Chang on Behalf of the King William’s Town Property Trust v Coral Blue Trading NO.3 CC (6158/2007) [2008] ZAECHC 26 (10 March 2008)

IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE DIVISON)

CASE NO: 6158/2007

DATE HEARD: 21/2/08

DATE DELIVERED: 10/3/08

NOT REPORTABLE

In the matter between:

LARRY CHAO-SHENG CHANG ON BEHALF OF

THE KING WILLIAM’S TOWN PROPERTY TRUST APPLICANT

and

CORAL BLUE TRADING NO.3 CC RESPONDENT

______________________________________________________________

The applicant sought an order evicting the respondent from two shops let in terms of two contracts of lease. It claimed this relief on the basis of the respondent having installed a geyser in one of the shops which, said the applicant, was a breach of clause 8 of the leases in that alterations or additions could not be effected without the lessor’s prior written consent. It was held that the term ‘alterations or additions’ had to be interpreted restrictively to mean permanent alterations or additions that are not functionally related to the purpose for which the premises were let. It was also contended that the manner in which the geyser was installed breached clauses that prohibited use of the premises that contravened ‘any laws, by-laws, regulations, town planning scheme or condition of title relating to or affecting the premises’ and clauses that provided that the respondent ‘shall not use any apparatus … on the premises which may in any way vitiate the landlord’s fire insurance policy in respect of the premises’. It was held that the breaches of these terms were not sufficiently serious to justify cancellation. The application was dismissed with costs.

JUDGMENT

PLASKET J

[1] The applicant, acting on behalf of the King William’s Town Property Trust (the trust), seeks an order evicting the respondent from Shop 3B and Shop 4, Bank Street, King William’s Town. He claims an entitlement to this relief on the basis of material breaches, on the part of the respondent, of the terms of two lease agreements.

[2] The first lease, entered into in July 2005, relates to Shop 4, Bank Street, King William’s Town. The second lease, entered into on 20 September 2006, relates to Shop 3B, Bank Street, King William’s Town.

[3] The applicant alleges that three provisions of the leases have been breached by the respondent. The first, clause 8 of both, provides that the respondent ‘shall not be entitled to make any alterations or additions to the premises whether structural or otherwise without prior written consent of the Landlord being obtained in regard thereto’.

[4] The second is clause 9 of both leases. It provides that the respondent ‘shall not contravene or permit the contravention of any laws, by-laws, regulations, town planning scheme or condition of title relating to or affecting the premises’.

[5] The third is clause 11 of both leases. It provides that the respondent ‘shall not use any apparatus or keep any combustibles or any hazardous inflammable or dangerous materials on the premises which may in any way vitiate the landlord’s fire insurance policy in respect of the premises or which may cause the rate of premium for such insurance to be increased’.

[6] The applicant contends that it was an implied term of the leases that in the event of the respondent breaching any material term of the leases, the trust would be entitled to cancel the leases forthwith and demand that the respondent vacate the premises. It is the argument of the applicant that the clauses of the leases that I have cited are material terms.

[7] The applicant states that an electrician, Mr W.L. Muller, was engaged to inspect the premises. He did so and reported as follows:

‘This letter serves as notice that I carried out a visual electrical inspection at shop 3 and 4 situated in Bank Street.

On my inspection it came to my attention that the electrical installation does not comply with the regulations of SANSO 142. Namely the shop has been sub-divided with only one distribution board serving both shops.

The geyser is currently connected to a plug point and is not bonded to earth, thus not complying to regulations.

The installation constitutes a fire and safety hazard and should be rectified as soon as possible.’

[8] There is some confusion as to when Muller conducted his inspection. The letter that I have quoted was dated 6 December 2007 but the trust’s letter to the respondent in which it purported to cancel the leases, and which attaches Muller’s letter, is dated 3 December 2007. Nothing turns on this, despite the respondent’s efforts to make something of it: clearly, the date on one or the other of these documents is erroneous but it is evident that the trust had received Muller’s letter by the time its letter of cancellation was sent.

[9] The letter in which the trust purported to cancel both leases was written by its attorney. It is to the following effect:

‘ELECTRICAL FITTINGS: SHOPS 3B & 4

My client, King William’s Town Property Trust, has instructed me to inform you to immediately desist from any further additions and/or alterations to the electrical system in the above two properties. It is also demanded that you remove the geyser which has been installed while you were [a] tenant.

