c5 lease agreement

Principles ofPROPERTY MANAGEMENT

THE LEASE AGREEMENT! ! 90! ! CHAPTER 5

Principles ofPROPERTY

MANAGEMENT

edited byC E Cloete

SOUTH AFRICAN PROPERTY EDUCATION TRUST2001


© ! The South African Property Education Trust! POBox 78544! Sandton! 2146

All rights reserved No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information and retrieval system, without permission in writing from the South African Property Education Trust

Second Edition2001

Typeset in 11 pt Hoefler TextPrinted and bound by Business Print Centre, PretoriaISBN 0-9584470-1-2

Cover photograph by C E Cloete


SERIES PREFACEResulting from the need expressed by various professional bodies in the property in-dustry for the rationalisation and promotion of formal education courses in property, a National Property Education Committee was established in 1988. Membership of the Committee includes representatives of the following professional bodies:

South African Property Owners Association (SAPOA)Institute of Property Practitioners of South Africa (IPPSA)Institute of Estate Agents of South Africa (IEASA)Estate Agency Affairs Board (EAAB)South African Council for the Property Valuers Profession (SACPVP)South African Institute of Valuers (SAIV)

After investigation of the various present and future needs of the property industry and the existing courses which were being offered, it was recommended that course material should be developed on a co-ordinated basis, to be utilised by tertiary educa-tional institutions for formal training in property and to be financed by a Trust estab-lished for this purpose.

The South African Property Education Trust was established in April 1990. The object of the Trust is, inter alia,

"The establishment of a Special fund in the Republic for the sole purpose of receiving donations to be used exclusively(i) for the promotion of adult education or vocational training of persons who are concerned with the immovable property sector of the South African economy; and(ii) for the benefit of any University or Technikon or Co#ege for the furthering of the acquisition of knowledge pertaining to the immovable property sector of the South African economy".

This includes having books or other educational material prepared, as well the ration-alisation and/ or co-ordination and/ or dissemination of educational material.

This book is one of a number of volumes prepared on behalf of the National Property Education Committee and financed by the South African Property Education Trust.

The hope is expressed that the material will contribute to enhancing the professional-ism of practitioners in the property industry.

Prof C E CloeteDepartment of Construction Economics, University of PretoriaCHAIRMAN, NATIONAL PROPERTY EDUCATION COMMITTEE


PrefaceThe books Property Management Part One and Property Management Part Two were pub-lished in 1994 as four volumes in the National Property Education Series.

When the need for a second edition became apparent, the National Property Educa-tion Committee requested that the contents of the revised and expanded volumes be published in the following volumes, to facilitate ease of use and reference by students and practitioners alike:

Principles of Property ManagementPrinciples of Property MaintenanceRisk Management in PropertyFacilities ManagementManagement of Residential PropertiesManagement of Commercial and Industrial Properties

This resulted in the complete re-structuring and revision of the material in the original volumes, while at the same time the material was expanded by the inclusion of a num-ber of new chapters. Chapters in the present volume correspond as follows to chapters in the original volumes (no indication of an original chapter implies a new chapter):

Principles of Property ' ' Property Management' Property ManagementManagement' ' ' ' Part One' ' ' Part Two

Chapter 1The Role of Property Management ! Chapter 8

Chapter 2The Management/ Owner Relationship! Chapter 8

Chapter 3Financial Management ! ! ! ! ! ! Chapter 10

Chapter 4Operating Costs! ! ! ! ! ! ! Chapter 10

Chapter 5The Lease! ! ! ! ! ! ! ! Chapter 3

Chapter 6Energy and Water Management! ! ! ! ! Chapter 14

Chapter 7Management Structures! ! ! ! ! ! Chapter 11Chapter 8


Employee Relations

Chapter 9The Marketing of Management Services!! ! ! Chapter 12

Chapter 10Asset Management

In all cases the material was revised and expanded to reflect modern principles ofproperty management as practised in South Africa.

ACKNOWLEDGEMENTSWhere applicable, sources are acknowledged in the text but I should like to specifically acknowledge the contributions of the following persons: Joe Faller (Chapters 3 and 4), Arthur Schoeman (Chapter 5), Piero Farina (Chapter 8 and sections of Chapter 1) and Dean Keet (Chapter 10 and section 3.6). Brian Kirchmann, the Executive Director of SAPOA, has kindly given permission for the SAPOA Memorandum 0f Agreement of Lease to be reproduced in the text. The volume has also benefited from material prepared by Nigel Mandy for a MBL course at U NISA' s School for Business Leadership.


