THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case No: 315/10

In the matter between:

HYPROP INVESTMENTS LTD

First Appellant
ELLERINE BROS (PTY) LTD

Second Appellant

and

SHOPRITE CHECKERS LTD

Respondent

Neutral citation: Hyprop Investments v Shoprite Checkers (315/10) [2011]
ZASCA 51 (30 March 2011)

Coram:
Nugent, Tshiqi JJA and Plasket AJA

Heard:
4 March 2011

Delivered:
30 March 2011

Summary: Agreement of lease – interpretation – phrase ‘the initial valuation
date’ for purposes of determining tenant’s pro rata liability for increases in
rates to be determined with reference to date of first valuation of completed
building.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: Western Cape High Court, Cape Town (Traverso DJP,
Saldanha and Binns-Ward JJ sitting as a court of appeal):

The appeal is dismissed with costs, including the costs of two counsel.
______________________________________________________________

JUDGMENT
______________________________________________________________

PLASKET AJA (NUGENT and TSHIQI JJA concurring):
[1] This appeal concerns the proper interpretation of a clause in an
agreement of lease. The clause in question, clause 7.3 of the general terms
and conditions of the lease, will be set out in due course. The parties agree on
one thing: clause 7.3 was drafted extremely poorly and, as a consequence, it
displays a degree of ambiguity. The result was that a single judge of the
Western Cape High Court, Cape Town (Griesel J) gave it one meaning while,
on appeal, a full bench of that court (Binns-Ward J, Traverso AJP and
Saldanha J concurring) gave it another. It falls to this court to decide which
interpretation is correct.

[2] The facts are common cause. On 9 February 2000, Century City
Centre Ltd and the respondent concluded an agreement of lease in terms of
which Century City Centre Ltd let premises in the Canal Walk Shopping
Centre in Cape Town to the respondent. The shopping centre was still under
construction when the agreement of lease was concluded.

[3] The shopping centre was duly completed and it opened for business
during October 2000. This meant that the lease commenced on 1 October
2000 because clause 1.3.2 provided that the lease commenced on the first
day of the month in which the shopping centre opened.

[4] The appellants purchased the shopping centre during 2003. In May
2005, they launched an application in which they sought a declarator as to the
respondent's liability to pay a pro rata share of the increase in rates payable
on their property. They also sought an order to direct the respondent to pay
them an amount of R2 086 766.75, being the pro rata share of the rates
increase that, on their interpretation of clause 7.3, the respondent was liable
to pay.

[5] Whether the appellant is entitled to the declarator and whether the
respondent is liable to pay the amount claimed by the appellants depends on
the meaning of clause 7.3. It provides:
'The Tenant shall be responsible for and promptly pay the Tenant's share, based on lettable
area of each tenancy in proportion to total lettable area, of any increases measured from the
initial valuation date, in rates, taxes, VAT, building’s operating costs, and/or sewerage
charges payable to the competent authority and/or Landlord in respect of the land or
improvements thereon imposed after the commencement date of the lease. The provisions of
this clause shall apply mutatis mutandis to any levy or tax not in force on the date of signature
of this lease being imposed at any time thereafter against the land and/or improvements
thereon by any competent authority. Should the Landlord for any reason increase or decrease
the Gross Leasable Area of the Building after the date of commencement of this lease then
the Tenant's pro rata share shall be adjusted accordingly.'

[6] A number of interim valuations of the property and the incomplete
shopping centre had been conducted by the local authority during its
construction. They reflected, progressively, the value of the land and a rough
estimate of the improvements to the property in its incomplete state. So, for
instance, in the Second Interim Valuation 2000/2001, the valuation that was
current when the lease commenced, the land was valued at R6 989 000 and
the incomplete shopping centre was valued at R60 million on the basis that
the building was about 50 per cent completed and the value of the building
when completed, would be R120 million. The next valuation, the First Interim
Valuation 2001/2002 reduced the value of the land but the value of the
improvements remained R60 million. The rates payable on the basis of this
valuation were R627 871.

[7] The first valuation of the completed shopping centre was effected in
terms of the 2000 General Valuation in October 2002 with an implementation
date of 1 July 2002. After a successful appeal by the appellants against the
initial valuation, the property and its improvements were valued at R950
million, made up of R860 million in respect of the improvements and R90
million in respect of the land. The rates payable were R13 425 400. This
valuation was a great deal higher than previous valuations for two reasons.
First, the shopping centre had been completed and secondly a new system of
valuation had been introduced that produced universally higher valuations.

[8] The appellants’ case was that the term ‘the initial valuation date’ in
clause 7.3 referred to the valuation that was current on the date of the
commencement of the lease. If that was so, it followed that the respondent
was liable to contribute its pro rata share of the increase in rates from R627
871 to R13 425 400. The respondent’s case was that ‘the initial valuation
date’ referred to the first valuation after the completion of the building and this
was the valuation of October 2002. This, it argued, was the base from which
future increases in rates were to be measured.

