Legal implications of overlooking lease renewal clauses - ConCourt ruling

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A lease renewal clause will usually require the tenant to furnish the landlord with written notification of the tenant’s intention to renew the lease for an additional period as contemplated in the lease agreement and will require that the tenant furnish such notification within a specified period.

In the case of Beadica 231 CC and Others v Trustees, Oregon Trust and Others 2020 (CC), the Constitutional Court had occasion to pronounce on the validity and enforcement of a renewal clause in a commercial lease concerning franchise agreements concluded with four close corporations. In terms of the franchise agreements, the close corporations were required to operate the businesses from an approved premises, which were subject to substantially identical lease agreements, which commenced on 1 August 2011.

In terms of the lease agreements, each lease would terminate on 31 July 2016 (that is, after a period of five years). However, the lease agreements provided the close corporations with an option to renew their leases for a further five-year period and stipulated that the lessees give the lessor written notice of renewal at least six months prior to the termination date (that is, on or before 31 January 2016).

The close corporations failed to give written notice of renewal by 31 January 2016, and the lessor demanded that they vacate the leased premises at the end of the lease.

The close corporations contended that the strict enforcement of the renewal clauses would be contrary to public policy.

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On appeal to the Constitutional Court, the majority of the Court held that public policy had been profoundly impacted by the Constitution, and that a careful balancing exercise is required to determine whether a contractual term, or its enforcement, would be contrary to public policy.

The Court held that, in general, public policy requires that contracting parties honour obligations that have been freely and voluntarily undertaken; however this must be balanced with a wide range of constitutional values. It also recognised the court’s power to refuse to enforce a contractual term in worthy cases, and again balanced against constitutional rights and values.

The Court held that a party seeking to avoid enforcement of a contractual term is required to demonstrate good reason for failing to comply with the term. It was noted that although this was not the only consideration, it was a critical one and the absence of an explanation would in most cases be the end of the enquiry.

In this case, the explanation provided by the four close corporation lessees was that its members were not sophisticated businesspeople and were not fully apprised on their rights and obligations in terms of the lease agreements.

The Court found, among other things, that the termination and renewal clauses were simple, clear and easy to understand, and that an ordinary person could reasonably be expected to understand them. The inference drawn was that the close corporations neglected to comply with the renewal clause in circumstances where they could have complied with them.

The Court ultimately found that the close corporations had failed to discharge the onus of demonstrating that the enforcement of the contractual terms was contrary to public policy.