CONTENTS1 ! THE ROLE OF PROPERTY MANAGEMENT ! ! 1

1.1 Definitions1.2 Reasons for Property Management1.3 Properties Requiring Management 1.4 Functions of the Property Manager1. 5 The Management Plan1.6 Profile of the Property Manager1.7 Growth of Professionalism in Property Management

2 ! THE MANAGEMENT JOWNER RELATIONSHIP ! 292.1 Nature of the Relationship2.2 Selecting the Property Manager 2.3 Compensation2.4 The Management Contract2.5 Taking Over the Property

3 ! FINANCIAL MANAGEMENT ! ! ! ! 413.1 Budgets3.3 Cash Control 3.3 Authorization of Expenditure3.4 VAT3.5 Financial Reporting3.6 Use of Computers

4 ! OPERATING COSTS ! ! ! ! ! 754.1 The Need for Centralized Services4.2 Scope of Service Charges 4.3 Impact of Design and Service Costs on Rental Values4.4 Budgets and Estimates of Maintenance Costs4.5 Refurbishment4.6 Forward Planning4.7 Economy and Efficiency 4.8 Financial Control of Service Charges 4.9 Service Charge Component4.10 Apportionment of Service Charges


5 ! THE LEASE AGREEMENT !! ! ! ! 895.1 The Objective of a Lease Agreement5.2 The Nature of a Lease5.3 Specific Aspects of Leasing5.4 Value Added Tax / Operating Cost5.5 Stamp Duty

6 ! ENERGY AND WATER MANAGEMENT ! ! ! 1356.1 Introduction6.2 Design Criteria6.3 Electricity Rates and Charges6.4 Maximum Demand6.5 Power Factor Correction6. 6 Tariff Selection6.7 The Energy Management Programme6.8 The Energy Audit6.9 General Energy Saving Measures6. 10 Water Saving Measures

7 ! MANAGEMENT STRUCTURES ! ! ! ! 1737.1 Introduction7.2 ManagementStructures

8 ! EMPLOYEE RELATIONS ! ! ! ! ! 1838. 1 Principles of Employment8.2 Grievance Resolution8.3 Disciplinary Action (part I)8.4 Disciplinary Action (part II)8.5 Interests8.6 Training and Development

9 ! THE MARKETING OF MANAGEMENT SERVICES ! 2139.1 The Nature of Services9.2 The Marketing of Professional Management Services9.3 Creative Property Management

10 ! ASSET MANAGEMENT ! ! ! ! ! 23510.1 Introduction10.2 Processes10.3 Some Practical Examples10.4 Conclusion


CHAPTER 5

THE LEASE AGREEMENT

CONTENTS

LEARNING OBJECTIVES

5.1! THE OBJECTIVE OF A LEASE AGREEMENT

5.2! THE NATURE OF A LEASE! 5.2.1 ! Definition of a lease ! 5.2.2 ! The essentials of a lease ! 5.2.3 ! Terms of the lease

5.3! SPECIFIC ASPECTS OF LEASING! 5.3.1 ! Writing, "long" and "short term" leases! 5.3.2 ! Rental! 5.3.3 ! Property defined! 5.3.4 ! Duration! 5.3.5 ! Options! 5.3.6! Right of first refusal! 5.3.7 ! Huur gaat voor koop! 5.3.8 ! Subleasing, assignment and cession! 5.3.9 ! Compensation for improvements! 5.3.10 ! Landlord's hypothec! 5.3.11 ! Cancellation! 5.3.12 ! Termination

5.4! VALUE ADDED TAX/OPERATING COST

5.5! STAMP DUTY


APPENDIX 5.1 ! SAPOA'S MEMORANDUM OF AGREEMENT ! ! ! OF LEASE

QUESTIONS FOR SELF-EVALUATION

REFERENCES


LEARNING OBJECTIVES

The objective of this chapter is to familiarize the student with the nature and implications of a lease.

After completion of the chapter the student should be able to: (a) ! explain the objective and nature of a lease; (b) ! discuss the implications of specific aspects of leasing; and (c) ! explain the implications of VAT and stamp duty on leases.