Your conduct is a fundamental breach of the contract which stipulates that you may not do anything to cause a fire hazard which will also render void my client’s insurance. My client hereby cancels the contract so that the building and all in it are kept secure. A copy of the electrical contractor’s report is attached and my client demands that you vacate the above two properties on or before 11h00 on 4 December 2007.’

[10] The respondent replied to this letter, through its attorney, on the same day. In this letter, it admitted that a geyser was installed. The respondent disavowed knowledge that the electrical system was defective but undertook to have it rectified. It was stated, however, that the respondent had no intention of removing the geyser as it was needed on the premises. Finally, the letter stated that the ‘loose wiring has been present when the client took over the premises and despite speaking to the landlords on several occasions about the loose wiring, nothing has been done to correct the position’. It stated that this problem should be rectified by the applicant.

[11] The first issue to be decided is whether the installation of the geyser constituted an addition or alteration for the purposes of clause 8. If it did, it may perhaps afford the applicant reason to cancel the lease in respect of the shop in which the geyser was installed.

[12] In Protea Assurance Co Ltd v Presauer Developments (Pty) Ltd,1 the alleged breach of a similar clause in a lease was in issue. The question to be determined was whether the erection of partitions in a building let as office space was in breach of a provision of the lease that forbade the lessee from effecting ‘alterations or additions’ to the premises without the lessor’s prior written consent. Vivier AJA held that the ‘construction of clauses of this nature depends upon a consideration of the nature, effect and scope of the lease and the intention of the parties as gathered from the lease’.2

[13] He held too that the term had to be narrowly construed:3

‘In construing the words “any alterations or additions” in clause 11 of the lease, it is clear that some limitation must be put upon these words. If the words were to be given their literal meaning, without any qualification, it would lead to absurd results and would just about render it impossible for defendant to carry on its business on the premises. It would mean, for example, that plaintiff’s written consent would be required whenever defendant wanted to lay a new carpet or fit an electrical socket in the wall.’

[14] Having referred with approval to a series of English cases and one South African case – to which I shall revert shortly – Viviers AJA approached the issue in the case before him as follows:4

‘Returning to the present case, I find it unnecessary to determine the exact limitation to be placed upon the words “alterations or additions” in clause 11 of the lease. It is sufficient for present purposes to say that, having regard to the scope and purpose of the lease, the nature of the demountable partitioning in question, the non-permanent function it was intended to serve, the fact that it in no way changed the structure or form of the building and the fact that it could easily be removed without damage to the building (these are all factors to be taken into account – the list is not exhaustive), the changes effected by defendant on the 11th floor of the building do not constitute such “alterations or additions”. The defendant, accordingly, did not breach clause 11 by erecting the partitioning in question on the 11th floor of the building.’

[15] Viviers AJA referred with apparent approval to the judgment of Searle J in Less and another v Bornstein and another.5 This case concerned the interpretation of a provision of a lease that required the prior written consent of the lessors for any ‘structural alterations in the leased premises’, in circumstances in which the premises had been let for use as a fish shop and the alterations were aimed at making this use possible. Searle J considered that the term ‘structural alterations’ was to be accorded a limited meaning. He held:6

‘Now, in my opinion, in the circumstances, without defining the term “structural alterations” for the purposes of clause 10 of the lease, it must be limited to alterations or additions which (a) are permanent in their nature and (b) which alter the form or structure of the premises as opposed to alterations of a superficial nature which merely alter the surface. Alterations as to fittings and fixtures for the purposes of converting the premises for the ordinary conducting of the business for which they are let would not, in my view, amount to “structural alterations” … even though the annexing of such fixtures might include the boring of holes in or plugging the actual walls or structure of the buildings … . It would seem to follow therefrom that any alteration necessary or essential for the carrying on of the trade for which the premises are let would not be a “structural alteration” unless it involves an actual permanent alteration of the structure of the premises themselves as opposed to mere superficial or surface changes.’

[16] From the above cases, I conclude that when interpreting clause 8 of the lease, it is necessary to restrict the meaning of the term ‘alterations or additions’ to those types of alterations or additions that are not functionally related to the purpose for which the premises were let and are permanent in nature.

