Are "agreements to agree" enforceable?

• South Africa

• Commercial agreements

18-11-2020

In order for an agreement to be valid and binding, it must comply with certain contractual requirements. One such requirement, is that the material terms of the agreement must be certain. This means that all of the material terms of the agreement must either be determined or determinable. Despite this seemingly straightforward requirement, agreements are often found to be invalid and unenforceable on the basis of uncertainty. The inclusion of clauses amounting to an agreement to agree, is often the cause of such uncertainty.

Generally, agreements to agree are unenforceable because of the absolute discretion of parties to agree or disagree. However, these agreements may be enforceable if they contain adequate deadlock breaking mechanisms. In other words, in the event that the parties are unable to reach agreement on the issue, the agreement must set out a method or mechanism to determine the omitted details.

Agreement to agree clauses are often found in lease agreements in the context of renewals, where the parties agree to negotiate the rental amount and other lease terms when the option to renew is exercised. The Supreme Court of Appeal (“SCA”) recently dealt with such a clause in Shepherd Real Estate Investments (Pty) Ltd v Roux Le Roux Motors CC (1318/2018) [2019] ZASCA 178 (2 December 2019).

Shepherd Industrial Commercial Real Estate CC (“Shepherd”) and Roux Le Roux Motors CC (“Roux”) concluded a lease agreement, in terms of which Shepherd let commercial property to Roux for an initial period of five years. The lease agreement contained an option to renew the agreement for two further periods of 5 years each. The rental amount for the first renewal period was easily determinable, in that the agreement provided a set percentage (8%) by which the rental would be increased each year during the renewal period. However, in respect of the second renewal period, the agreement provided that the renewal “shall be on terms and conditions in compliance with the Landlord’s then standard letting policy, except that there shall be no right of further renewal and that the rental and costs shall be mutually agreed upon in writing between the Landlord and the Tenant when the right of renewal is exercised.”

Roux validly exercised its option to renew in terms of the first renewal period. However, when Roux tried to exercise its second option to renew, Shepherd informed Roux that it is amenable to renewing the lease, provided that the rental amount would be R150 000 per month, instead of a yearly increase of 8%, as was prescribed in respect of the first renewal. The parties were unable to reach agreement on the rental amount, and Shepherd refused to go to arbitration (the prescribed dispute resolution procedure) in order to determine the rental amount.

In light of the lack of consensus, Shepherd brought an application to the High Court for the ejectment of Roux from its premises. As the application was unsuccessful, Shepherd appealed the decision to the SCA, and argued that the second renewal clause was void for vagueness, as the rental amount was neither determined, nor determinable.

The SCA reiterated that agreements to agree are generally, void unless it contains a deadlock breaking mechanism. The SCA found that the renewal clause did not provide a mechanism to determine what the rental amount would be, and held that the arbitration clause did not amount to such a mechanism, as the arbitrator would be ill equipped to resolve commercial issues that the parties could not resolve themselves. The SCA further found that it would be against public policy for a court to force the landlord to conclude a lease agreement with a tenant. As such, the SCA held that the agreement was incomplete and thus unenforceable.

The outcome of this case would have been very different if the renewal clause provided a deadlock breaking mechanism to determine the rental amount, in the event the parties were unable to agree on the amount, such as a standard 8% increase from the preceding year, or basing the rental on market-related rentals in the area.

When concluding agreements which contain agreement to agree clauses, parties should ensure that the agreements contain deadlock breaking mechanisms which provide sufficient certainty for the agreements to be enforceable, as a court or arbitrator cannot simply import a term that was not intended by the parties.

Written by: Meghan Annandale (Candidate Attorney)