The objective of this chapter is to familiarize the student with the nature and implications of a lease.

After completion of the chapter the student should be able to: (a) ! explain the objective and nature of a lease; (b) ! discuss the implications of specific aspects of leasing; and (c) ! explain the implications of VAT and stamp duty on leases.

5.1 ! THE OBJECTIVE OF A LEASE AGREEMENT

The culmination of marketing activity is a written agreement between tenant and owner. By definition, a lease is a contract given by one person (the land-lord or lessor) to another (the tenant or lessee) for use or possession of real property for a specified time and in exchange for fixed payments. This con-tract is usually written and binding in the legal sense with respect to the com-mitments given by the signatories. The major objective for the drawing of a lease agreement can be described as protection which encompasses the land-lord's desire to assure occupancy and income for the period which it covers and, therefore, preventing any loss in income due to sudden vacancy. From the point of view of the tenant, the lease objective would be that security is pro-vided for the tenant to have possession of the premises let for the length of its term. Theoretically, without a lease, tenants can be evicted at the whim of a landlord and, therefore, cannot feel secure in the possession of their premises.

As leases are designed primarily to eliminate misunderstanding between owner and tenant, the lease provisions must be clearly understood by both parties. In this regard, the professional manager should not adopt a lease form simply because it is popular, but should use a form that is reasonable, standardised and suitable for all tenants. Appendix 5.1 contains the SAPOA Memorandum of Agreement of Lease, which is generally accepted by the property industry as


being suitable for use in most cases. It is important to note that the profes-sional manager interested in establishing goodwill, does not use a lease form from which informed people will remove basic clauses and which uninformed people will sign as a matter of faith. A proper lease form is suitable to both informed and uninformed parties and its contents upheld. When properly prepared and presented as a means of protecting the interests of tenants, a lease has excellent marketing value.

5.2! THE NATURE OF A LEASE

5.2.1 Definition of a lease

"A contract of letting and hiring [or lease] is:‑' a reciprocal agreement between one party [the lessor] and another [the lessee]; in

terms of which the lessor binds himself to give the lessee the temporary use and enjoyment of a thing, who#y or in part;

‑' in return for the payment of monetary remuneration [rent] by the lessee."! [LAWSA Vol. 14, paragraph 136 at page 138].

5.2.2 The essentials of a lease

The essentials of a lease are consequently:

• ! an undertaking by the lessor to deliver the property to the lessee;• ! an agreement between the lessor and lessee that the lessee will have

the temporary use and enjoyment of the property; and• ! an undertaking by the lessee to pay rental.

5.3.3 Terms of the lease

In the law of contract, and consequently the law of lease there are three types of "terms". Or as they are sometimes incorrectly described in leases as the "terms and conditions".

These are:

(a)! the essentialia ‑ these are the terms without which an agreement would not be a valid lease. As was referred to above, the three aspects are:

! -! an undertaking to deliver the property;


! -! agreement that the lessee will have temporary use of the property; and

! -! an undertaking by the lessee to pay rent.

! These terms are the essentialia of a lease.

(b) ! the naturalia ‑ these are the things that follow automatically unless the parties contract otherwise. For example a naturalia of a lease is that the lessee can sublet the premises. This is normally restricted by way of agreement; and

(c) ! the incidentalia or accidentialia ‑ which are terms added by the parties. For example, an agreement that the tenant pay additional rental by way of a percentage of his turnover. Or an agreement by which the landlord cannot cancel the lease until he has given the ten-ant 20 days notice to remedy the breach.

5.3! SPECIFIC ASPECTS OF LEASING

5.3.1 Writing, "long" and "short term" leases

A lease does not have to be in writing. This is in terms of the Formalities in respect of Leases of Land Act No. 18 of 1969.However, that Act provides that where a lease is entered into for more than 10 years it is not valid against third parties unless it is in writing and registered against the title deeds of the leased land.

Now what does that mean? I, a tenant, enter into a lease with you, the land-lord, for 15 years. I do not register the lease against the title deed of the land. You sell the land to a third party, and he is unaware of my lease: he does not have to respect my lease and can eject me immediately. If however the new owner is aware of the lease, he is bound in respect of the tenant's rights.

5.3.2 Rental

For a lease to be enforceable, the rental must be determined or determinable. The determination must not be under the absolute control of the landlord or the tenant.