[9] In terms of clause 1.2 of the agreement of lease, the premises were
defined as a ‘supermarket on the lower level’ of the shopping centre some 6
000 square metres in size. The period of the lease was 15 years plus four
optional periods of five years each. The commencement date of the lease was
defined in clause 1.3.2 as the ‘first day of the month in which the Centre
opens’. In terms of clause 1.3.4, the obligation to pay rental commenced on
that day too. The rental was stipulated in clause 1.4 to be ‘2.5 per cent of the
Tenant’s Turnover as defined in Clause 5.1.2 [of the general terms and
conditions] for the first 12 months of trading, 2.25 per cent in the second 12
months and 2 per cent thereafter’. The date of beneficial occupation was
defined by clause 1.3.6 to be 90 days before the opening of the shopping
centre. The premises, according to clause 1.9, could only be used for the
purpose of carrying on the business of a supermarket.

[10] Annexure ‘A’ to the agreement contains its general terms and
conditions. Clause 7.3 is one of these terms. Clause 2 states that the
premises ‘shall have been constructed substantially in accordance with’ an
attached plan but the parties agreed to the possibility of amendments to the
plan, either as a result of municipal requirements, the requirements of any
other authority having jurisdiction or in the discretion of the landlord (within the
bounds of reasonableness). Clause 3 dealt with beneficial occupation. Clause
3.2 provided that if the ‘Landlord is unable to give the Tenant beneficial
occupation of the Premises’ 90 days before the opening of the shopping
centre ‘by reason of the building or Premises being incomplete’, the tenant
would have no claim against the landlord and have no right to cancel for this
reason. Clause 6 placed the obligation on the tenant to pay its share of the
operating costs, which are, in terms of clause 6.2, ‘the total actual cost and
expense incurred in operating, administering and managing the Building’.

[11] Clause 7 consists of three sub-clauses. Clause 7.1 required the tenant
to pay for electricity, water, gas and other utilities that are used or consumed
in the premises as well as the cost of refuse removal from the premises.
Clause 7.2 entitles the landlord, in the event of it paying for utilities used or
consumed by the tenant, to recover the amounts so paid, with interest and to
cancel the lease if the tenant does not pay within 14 days of demand. Clause
7.3 then, as we have seen, deals with the tenant’s obligations to pay a pro
rata share of any increases in rates, taxes, VAT, the building’s operating costs
and sewerage charges. Finally, clause 20.1 entitles the landlord to ‘complete
construction of the Building (if it is still in the course of completion at the
commencement date of this lease)’, to add to ‘the improvements on the Land
(other than the Premises)’ and to effect additions to the building or the
premises, and for these purposes to erect scaffolding, hoardings and building
equipment and to have access to the premises if needs be.

[12] The process of interpretation of contracts involves a search for the
intention of the parties through the words that they used, considered in the
context of the agreement as a whole, including the factual background and
construed ‘in accordance with sound commercial principles and good

business sense so that it receives a fair and sensible application’.1  In this
case, little purpose would be served by attempting to give the words used in
clause 7.3 their literal meaning – by applying the so-called golden rule of
interpretation – because as Binns-Ward J observed in the full bench
judgment, the parties were in agreement that clause 7.3 was ‘inelegantly
composed and ambiguous in relevant respects’.2

[13] Because of the ambiguity of clause 7.3 this is not the type of case in
which ‘sophisticated semantic analysis’ will assist to find the intention of the
parties.3 Despite its drawbacks, a sensible meaning can be attributed to
clause 7.3 which accords with good business sense and is equitable, and thus
reflects the intention of the parties. That considerations of equity are relevant
to the interpretation process is evident from South African Forestry Co Ltd v
York Timbers Ltd4 in which Brand JA said that ‘the notions of fairness and
good faith that underlie the law of contract . . . have a role to play’; that while a
court may not superimpose its idea of fairness on ‘the clearly expressed
intention of the parties’, different considerations apply when the contract is
ambiguous; and, in that case, ‘the principle that all contracts are governed by
good faith is applied and the intention of the parties is determined on the basis
that they negotiated with each other in good faith’.

[14] In ascribing meaning to the phrase ‘the initial valuation date’ the first
issue that must be addressed is what the increases ‘measured’ from this date
refer to. Do they refer to rates only or do they refer also to ‘taxes, VAT,
building’s operating costs and/or sewerage charges’? In my view, it makes no
sense to determine increases in anything but rates from ‘the initial valuation
date’ as none of the other expenses are determined by a valuation of the land
on which, and buildings in which, the leased premises are situated. In
consequence, it must have been the intention of the parties that only

1 Picardi Hotels Ltd v Thekwini Properties (Pty) Ltd 2009 (1) SA 493 (SCA) para 5. See too
KPMG Chartered Accountants (SA) v Securefin Ltd & another 2009 (4) SA 399 (SCA) para
39; Coopers & Lybrand & others v Bryant 1995 (3) SA 761 (A) at 767E-768E.
2 Para 4.
3 Lloyds of London Underwriting Syndicates 969, 48, 1183 and 2183 v Skilya Property
Investments (Pty) Ltd [2004] 1 All SA 386 (SCA) para 14.
4 South African Forestry Co Ltd v York Timbers Ltd 2005 (3) SA 323 (SCA) para 32.

increases in rates were to be determined from the initial valuation date. In
other words, what was intended was that the respondent would be
responsible for its share of any increases in rates, ‘measured from the initial
valuation date’, and increases in taxes, VAT, the building’s operating costs
and sewerage charges. Increases in the expenses mentioned other than rates
would be payable by the respondent on a pro rata basis when the increases
occurred.

