Is an ‘option to renew a lease’ binding and valid, and therefore enforceable by an order of Court?

An option to renew a lease allows the tenant to continue occupying the premises after the initial term of the lease has expired.  This option is only available if an ‘option to renew’ clause is contained in the initial lease agreement. These clauses typically contain a time period for the tenant to exercise its option to renew and the manner in which that option must be exercised. Exercising the option to renew has the effect of a new lease agreement being entered into for a further period.  

The question arises whether the clause in the lease relating to the option to renew is valid and binding?  Firstly, in order for the option clause to be a valid option it must contain all of the essential elements of a valid contract of lease which are:

-          a description of the parties to the agreement;

-          a description of the thing to be let;

-          temporary use and enjoyment of the thing; and

-          the rental.

The first essential element is that the parties to the lease agreement must be properly described. The reader must be able to tell who is the lessor and who is the lessee. In this regard, an option to renew only exists between the parties to the initial lease agreement. It is not open to a third party to exercise the option to renew.

The next essential element is that the parties must agree on what particular property or thing is going to be let.  The contract of letting and hiring must confer on the lessee the power to enjoy the object that is to be let. An option to renew typically allows the lessee to continue letting the object of the initial lease agreement.

Thirdly, in the contract of lease the lessor enjoys temporary use of the property or thing.  The duration of the lease may be indefinite and it may also be expressed to be at the will of either the lessor or lessee.

The last essential element which is the rental is the most important and most litigated aspect in these types of contracts.  The lessee must undertake in the contract to pay rent and such rent must be specified. The amount payable must be certain. 

The parties may also agree to a method of how rent is going to be determined for the renewal period or that a third party can determine the rent. In this regard, the amount of the rental must be ascertainable by reference to some objective criteria.

If the agreement states that the rent in respect of the renewal will be the fair market rental or that rent in respect of the renewal period is to be renegotiated, it will not be regarded as fixed or ascertainable by reference to some objective criteria – rendering it invalid and therefore not binding. If the wording implies some uncertain and potentially arbitrary measure still to be fixed or which may lead to a difference in opinion, the courts will regard it as unenforceable. It is, therefore, crucial that the amount for the rental in respect of the renewal period also be certain. Our Courts have consistently held that an option to renew a lease upon terms to be agreed, is invalid and unenforceable.

In conclusion, in order for an option to renew to be binding and enforceable, all of the essential terms must be agreed upon and must be certain.  

 

 

By: Thobile Msane (Candidate Attorney)

  • Added 09 May 2012

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