There have been a number of reported cases on this question, particularly in relation to operating costs. The first case which literally set the cat amongst the pigeons (the cat being the tenant and the pigeon being the landlord) was the case of Kriel v Hochstetter House [Edms] Bpk 1988 (1) SA 220 (T).

In this case certain operating costs were determinable in the discretion of the landlord. The court held that since the landlord had an unfettered power to determine a portion of the rental, the lease was not valid.

Since then a number of cases have been reported, the most notable being:

- ! Proud Investments (Pty) Ltd v Lanchem International (Pty) Ltd 1991 (3) SA 738 (A),

-! Genac Properties JHB (Pty) Ltd v NBC Administrators CC (previously NBC Administrators (Pty) Ltd) 1992 (1) SA 566 (A), and

-! Benlou Properties (Pty) Ltd v Vector Graphics (Pty) Ltd 1993 (1) SA 169 (A).

(a) # The "Proud" case

What is important about the Proud case is the three findings of the court, namely:

(i) ! that the court assumed without deciding the issue, that the operating costs amounted to rental. As a consequence, the legal principles re-garding the fixing and determination of rental applied;

(ii)! where a tenant had to pay "levies of whatsoever nature", the court held that this was not void for vagueness. The levies were determined by a public body or local authority. They could be easily ascertained and consisted of fixed amounts of money;

(iii)! in regard to the further operating clauses, being reasonable wages, rea-sonable costs of maintaining service lifts and reasonable costs of main-tenance of water reticulation, it was held that these clauses had to be read in conjunction with clause 9.2. That clause provided that if there was a dispute between the landlord and tenant concerning the reason-ableness of the operating costs, the matter had to be determined by the landlord's auditors.


In other words, the final determination was taken away from either landlord or tenant. The mere fact that each cost item was qualified by the word "reasonable" did not brand them as reasonable rental. As stated, clause 9.2 provided for an objective determination of reason-ableness of any operating costs by a third party i.e. the landlord's audi-tors.

(b) # The "Genac" case

In the Genac case the tenant had to pay a specified part of certain expenses incurred by the Landlord which were termed "maintenance and running ex-penses". These expenses were all termed as being "the aggregate of the land-lord's actual and reasonable maintenance and running expenses in respect of the property of the building".

The important aspect of this case is that using the word "reasonable" did not create uncertainty. The expenses could be determined from the landlord's fi-nancial records.

What is disturbing is that the court held that whether they were reasonable was also capable of objective ascertainment. In this regard one must assume that the reasonableness or otherwise would be determined by a court of law. Landlords do not have time, when tenants dispute charges relating to operat-ing costs, to refer the matter to court every time to determine whether the court finds the costs reasonable or not!

It is suggested that the procedure in the Proud case be followed i.e. that if there is a dispute between the landlord and the tenant concerning the reason-ableness or extent or nature of the operating costs, the matter is to be deter-mined by the landlord's auditors.

(c) # The "Benlou" caseThe Appeal Court restated the general principle that rental may not be fixed by either party where the determination of the rental depends entirely upon the unfettered will of one of the parties.

In Benlou's case the tenant had to contribute a specified percentage of any in-crease in the landlord's expenditure on certain items. The Court held that the


landlord's discretion was not unfettered. It was fettered by 3 qualifications, namely:

(i) ! That only a defined share of the increased expenditure could be recov-ered from the tenant.

(ii)! That such expenditure had to be actually incurred by the landlord in the sense of an increased contractual liability towards a third party.

(iii) ! That the tenant was only obliged to contribute to the increased expen-diture after the date of commencement of negotiations and in respect of certain specified items.

To sum up then on this now settled issue of operating costs ‑ despite the cases I suggest that the principles of the "Proud" case be followed ie. that where there is a dispute between a landlord and tenant, the matter be determined by a third party.

(d) # "Reasonable rental"It follows from the Genac case that a lease for a reasonable rental may be en-forceable. This is contrary to the case of Trook t/a Trook's Tea Room v Shaik and Another 1983 (3) SA 935 (N).

This is a very difficult area for landlords and they should carefully consider the various cases.

