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[2020] ZASCA 21
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Hugo, Kirsten & Kirsten (Pty) Ltd v Collotype Labels (Pty) Ltd (323/2019) [2020] ZASCA 21 (25 March 2020)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
In
the matter between:
Not
Reportable
Case
No: 323/2019
HUGO, KIRSTEN &
KIRSTEN (PTY)
LTD
APPELLANT
and
COLLOTYPE
LABELS (PTY)
LTD
RESPONDENT
Neutral
citation:
Hugo, Kirsten & Kirsten (Pty) Ltd v Collotype
Labels (Pty) Ltd
(323/2019)
[2020] ZASCA 21
(25 March 2020)
Coram
:
CACHALIA, ZONDI, PLASKET, DLODLO and MBATHA JJA
Heard
:
11 March 2020
Delivered:
25 March 2020
Summary:
Lease agreement – agreement contained clause providing for
negotiation of new lease on expiry of current lease – clause
void – effect of invalid clause on remainder of lease.
ORDER
On
appeal from:
Western Cape Division of the High Court, Cape Town
(Langa AJ sitting as court of first instance):
1.
The appeal succeeds with costs, including the costs of two
counsel.
2.
The order of the court below is set aside and replaced with
the following order.
‘
(a)
The questions formulated as the separated issues in terms of rule
33(4) of the Uniform Rules of Court are answered as follows:
(i) clause 3 of the lease
agreement is void and unenforceable;
(ii) the invalidity of
clause 3 does not have the effect of invalidating the lease
agreement.
(b)
The defendant is directed to pay the plaintiff’s costs.’
JUDGMENT
Plasket
JA (Cachalia, Zondi, Dlodlo and Mbatha JJA concurring)
[1]
This is an appeal against an order of Langa AJ, in the Western Cape
Division of the High Court, Cape Town, dismissing a claim,
brought by
the appellant, Hugo, Kirsten & Kirsten (Pty) (HKK) against the
respondent, Collotype Labels (Pty) Ltd (Collotype),
for damages
arising from the breach of a lease agreement to which both were
parties. Langa AJ refused leave to appeal but that
was granted on
petition by this court.
Background
[2]
On 27 September 2004, the parties concluded a written agreement of
lease in terms of which HKK let premises at 2 Jan van Riebeeck
Avenue, Paarl (the premises) to Collotype. In terms of clause 2, the
lease was to endure until 1 October 2014 but, in terms of
clause 3,
Collotype was granted a qualified opportunity to negotiate a new
lease.
[3]
Clauses 2 and 3 of the lease provide:
‘
2 The Lease shall
be for a period of 10 years and 3 months, commencing on 1 October
2004 and terminating on 31 December 2014.
3.
The LESSEE has a first option to Lease the PREMISES for a
further period of 10 years, subject to the following:
3.1
The LESSEE fulfilled his obligations in terms of this
contract;
3.2
That the LESSEE renew his Lease by giving written notice to
the LESSOR of his intention to do so 6 (SIX) months in advance.
3.3
A new rental Agreement, acceptable to the LESSOR be
negotiated.’
[4]
Having been in occupation of the premises since 1 October 2004 in
terms of clause 2 of the lease, on 31 March 2012 – some
seven
and a half years later – Collotype vacated the premises. It has
not paid any rental since that date.
[5]
HKK alleged in its particulars of claim that Collotype’s
abandonment of the premises constituted a repudiation of the
agreement. HKK terminated the lease and claimed damages arising from
Collotype’s breach. Collotype pleaded, inter alia, that
the
lease was invalid because clause 3 was a void option to renew that
could not be severed from the rest of the agreement.
[6]
It was agreed by the parties, and ordered by the court below, that
the only issues to be dealt with in the trial were whether
clause 3
was void and, if so, whether it had the effect of rendering the
entire agreement unenforceable.
[7]
Collotype accepted that it had the duty to begin. It closed its case
without calling any witnesses. HKK called one witness,
whose evidence
is thus uncontroverted. That witness, Mr Denver Kirsten, was a
director of both HKK and Collotype at the time the
lease was
concluded, and was able to testify as to the background and context
relevant to the agreement. I shall deal with his
evidence below.
[8]
In the court below, Langa AJ took the view that clause 3 created an
option and that, because the exercise of the option was
‘dependent
on the acceptance of the renewal by the lessor’, it was void
for vagueness. He found too that, clause 3
being an option, was an
essential term of the lease and that, in the absence of clause 3,
Collotype would not have concluded the
lease at all. For these
reasons he concluded that clause 3 was not severable from the
remainder of the lease, with the result that
‘the whole lease
agreement is void as a consequence of the void renewal option
clause’.
