10 March 2021 by and Corporate & Commercial Alert

Personal lease agreements: Regulating the relationship when it’s close to home

For most lessors, the identity and commercial standing of a lessee is of vital importance. Where a lease is silent as to whether the rights of a lessee can be ceded to third parties, the lessee is generally free to do so. But to what extent can the importance of the identity of a lessee preclude that lessee from ceding its rights to use and enjoy the property?

Unless cession is expressly prohibited in an agreement of lease (or permitted subject to the lessor’s consent), a lessor would have to rely on the doctrine of delectus personae to prevent a lessee ceding its rights under a lease to a third party. A delectus personae exists where a right is of such a personal nature that the identity of the creditor could make a reasonable and substantial difference to the debtor. In the case of a lease agreement, the question is thus essentially whether it matters to the lessor to whom it leases its premises.

Courts have held that rights and obligations in a lease agreement are not ordinarily delectus personae – particularly so in the case of long-term leases. That the commercial standing of the lessee is important to the lessor is insufficient to establish delectus personae. There must be additional pointers to the personal nature of the obligation in question, as illustrated in a matter soon to be decided by the Constitutional Court in CCT 70/20 University of Johannesburg v Auckland Park Theological Seminary (UJ v ATS).

In UJ v ATS, the parties agreed to a long-term lease in 1995, during the subsistence of a cooperation agreement in terms of which the lessor – the University of Johannesburg (UJ) – would offer a theology degree, for which certain courses would be taught by the lessee – Auckland Park Theological Seminary (ATS). UJ offered the premises to ATS, for a once-off payment below market value, so that ATS could establish a theological college to this end. The lease agreement itself merely stipulated that the premises must be used for the purpose of education. ATS did not establish a college on the premises. Instead, it ceded its rights under the lease agreement – for a substantial amount of money – to a third party, which intended to establish a primary and high school on the premises.

UJ argued that the rights in the lease agreement were personal to ATS, and that ATS had thus repudiated the lease. In support of this argument, UJ tendered evidence of negotiations, and letters sent prior to the conclusion of the lease. The High Court agreed that this evidence pointed to the personal nature of the rights, which thus could not be ceded.

On appeal, the Supreme Court of Appeal (SCA) held that the evidence considered by the High Court, rather than forming part of the context and background of the lease agreement, was inadmissible in terms of the parol evidence rule. This rule essentially requires that what is written in a contract – where that contract was intended to be a complete record of the agreement between the parties – cannot be contradicted, added to or modified by extrinsic evidence. The SCA, applying this rule, found that nothing in the lease itself points to the rights being personal and incapable of cession, and thus overturned the High Court’s orders.

This case thus also raises important questions regarding the admissibility of evidence of negotiations and preparatory material in interpreting an agreement. Although the parol evidence rule is well established, its relationship with the rules regarding the interpretation of contracts is not always clear. The rules of legal interpretation, which are settled, require that when interpreting a contract, the language of a provision must be read in context, and with regard to its purpose and the background to the preparation and production of the document. The SCA has emphasised that context, purpose and background are not only relevant where the language is ambiguous – all factors must always be considered in one unitary exercise.

How, then, does one differentiate contextual evidence establishing a delectus personae from evidence varying the express terms of a lease agreement? Until the UJ v ATS case is decided by the Constitutional Court, this will remain a grey area in our lease.

Those concluding a lease are thus well advised to regulate the permissibility of cession clearly and appropriately in the agreement. Where this is not done, lessors’ may nevertheless find safe harbour in the principle of delectus personae, where it is evident that the specific identity of the lessee is of particular importance to the lessor. This is most likely to be the case in the context of a joint venture or a similar strategic arrangement between the lessor and the lessee. As evidenced in UJ v ATS, this may however prove difficult to prove and disputes regarding the admissibility of the evidence tendered to establish such relationship may arise. For those who have already concluded leases where the permissibility of cession is not clearly regulated, the Constitutional Court will hopefully soon provide further clarity on the circumstances in which delectus personae precludes the cession of rights under lease agreements.

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