5.3.3 !Property identified

The property must be identified in the lease or must be identifiable. Failing that, the contract will be void for vagueness. This is in accordance with the general principles of contract. In an interesting case - Ellerine Furnishers (Venda) (Pty) Ltd v Rambuda 1989 (2) SA 874 (V) - a written lease re-ferred to a building being the subject matter of the lease as depicted on plans annexed as Annexure "E".

Annexure "E" was not attached to the lease when signed. Since the lease was intended to be the sole agreement between the parties, the lease was accord-ingly held to be incomplete, thus void and unenforceable.

5.3.4 !Duration


It is a requirement for leasing that the use and enjoyment of the property be parted with temporarily. ! There is compliance with this requirement if the lease is to run for a definite period or until the occurrence of an event which is bound to happen although the date of its occurrence is uncertain.

A lease can also endure for such a period as the landlord or tenant may decide.

Furthermore, if the landlord and tenant have not made any agreement about the duration of the lease, it becomes a periodic lease. The period is usually the period in terms of which the rental is payable. In other words, if the rental is payable monthly, it can be terminated on a monthly basis.

A contract which confers the power to use and enjoy the land in perpetuity is not a lease. (see LAWSA ‑ Volume 14, Lease, paragraph 139).

5.3.5 !Options

One often finds options in leases when it is the intention of the parties that the lease be extended or, as is often said, renewed. In fact an option to renew a lease is a totally new agreement. Therefore the option must comply with the three essential requirements, and one of these, which is so often forgotten, is that the rent must be determined or determinable and not by one of the par-ties.

In a recent case (being Cash‑In CC v OK Bazaars 1991 (3) SA 353 (C)), the lease provided that the tenant should have the right to renew the lease pro-vided he had faithfully carried out the terms and conditions and provided he was not in default at the expiration of the lease. The court held on the par-ticular wording and because of the word "faithfully", that since the tenant had failed to comply with one of the terms of the lease previously, he could not re-new the lease.

So often a right of first refusal is confused with an option. An option must be for a specified rental. There are of course ways of determining the rental by referring it to arbitration or to a third party to determine the rental. Such an option will be enforceable.

5.3.6 !Right of first refusal


In contrast to an option, a right of first refusal or a right of pre‑emption (Afri-kaans "voorhuurreg") is an agreement in terms of which the landlord under-takes, if he should lease the property again, to offer it to the tenant first and that the tenant will have the "first" right to enter into a new agreement of lease. There are two possibilities here:

(a) ! The one is where the landlord receives an offer from a third party, which is not generally the case, but he is obliged in such case to refer the offer to the tenant who must "match" it to conclude the lease.

(b)! The other ‑ the more common position, is where the landlord says "I want to lease it again for a further period and I want R50,00 per square metre" and the tenant says "I accept it".

Clearly a right of first refusal serves as a basis for a negotiated agreement. The landlord's obligation is always, whether or not negotiations break down be-tween him and the tenant, if he decides to lease it to a third party for say R40,00 a square metre, to refer that offer to the tenant. These clauses are of-ten poorly worded in leases and should be worded circumspectly.

The Law Reports abound with cases relating to what was intended because clauses like this were badly worded - see Soteriou v Retco Poytors (Pty) Ltd, 1985 (2) SA 822 (A)

5.3.7 !Huur gaat voor koop

One of the difficult aspects of leases is the so‑called principle of "huur gaat voor koop". (from the Dutch, literally meaning: “lease goes before sale”) In a typi-cal situation, let us say a tenant enters into a lease for 10 years with the land-lord. The landlord then sells the property to a new owner.

The new owner being the purchaser is bound to honour the lease.

In the recent case of Mignoel Properties (Pty) Ltd v Kneebone 1989 (4) SA 1042 (A),the principle was aptly illustrated. The court confirmed that once a tenant elects to remain in the premises after a sale, the seller in terms of law falls out of the picture. The new owner steps into the shoes of the seller as landlord. No new contract comes into existence. All that happens is the purchaser is


substituted for the seller as landlord. There is no necessity for a cession of rights or assignment of obligations.

One further interesting aspect is that the purchaser acquires all the rights which the seller had in terms of the lease. This includes the right that the seller had against a surety for the tenant's obligations under the lease. In other words, the suretyship remains in place even if there is a change of ownership of the leased premises.

5.3.8! Subleasing, assignment and cession

Subleasing

Remember that it is one of the naturalia of an agreement of lease that the ten-ant may sublease the premises. The parties can agree otherwise. What is im-portant in a sublease, is that the sublease does not create a contractual rela-tionship between the sublessee and the original lessor.