The issues
[9]
It is necessary to interpret clause 3 within the context of the lease
as a whole in order to determine whether the findings
and conclusions
of the court below are correct. The starting point, as always, is the
language that the parties used to express
their common intention. But
first, it is necessary to sketch the background to the conclusion of
the lease. That background is
to be found in the evidence of Mr
Kirsten. He signed the lease on behalf of HKK, while Mr Thys Hugo,
who, like Mr Kirsten, was
also a director of both companies, signed
it on behalf of Collotype.
[10]
Mr Kirsten testified that originally Collotype leased the premises
from Meyer Middeldorp Beleggings (MMB) in terms of a series
of
leases. The basis of its agreement with MMB was that it leased the
premises for a fixed period – two, three or four years
–
and prior to the expiry of the period concerned, negotiated with MMB
for a new lease. As a matter of course, Collotype
would give MMB
notice that it wished to negotiate a new lease, negotiations would
ensue and eventually a new lease would be concluded.
[11]
At some point, after proper disclosure by HKK to Collotype’s
Australian holding company, HKK purchased the premises and
let them,
in terms of the agreement with which this case is concerned, to
Collotype. The lease followed the earlier leases between
MMB and
Collotype in all respects but two; and clause 3 was taken verbatim
from those earlier leases. The only differences were
that the
duration of the lease was ten years and three months, and the
possible renewal period was a longer period, namely ten
years.
[12]
It had been alleged by Collotype that the ‘option’ in
clause 3 ‘was clearly a material term’ and in
its
absence, Collotype would not have concluded the lease. It was stated
that without clause 3, ‘it would not have been possible
for
[Collotype] to have achieved the object of the lease, ie to ensure a
tenancy of no less than 20 years for [Collotype] at its
election’.
[13]
This aspect was dealt with by Kirsten. He testified that HKK wanted a
lease of ten years to enable it to finance the purchase
of the
premises. In regard to Collotype’s attitude to a ten year
lease, he said:
‘
It was a very
difficult one to sell to be honest with you M’Lord. Ten years
was extended – this is an Australian company
that has just
bought into a South African company and we asked them for ten years.
It was one of the first acquisitions they had
done overseas and they
were quite risk averse to be honest with you but the one thing that
got us through for the ten year period
was the relationship that they
had with my chairman, incredibly transparent and there was a huge
element of trust. And they agreed
to the ten years, M’Lord.’
[14]
His evidence concerning clause 3 had been that, first, it had worked
well in relation to the lease with MMB in the past and,
secondly,
that it allowed for both parties to review their respective positions
and decide on how to proceed into the future. In
this there would
have been no difference in how Collotype dealt with MMB in the past.
[15]
When Mr Kirsten was asked what Collotype’s view would have been
if it had been told that a 20-year lease or ‘option
for the
further ten’ was not possible, he answered:
‘
Mr Loots, there is
no ways that Collotype would have taken a 20-year lease just
investing in the business. The fact, M’Lord,
that we got ten
years through was an intense board meeting in itself. That was a
challenge in itself. 20 years was certainly not
on the cards.
However, we were open to negotiation post ten years . . . ‘
[16]
I turn now to the lease. The use and enjoyment of the premises, a
commercial property, was granted to Collotype for ten years
in return
for rental, the amount of which was set out, year by year, in clause
4. For the rest, there is nothing out of the ordinary
in the
remaining clauses. They are typical of what one would expect of a
lease of this type.
[17]
That brings me to clause 3. It follows the clause in which the
duration of the lease was stipulated. Clause 3 speaks of Collotype
being granted a ‘first option’ to lease the premises ‘for
a further period of 10 years’, but that ‘right’
is
made subject to three conditions.
[18]
Those conditions are that Collotype fulfilled its obligations in
terms of the lease; that if it wished to ‘renew’
the
lease, it was required to give HKK written notice of that fact six
months before the expiry of the lease; and that, then, a
‘new
rental Agreement acceptable to [HKK] be negotiated’.
[19]
When clause
3 is considered in context and holistically, it is clear that what
the parties intended was not an option – a
binding agreement
subsidiary to the lease agreement to keep open an offer to renew the
lease
[1]
– despite the use
of the word ‘option’ in the clause. Instead, they put in
place a mechanism to regulate the
negotiation of a new lease shortly
before the expiry of the current lease, if that is what Collotype
wished to do. In this sense,
clause 3 is akin to a right of
pre-emption: it purported to give Collotype a ‘right’ to
a preference over other potential
lessees.
[2]
[20]
The purported effect of clause 3 was thus that if Collotype wished to
continue in occupation of the premises after the expiry
of ten years,
and it gave notice timeously, HKK could not let the premises to
anyone else unless the negotiations for a new lease
had come to
naught.
