Brief Summary

Arbitration — Interpretation of lease agreements — Dispute over the meaning of "fair market value" in lease agreements — Applicants, trustees of two trusts, sought a declaratory order regarding the interpretation of lease terms after a valuation dispute with Transnet — The lease specified that the rental for renewal periods would be determined based on the "fair market value of the LAND," which the trusts argued excluded improvements made to the land — Transnet contended that the arbitrator, as an expert valuer, should determine the valuation without legal interpretation — Court held that the arbitrator was intended to act as an expert, not as a legal arbitrator, and that the legal interpretation of the lease terms should be determined by the court, allowing for a proper resolution of the valuation dispute.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings took the form of an application for a declaratory order. The application arose from a dispute concerning the interpretation of renewal-rental provisions in two long-term notarial lease agreements and, specifically, the scope of an appointed valuer’s (described in the leases as an “arbitrator”) mandate when determining the “fair market rental” for the renewal period.

The applicants were three trustees acting in their representative capacities (N.O.) as trustees of two trusts, namely the Iliad Business Development Trust (IDB Trust) and the Commercial Projects Trust (CPD Trust). The first respondent was Nthebe Avhakholwi, the individual who had been appointed to determine the fair market rental under the contractual dispute-resolution mechanism. The second respondent was Transnet SOC Limited, the lessor under both leases. The third respondent was BP Southern Africa (Pty) Ltd, the entity operating fuel service stations on the properties as sub-lessee/occupier, cited but not participating in the litigation.

The procedural history, as relied upon by the court, was that the parties could not agree on the renewal rental and invoked the contractual mechanism requiring valuation by party-appointed valuers and, failing agreement, determination by an appointed “arbitrator” who had to be a registered valuer. A further dispute emerged about whether the meaning of “fair market rental for the LAND” was a question of law (to be determined legally) or a valuation question (to be determined by the appointed valuer). The trusts attempted, unsuccessfully, to have the appointed valuer refer the interpretive question to a legal expert. The trusts then approached the High Court for declaratory relief. The first respondent subsequently resigned her appointment, with the result that any further determination would require a new appointee if the matter reverted to the contractual process.

In general terms, the dispute concerned whether the renewal rental must be calculated by valuing the land in an unimproved state, or whether the valuation could include the value attributable to the improvements installed by the trusts for the operation of fuel stations.

Material Facts

Two long-term notarial leases were concluded between the trusts and Transnet in December 1993 and March 1994, each for a duration of 25 years and 120 days, and each containing identical renewal provisions permitting renewal for a further 20 years. It was common cause that when the leases were entered into, the land had no improvements and that the trusts, at their expense, developed the land and installed infrastructure enabling use as fuel service stations. It was also common cause that, upon termination, those improvements would adhere to the land and would not be recoverable by the trusts.

The leases were renewed in circumstances where the leases permitted renewal before the renewal rental was agreed or determined. Because of the ongoing dispute as to the renewal rental, the trusts occupied the properties rent-free pending determination of the renewal rental.

Each lease contained a mechanism for determining the renewal rental. The renewal rental was to be the “fair market rental for the LAND”, agreed by the parties, failing which it would be determined through a process involving party-appointed valuers and, if those valuers could not reach agreement, by a third party described in the lease as an “arbitrator” who had to be a registered valuer (with appointment to be made by the President of the Council of Valuers if necessary). The lease further provided that the arbitrator’s determination would be final and binding and not subject to review by a court (in the language of the clause quoted).

A dispute emerged about what the valuation base was meant to be, given the lease’s defined terms. The lease defined “LAND” as the area of land indicated on the plans. It defined “IMPROVEMENTS” as buildings, structures, and developments erected on the land by the lessee and any existing structures not demolished. It defined “PREMISES” as the land and improvements together.

The trusts’ position (supported by their expert) was that the fair market rental had to be determined with reference to the “LAND” in its unimproved state, excluding improvements. Transnet’s expert produced two valuations: one for the land alone and another for the land plus improvements. The court recorded that the experts’ valuations of the land alone were not far apart, but that including improvements materially increased the valuation (nearly doubling in one case and substantially increasing it in the other).

The court treated as central the parties’ dispute about whether determining what “fair market rental for the LAND” means (given the defined terms) was a matter of legal interpretation that could not properly be left to a non-lawyer valuer, or whether it was instead a matter of valuation methodology for the appointed valuer to decide.

Legal Issues

The central legal questions the court was required to determine were whether a dispute existed that was suitable for declaratory relief and, substantively, whether the lease agreements required that the appointed valuer (referred to as an “arbitrator”) determine the renewal rental by valuing only the “LAND” as defined, namely in an unimproved state without regard to improvements.

Embedded in this was a further question concerning the capacity in which the appointed decision-maker acts under the lease: whether the parties intended that person to function as an expert valuer (exercising professional judgment and skill, without deciding legal issues), or as an arbitrator in the juridical sense (capable of deciding disputes including issues of law).

The dispute therefore concerned primarily a question of law (interpretation of defined contractual terms and the scope of the decision-maker’s mandate), with consequential issues of application of law to fact (what valuation base follows from the proper interpretation). It did not require the court to determine the factual market rental itself, but to determine the interpretive framework within which valuation must occur.