For example if the original lease is terminated the sublessee can be ejected. In other words if you are a sublessee make sure that the terms of your sublease line up with the terms of the original contract. Furthermore all the conditions and terms of the original contract should be contained in your contract.

A further aspect of sublessees is that one often finds a clause reading ‑"The lessee sha# not sublet the premise without the prior consent of the lessor which con-sent sha# not be unreasonably withheld."

The principles of a clause like this was discussed in the case of F W Knowles (Pty) Ltd v Cash‑In (Pty) Ltd 1986 (4) SA 641 (C), which related to an agreement of lease.

In that case the tenant sold some of its supermarkets to OK Bazaars. The landlord refused to assign the lease to OK Bazaars. The landlord alleged that by allowing OK to become the tenant the "family image" of the store would change and would downgrade the shopping centre.

The court held that only if the landlord's rights are affected, does the landlord have the right and thus a valid reason to refuse consent. In the circumstances the lessor was unreasonable in not consenting to the cession of the lease. For example, if a tenant runs a supermarket and he wanted to assign his lease or


sublet to a person who conducted a barber shop, it would probably be unrea-sonable.

Cession

A cession relates to rights only. If a lease is silent as to whether a tenant can or cannot cede his rights, he is generally speaking free to cede the lease.

Assignment

An assignment of the lease is both a cession of the tenants rights and the dele-gation of his obligations. A tenant can never assign his rights and obligations without the consent of the landlord. The landlord can of course give that con-sent in advance.

Assignment/sublease?

The question is often asked whether a landlord should agree to a sublease by a tenant or should he agree to the assignment of the lease. A landlord has a right of retention known as the landlord's hypothec over the assets of the tenant for arrear rental. (See paragraph 5.10)

If the landlord consents to a sublease, the landlord knows that the assets in the shop belong to the sublessee. Since there is no agreement between the subles-see and the landlord, the landlord cannot attach the sublessee's property for the rental due by the tenant - see Schoeman (1991).

It may therefore be better for the landlord to agree to an assignment of the lease by the tenant to the new tenant, and in addition to obtain the existing tenant's suretyship for the obligations of the new tenant.

The result would be that the landlord would have a right over the new tenant's movables and also a right to claim the rental from the existing tenant.

5.3.9 !Compensation for improvements

Compensation for improvements is a problem that often arises in a lease and should be dealt with specifically.


The common law position [i.e. if nothing is written] is that a lessee who has effected improvements to the leased property is entitled to compensation for those improvements on termination of the lease. This is a complicated part of the law and entails a detailed discussion on the question of enrichment. Suf-fice to say that a landlord should deal with this aspect in the agreement of lease.

5.3.10 !Landlord's hypothec

One of the important rights that a landlord has is that if the tenant fails to pay the rental, he has a prior right to the movables contained in the leased prem-ises. This is the so‑called landlord's hypothec.

There are certain strict rules regarding the enforcement of the hypothec. One of the most important is that, if the tenant is in arrear with his rental the land-lord does not automatically have a hypothec until he institutes action in terms of the procedural laws of court and establishes his right of hypothec. For ex-ample, if the goods are removed before the hypothec is so established the landlord loses his hypothec.

The Security by Means of Mavable property Act, No 7 of 1993 relates to notar-ial bonds. Of importance to landlords is Section 2. If a tenant’s movable prop-erty is hypothecated by a special notarial bond or if a tenants movable prop-erty relates to an instalment sale agreemnts a defined in the Credit Agree-ments Act, it is never subject to the landlord’s tacit hypothec. It is suggested that a clause to the effect tht the tenant may not hypothecate hos movables by a special notarial bond, be inserted in the lease agreement. If the tenant then does so, he is in breach of the lease.

In the case Paradise Lost Properties (Pty) Ltd v Standard Bank of South Africa (Pty) Ltd 1997 (2) SA 815 the court held that if the landlord knew as a fact that the goods did not belong to the tenant, he cannot be under the mistaken belief that the goods belong to the tenant.

5.3.11 !Cancellation

Cancellation is a drastic remedy. Before a landlord cancels an agreement, he must make sure that he complies with the formalities of the lease relating to cancellation. For example if the landlord can only cancel on 7 days notice, he must give a clear 7 days notice.