[17] The two shops are part of a business complex owned by the applicant. Clause 4 of the leases provides that the premises consist of ‘the aforesaid shop as pointed out and agreed upon and for the business of the tenant and for no other purpose whatsoever, without the prior written consent of the landlord, which consent shall not be unreasonably withheld’.

[18] The type of business the respondent could operate was therefore not restricted by the leases. In the modern age, and in the normal course of most businesses, it is not unreasonable to require hot water and one would expect to find geysers in business complexes, if only for the benefit and comfort of the lessee’s employees. A hairdressing business is being conducted in Shop 3B and hot water would be essential for such a business. An interpretation of clause 8 in the context of the purpose of the lease would therefore not be against the installation of a geyser.

[19] In addition, the installation of a geyser will not affect the structure or form of the building. It is not permanent in nature in the sense that it can be removed easily and without damage to the building. I find, consequently, that the installation of the geyser was not an alteration or addition as intended by the parties. There was therefore no breach of clause 8.

[20] That, however, is not the end of the matter because the applicant relies, in addition, on the installation of the geyser constituting a breach of two further clauses, namely clause 9 -- that the respondent ‘shall not contravene or permit the contravention of any laws, by-laws, regulations, town planning scheme or condition of title relating to or affecting the premises’ -- and clause 11 -- that the respondent ‘shall not use any apparatus … on the premises which may in any way vitiate the landlord’s fire insurance policy in respect of the premises or which may cause the rate of premium for such insurance to be increased’.

[21] I shall assume that the manner in which the geyser was installed had the effect of breaching clauses 9 and 11. The basis of my assumption is the report of Muller which states that the ‘installation constitutes a fire and safety hazard’. The issue that I shall now turn to is whether a breach of these clauses by the respondent entitles the applicant to cancel the lease.

[22] The position is, in the words of Christie, that ‘a sufficiently serious breach of a sufficiently important term will justify cancellation without the necessity of proving an intention to repudiate’.7 This idea has been described with the use of a variety of formulae in the case law. In Aucamp v Morton,8 for instance, Centlivres CJ spoke of the breaches in question having to be ‘so vital or material to the performance of the whole contract’ that the innocent party ‘could say that the foundation of the contract was destroyed’.

[23] It determining whether the term breached and the breach itself are serious enough to warrant the extraordinary remedy of cancellation, a court is to be guided by fairness to both parties. In Singh v McCarthy Retail Ltd t/a McIntosh Motors9 Olivier JA stated:

‘I perceive the correct approach to be as follows: The test, whether the innocent party is entitled to cancel the contract because of malperformance by the other, in the absence of a lex commissoria, entails a value judgment by the Court. It is, essentially, a balancing of competing interests – that of the innocent party claiming rescission and that of the party who committed the breach. The ultimate criterion must be one of treating both parties, under the circumstances, fairly, bearing in mind that rescission, rather than specific performance or damages, is the more radical remedy. Is the breach so serious that it is fair to allow the innocent party to cancel the contract and undo its consequences?’

[24] I turn now to the contracts as the starting point for the enquiry into whether the terms relied upon by the applicant were sufficiently serious in themselves, and were breached in a sufficiently serious manner, to justify the conclusion that the cancellation of the contracts was fair to both parties. I note from a perusal of the contracts that the parties made provision for cancellation in certain instances. In clause 3.4 of the lease for Shop 4 and clause 3.3 of the lease for Shop 3B, provision is made for cancellation in the event of non-payment of rental: in the former lease, the contract ‘will automatically be cancelled’ if the non-payment has not been rectified within three days of written notice to pay having been given. Similarly, clause 13.1 of both leases makes provision for their ‘automatic termination’ if the premises ‘are so damaged so as to render them totally untenantable’.

[25] For the rest, however, the parties have not seen fit to regulate the circumstances in which the lessor may elect to cancel. I shall assume that the clauses that are relied upon by the applicant are, indeed, sufficiently important terms and so may justify cancellation. Even so, the type of breach may vary in its scope, significance and impact and it is necessary to examine whether the breaches alleged are sufficiently serious.