[21]
Clause 3.3
referred to a new lease agreement being negotiated that was
acceptable to HKK. Because it contemplated no more than an
agreement
to perhaps agree in the future, the cases are clear on its effect: in
Premier,
Free State and Others v Firechem Free State (Pty) Ltd
,
[3]
Schutz JA stated that ‘[a]n agreement that the parties will
negotiate to conclude another agreement is not enforceable, because
of the absolute discretion vested in the parties to agree or
disagree’. (The position is different if the parties include
a
deadlock-breaking mechanism in their agreement to agree.
[4]
)
[22]
The unenforceability of clause 3 does not end the matter. I turn now
to the effect of its invalidity on the lease. In my view,
when the
lease agreement is interpreted in context and holistically, it is
clear that clause 3 was not a material term. I say this
because the
principal purpose of the agreement was to establish a lease that was
to endure for ten years and three months. Clause
3 was incidental to
that purpose. It was a mere mechanism for possible negotiations in
the future to conclude a new lease.
[23]
What is
more, that is how Collotype had always understood and applied the
exact predecessors of clause 3 in its earlier leases with
MMB. As
Leach JA held in
Unica
Iron and Steel (Pty) Ltd and Another v Mirchandani
,
[5]
‘the way in which the parties to a contract carried out their
agreement may be considered as part of the contextual setting
to
ascertain the meaning of a disputed term . . . because the parties'
subsequent conduct “may be probative of their common
intention
at the time they made the contract”’. In other words,
Collotype never considered clause 3 to be an option
that was an
essential part of the agreement. What is more, given the plain
meaning of clause 2, and Mr Kirsten’s evidence,
Collotype never
intended to contract for a 20-year lease. Put differently, the
parties would have concluded the lease for a ten
year period even in
the face of the invalidity of clause 3. The unenforceability of
clause 3 does, therefore, not result in the
invalidity of the entire
lease.
[24]
In the light of this finding, there is no need to formally sever
clause 3 from the rest of the lease. It is not an option upon
which
the validity of the rest of the lease is reliant.
Conclusion
[25]
The appeal must succeed. The order of the court below must be set
aside and the two questions that were formulated as the separated
issues in terms of rule 33(4) must be answered in the light of the
findings made above.
[26]
I make the following order.
1. The appeal succeeds
with costs, including the costs of two counsel.
2. The order of the court
below is set aside and replaced with the following order.
‘
(a)
The questions formulated as the separated issues in terms of rule
33(4) of the Uniform Rules of Court are answered as follows:
(i) clause 3 of the lease
agreement is void and unenforceable;
(ii) the invalidity of
clause 3 does not have the effect of invalidating the lease
agreement.
(b)
The defendant is directed to pay the plaintiff’s costs.’
________________
C Plasket
Judge of Appeal
APPEARANCES
For
the appellant: L S Kuschke SC and J H Loots
Instructed
by: Norton Rose Fullbright South Africa Inc, Cape Town
Phatshoane
Henney Attorneys, Bloemfontein
For
the respondent: R van Riet SC and J R Whitaker
Instructed
by: Van der Spuy and Partners, Paarl Symington & De Kok,
Bloemfontein
[1]
Du Plessis NO and Another v Goldco Motor & Cycle Supplies (Pty)
Ltd
2009 (6) SA 617
(SCA) para 15; G B Bradfield Christie’s
Law of Contract in South Africa (7 ed) (2016) at 66.
[2]
Van Pletzen v Henning
1913 AD 82
at 95. Innes J said of a right of
pre-emption in a deferred sale agreement: ‘The grant of a
right of pre-emption does not
compel the grantor to sell: it only
compels him to give the grantee the preference in case he sells at
all. And consequently
it too prevents him from selling to third
parties during the existence of the right.’ See too Owsianick
v African Consolidated
Theatres (Pty) Ltd
1967 (3) SA 310
(A) at
316C-E in which Ogilvie-Thompson JA compared rights of pre-emption
and options. He said: ‘A right of pre-emption
is well known in
our law . . . and it is to be distinguished from an option to
purchase. Upon exercise of the latter by the holder
of the option,
the granter of the option is obliged to sell. The granter of a right
of pre-emption cannot be compelled to sell
the subject of the right.
Should he, however, decide to do so, he is obliged, before executing
his decision to sell. to offer
the property to the grantee of the
right of pre-emption upon the terms reflected in the contract
creating that right.’
[3]
Premier, Free State and Others v Firechem Free State (Pty) Ltd
2000
(4) SA 413
(SCA) para 35.
[4]
Southernport Developments (Pty) Ltd v Transnet Ltd
2005 (2) SA 202
(SCA) paras 11-16; Roazer CC v The Falls Supermarket CC
2018 (3) SA
76
(SCA) para 13.
[5]
Unica Iron and Steel (Pty) Ltd and Another v Mirchandani
2016 (2) SA
307
(SCA) para 21.