The landlord should ensure that the notices are sent to the proper parties at the proper addresses. If the landlord cancels incorrectly or as it is called in law "prematurely" he is guilty of breach of contract.

5.3.12 !Termination

Generally speaking, a lease is not terminated by the death of either the land-lord or the tenant unless the contract provides otherwise.

Where a lease is for an undetermined period, it can only be cancelled by rea-sonable notice. Generally speaking, the notice should go with the basis of the rental. If it is payable monthly, a month's notice should be given.

The lease is not terminated by the landlord's insolvency. When the leased property is sold by the insolvent landlord's trustee, the tenant is protected by the rules of Huur Gaat Voor Koop. A stipulation in the lease that the lease wi# terminate on liquidation of the landlord is void.

Where a tenant is liquidated or is sequestrated, the Insolvency Act provides that the lease is not terminated automatically but may only be terminated by the trustee by way of notice. If the trustee fails to notify the landlord within three months, he is deemed to have terminated the lease at the end of those three months.

5.4 ! VALUE ADDED TAX/OPERATING COST

VAT is an inclusive tax. Only in certain circumstances may rental be stated to be exclusive of VAT. In such a case the rental must be stated as say ‑ ! ! Rl00,00 + Rl4,00 VAT = Rll4,00. Since VAT is an inclusive rental, it is suggested that the rental be increased by the amount of VAT (14% at the current rate).

Operating costs are more difficult. In the Proud judgment, the court ac-cepted without deciding that operating costs were rental. In the Genac case likewise, the court in a statement made suggested strongly that operating costs are rental. However, like in the Proud judgment the court did not find it nec-essary to express a firm opinion on this point. This was only accepted for the purposes of determining whether the operating costs, like rental had to be de-


termined or determinable. Often leases themselves provide that operating costs are deemed to be rental.

This is for a good reason. It is because the landlord wants to have his land-lord's hypothec over the tenant's property for any arrear operating costs which is then rental. Unless stipulated otherwise, operating costs are inclusive of VAT.

5.5 ! STAMP DUTY

Leases attract stamp duty. Remember that where the total rental considera-tion exceeds the value of the property, stamp duty can be payable on the value of the property, which results in less stamp duty.

A cession of a lease, even if it is at a higher consideration, only attracts a nominal stamp duty.

A landlord for income tax purposes can deduct all expenses incurred in pro-duction of its income. This would for example include the costs of the lease and stamp duty. A tenant not being in the business of leasing is probably not entitled to deduct stamp duty or costs of preparing the lease.

A suggestion is that the landlord bear these costs, but the tenant pays the land-lord in the first month's rental an amount equivalent to those costs. The land-lord is not worse off from a cash point of view nor from a tax point of view. The tenant is better off because he can deduct the increased rental.

Acknowledgement: Thus chapter is a slightly adapted version of Schoeman (1993)


QUESTIONS FOR SELF-EVALUATION

What is a lease?! (3)

What are the terms of a lease? Discuss briefly. (8)

"For a lease to be enforce-able, the rental must be de-termined or determinable." Discuss the statement criti-cally, with reference to ap-plicable case law.! (15)

Distinguish an option and a right of first refusal. (6)

What do you understand by the phrase "huur gaat voor koop'?! (4)

Discuss the subleasing of a premises in a shopping centre.! (4)

What is the landlord's hy-pothec?! (3)

Is a lease terminated by the death or insolvency of either the landlord or the tenant? Discuss briefly.! (5)


REFERENCES

Cooper, W E 1973. The South African Law of Landlord and Tenant. Cape Town:! Juta.

Delport, H J (red.) 1998. South African Property Practice and the Law. Cape Town: Juta.

Kleyn, D G & Boraine, A 1992. Silberberg and Schoeman's The Law of Property (3rd ed). Durban: Butterworths.

Schoeman, A C 1991. "Landlord and Tenant ‑ Should a Landlord agree to an assignment or sublease?". SAPOA News June 1991: 9-11.

Schoeman, A C 1993. "Property Law". Lecture delivered at the SAPOA/University of Pretoria Certificate Course in Shopping Centre Management. 3-6 March 1993.


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property industry

immovable property sector

south african economy

promotion of adult education

trust estab

c e cloetethe lease

course material

various professional