[26] It is not difficult to envisage breaches of the clauses in issue varying immensely in their seriousness. For instance, using the premises to manufacture fire-works would undoubtedly be a serious breach of the obligation not to vitiate or prejudice the lessor’s fire insurance, whereas the faulty installation of a geyser is, objectively speaking, of a different order of seriousness. The first breach may warrant cancellation but the second may not: it can be remedied by directing the lessee to correct the defect as, indeed, the applicant tried to do when, at the same time, it sought to cancel. Similarly, the use of the premises to deal in drugs, for instance, is of such an order of seriousness that, if the premises were being used for this purpose, it would constitute a sufficiently serious breach of the lease that would justify cancellation. If, however, the breach of clause 9 came about as a result of a change in a municipal by-law which rendered previously lawful conduct unlawful, it could hardly be contended that the lessor could cancel before the lessee had been afforded an opportunity to re-organise its activities so that it complied with the law.

[27] In my view, the breaches were not of such a nature as to entitle the applicant to cancel: they were not sufficiently serious to justify this extraordinary remedy and could not be said, when regard is had to the need to balance the interests of the parties and to be fair to both, that they went to the root of the leases. This, it seems to me, is in accordance with Van Heerden JA’s judgment in Spies v Lombard10 in which he spoke of cancellation only being justified ‘if the misuse [of the property] is so serious in degree as to justify the invocation of that remedy’.11 He spoke too of the ‘tolerant treatment’ of the contract of lease having been ‘received in our law’ from the Roman Law and that, as a result, ‘in the absence of a lex commissoria neither party is bound to suffer cancellation merely because he has been to some extent unpunctual or remiss in his performance’.12

[28] A final point bears mention. It is that the applicant purported to cancel both the lease in respect of Shop 4 and the lease in respect of Shop 3B. In the letter in which it purported to cancel, the applicant’s attorney wrote that he was instructed to inform the respondent ‘to immediately desist from any further additions and/or alterations to the electrical system in the above two properties’ and he demanded that the respondent ‘remove the geyser which has been installed while you were a tenant’. It relies on one act – the installation of the geyser – as constituting a breach of three terms of both leases. It is never stated in the papers, however, where the offending geyser is. If it is in Shop 4, the faulty installation was a breach of the lease in respect of Shop 4. If it had been installed in Shop 3B, the lease in respect of that shop was breached. I am, however, at a loss to understand how this one act may be said to entitle the applicant to cancel both leases. On this ground, I am of the view that the applicant has failed to prove its entitlement to cancel either of the leases.

[29] In the result and for the reasons set out above, the application is dismissed with costs, including the costs of 14 February 2008 when the matter was postponed.

_______________

C. PLASKET

JUDGE OF THE HIGH COURT

APPEARANCES

For the applicant: Mr S.H. Cole, instructed by John Haydock Attorneys, Grahamstown

For the respondent: Mr B.L. Boswell, instructed by N.N. Dullabh and Co, Grahamstown

1 1985 (1) SA 737 (A).

2 At 742I.

3 At 745D.

4 At 746D-E.

5 1948 (4) SA 333 (C).

6 At 339-340.

7 Christie The Law of Contract in South Africa (5 ed) Durban, NexisLexis Butterworths: 2006, 514. See too Kerr The Principles of the Law of Contract (6 ed) Durban, Butterworths: 2002, 602: ‘Parties to a contract are bound together in a legal relationship. Termination of the legal relationship is clearly an important step. Because it is so important it may not be taken if the breach is a minor one only.’ See further Hutchinson, Van Heerden, Visser and Van Der Merwe Wille’s Principles of South African Law (8 ed) Cape Town, Juta and Co: 1991, 520: ‘Cancellation, or rescission, of a contract is an extraordinary remedy that is available only in limited circumstances. In the absence of an agreement to the contrary, the right to cancel for breach depends on the materiality of the breach, and the particular form that it takes.’

8 1949 (3) SA 611 (A), 620. See too Swartz and Son (Pty) Ltd v Wolmaransstad Town Council 1960 (2) SA 1 (T), 4F-G.

9 [2000] ZASCA 129; 2000 (4) SA 795 (SCA), para 15.

10 1950 (3) SA 469 (A).

11 At 486H.

12 At 487B.