the fortunate position of being unaffected by load-shedding, you find yourself paying through the nose for every shred of heat that you can scrounge. And so it is, in a roundabout kind of way, that you may find yourself seeking warmer premises to rent for your home or office. Preferably with large North-facing windows so that the Sun may warm your frost-bitten self, without having to resort to the electric heater.

As anyone who has ever moved knows, moving, whether it’s home or office, is not something to look forward to. So it’s probably a good idea to confirm whether your lease agreement gives you the option to renew the lease when the rental period comes to an end, thereby saving you the hassle of moving again if it transpires that you rather like the place. Most landlords are amenable to this: it’s an equally laborious task for them to find a new tenant should you decide to move. But this raises a vexed question: if the lessee exercises their option to renew the leasing contract, what will the rental payment be?

Many lease agreements have an automatic annual increase built in: ten percent generally seems to be a favoured amount. A nice, round, easy-to-calculate number that comfortably safe-guards the landlord against rates and levy increases, bond rate increases and the like. And it’s in keeping with the industry norm, as the landlord may declare. But it’s also well above inflation, the lessee is wont to argue. Not to mention that with the sorry state of the property market, there’s a good chance of choice rental stock being available at a good price when the lease terminates.

Soon both parties may concede the futility of arguing about an uncertain state of affairs in the future. To remedy the situation to both parties’ satisfaction, the lease agreement is drafted to provide that the lessee has the option to renew the lease, with the rental “to be negotiated and agreed at the time of renewal”. The lessee would, however, be well-cautioned to reconsider before accepting this provision in the agreement.

In a recent case the court was asked to decide on a matter in which the lessee was granted the option to renew, on a rental amount to be agreed. The lessee had entered into a written lease agreement with the former owner of a shopping centre, and had an option to renew the lease on it expiry, subject to agreement being reached on the rental. In due course, the landlord sold the centre to a new owner, who duly evicted the lessee when the lease expired. The lessee contended that the landlord first had to negotiate a new rental in good faith, and only if a fair rental couldn’t be agreed could the lessee be evicted. The court, however, agreed with the landlord’s argument – that the agreement to agree did not constitute a binding right of renewal.

In order to avoid uncertainty when the lease period expires, it is therefore preferable that the consequences of termination and expiry, and any right of renewal, are clear and unambiguous, without the need for further negotiation and agreement.

In Summary: The High Court has held that an option to renew a lease “on rental to be agreed” is unenforceable. So landlord and tenant alike are cautioned to read the Lease Agreement carefully, and take steps to avoid any agreement to agree. Especially if it pertains to a material term of the contract, such as the rental amount.

 

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.

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