Court’s Reasoning

The court approached the dispute by focusing on what the parties’ contractual scheme revealed about the intended role of the person appointed to determine the market rental. Although the lease used the term “arbitrator”, the court considered it “clear” that, by requiring the appointee to be a person with valuation expertise (a registered valuer) rather than a lawyer, the parties intended the appointee to act as an expert, not as an arbitrator performing a quasi-judicial function. The court treated the parties’ later agreement that Arbitration Act procedures would apply as insufficient to change that essential characterisation of the function contemplated by the lease.

In support of this distinction, the court relied on the principle stated in Perdikis v Jamieson 2002 (6) SA 356 (W), namely that a valuer acting as an expert has a function distinct from an arbitrator: the valuer’s task is to decide questions by the exercise of judgment and skill without a judicial inquiry, and the valuer does not exercise a quasi-judicial function. On this approach, the court reasoned that the appointed valuer was not expected to decide legal questions such as the interpretive effect of carefully defined contractual terms.

The court then characterised the meaning of “fair market rental for the LAND” (given the contract’s express definitions of “LAND”, “IMPROVEMENTS”, and “PREMISES”) as “undoubtedly” a question of law. The court considered it artificial, and contrary to the structure of the lease, to suggest that those definitions could yield anything other than a legal interpretation. Once the interpretive question is decided, what remains is an expert valuation exercise—determining the fair market rental of the land, as legally defined, which in turn engages valuation methodology and valuation skill.

The court rejected Transnet’s contention that the meaning of “fair market value” (and whether “land” includes improvements) should be treated as a purely economic or commercial question for valuation methodology. While acknowledging Transnet’s argument that “land” may in some contexts be defined to include improvements, the court held that, in this lease, the parties had selected and defined their terms, and that chosen definition must apply.

Transnet also relied on Telcordia Technologies Inc v Telkom SA Ltd 2007 (3) SA 266 (SCA) for the proposition that an arbitrator can decide a point of law. The court distinguished Telcordia on the basis that it concerned an arbitrator who was a barrister, and whose mandate included deciding the application of law. This was not comparable to the present contractual arrangement, where the appointee was an industry expert (valuer) and not a lawyer mandated to decide legal questions.

Having determined that the interpretive dispute was appropriately for judicial determination, the court considered whether declaratory relief was competent. It applied the established two-stage approach: first, the applicant must show an interest in an existing, future, or contingent right or obligation; second, the court has a discretion whether to grant the order. Referring to the requirement of a “real and pertinent dispute”, the court found that a genuine dispute existed between the parties and that resolving it would likely avoid protracted litigation and enable a speedier resolution, which would be in the interests of both parties. On that basis, it exercised its discretion to grant declaratory relief.

Outcome and Relief

The court granted declaratory relief confirming both the existence of an interpretive dispute and the proper interpretation of the relevant renewal-rental provisions. It declared that the lease agreements require that the appointed valuer (described as an arbitrator in the lease) determine the renewal rental by determining the fair market rental for the “LAND” as defined, namely in its unimproved state and without regard to improvements effected to the land.

The court ordered that Transnet SOC Limited (the second respondent) pay the costs of the application.

Cases Cited

Perdikis v Jamieson 2002 (6) SA 356 (W)

Telcordia Technologies Inc v Telkom SA Ltd 2007 (3) SA 266 (SCA)

Cordiant Trading CC v Daimler Chrysler Financial Services (Pty) Ltd 2005 (6) SA 205 (SCA)

Competition Commission v Hosken Consolidated Investments Ltd and Another 2019 (3) SA 1 (CC)

Legislation Cited

Arbitration Act 42 of 1965

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, despite the lease using the term “arbitrator”, the parties intended the appointed decision-maker to act as an expert valuer rather than an arbitrator determining legal disputes. As a result, the interpretation of the lease’s defined terms—specifically whether “fair market rental for the LAND” excludes improvements—was a legal question suitable for determination by the court via declaratory relief.

On the proper interpretation of the lease agreements read with their definitions, the court held that the renewal rental must be determined by valuing the LAND in its unimproved state, excluding the value attributable to improvements effected by the trusts. Transnet was ordered to pay the costs.

LEGAL PRINCIPLES

The judgment applied the principle that an expert determination (such as a valuation) is distinct from arbitration in the juridical sense. An expert valuer’s role is to apply specialist skill and judgment to questions submitted, without conducting a quasi-judicial inquiry and without necessarily being empowered to determine legal issues, even where the contract uses the label “arbitrator”.

The judgment further applied the principle that a declaratory order is competent where the applicant demonstrates an interest in an existing, future, or contingent right or obligation, and where a court, in the exercise of its discretion, considers it appropriate to grant declaratory relief in light of all relevant circumstances, including the existence of a real and pertinent dispute and whether declaratory relief may avoid protracted litigation.

Finally, the judgment applied the principle that where parties have expressly defined contractual terms, those definitions govern the interpretation and application of the agreement in that contractual setting, notwithstanding that similar words may bear different meanings in other legal contexts.

Van Rhyn N.O and Others v Avhakholwi and Others (17887/2021) [2022] ZAGPJHC 279 (5 July 2022)