[15] There are important indications in the agreement that the parties
intended the lease to become operative only when the building was
completed. First, the opening of the shopping centre, as the trigger for the
lease commencing, appears to me to contemplate a building that is complete.
Secondly, clause 2 of the general terms and conditions speaks of the
premises having ‘been constructed’ in accordance with an attached plan.
Thirdly, clause 1.3.6 of the lease agreement and clause 3 of the general terms
and conditions, dealing with beneficial occupation, contemplate that the
building and the premises would be completed 90 days before the opening of
the shopping centre. Finally, clause 6 of the general terms and conditions,
dealing with the tenant’s obligations to pay its share of the operating costs of
the building, contemplates a completed building – one that is operated,
administered and maintained.

[16] The tenant’s rental was determined on the basis of a percentage of its
turnover, presumably on the basis of projected figures determined by
experience and expertise in this type of development. The operating costs of
the building, whatever they may be, were for the tenant’s account, as were
consumables such as electricity and water, these being based on the amount
of use. Finally, in accordance with the common law position, the landlord bore
responsibility initially for rates. In terms of this scheme, there were few
imponderables for the landlord: with the exception of the rental, other costs
were to be borne by the tenant and those that were borne by the landlord
were, if not known in precise terms, capable of easy and accurate estimation.
All that was left was future increases. Clause 7.3 is a mechanism – albeit a
poorly crafted mechanism – for the landlord to make provision for the tenant

to contribute, not to rates per se, but to increases in rates as and when they
arise.

[17] It is within the context that I have outlined that the meaning of the term
‘the initial valuation date’ must be determined. It must first be stated that, for
what it is worth, the word ‘date’ is out of place; the liability to pay a pro rata
share of any increase in rates arises from ‘the initial valuation’ or, I suppose,
the date on which the initial valuation came into effect.

[18] As stated above, the two possibilities contended for by the parties are
first that the initial valuation date refers to the valuation that was operative
when the lease commenced and the second is that it refers to the first
valuation of the completed building. The first possibility has, in my view, at
least three problems. They are, first, that it conflates the phrase ‘the
commencement date of the lease’ with the phrase ‘the initial valuation date’,
rendering the latter term meaningless and superfluous. I cannot imagine that
both phrases would have been used in clause 7.3 if the parties intended them
to mean the same thing. Secondly, I can see no reason why the parties would
have intended that the base from which increases in rates were to be
determined would be a valuation of an incomplete building. As the tenant
would only be able to utilise the building when it was complete, as
contemplated in the agreement, it would be illogical, as well as making no
business sense for it to have agreed to such a scheme. Thirdly, on that
construction, the base date would be arbitrarily set. The parties could not
have intended that the base date would be set by the state of completion in
which the building happened to be at the time the valuation was made.

[19] In my view, it would have been logical, equitable and would have made
business sense for the parties to have agreed that the respondent would only
be liable for increases in rates on the basis of an increased valuation of the
completed building. In other words, the base from which increases are to be
determined is a valuation of the completed building. This fits into the scheme
of the lease that the tenant leases part of a completed building and
contributes to increases in rates levied on a completed building. It follows that,

‘the initial valuation date’ in clause 7.3 refers to I July 2002, the
implementation date of the General Valuation of October 2002. That being so,
the appeal must fail.

[20] The following order is made:
The appeal is dismissed with costs, including the costs of two counsel.

____________________
C PLASKET
ACTING JUDGE OF APPEAL

APPEARANCES
APPELLANT
:
S Burger SC and E Fagan SC
Instructed by Bernhardt, Vukic, Potash and Getz,
Cape Town;
Lovius-Block Attorneys, Bloemfontein

RESPONDENT
:
J A Newdigate SC and J H Roux SC

Instructed by Werksmans Attorneys, Cape Town

Naudes, Bloemfontein

THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE
SUPREME COURT OF APPEAL
MEDIA SUMMARY – JUDGMENT DELIVERED IN COURT OF
APPEAL
30 March 2011

STATUS: Immediate

HYPROP INVESTMENTS V SHOPRITE CHECKERS (315/10)

Please note that the media summary is intended for the benefit of the media and
does not form part of the judgment of the Supreme Court of Appeal

The Supreme Court of Appeal (the SCA) today dismissed the appeal with costs.

During 2003, the appellants purchased a shopping centre in which the respondent
carried on the business of a supermarket. In May 2005, the appellants launched an
application in which they sought a declarator as to the liability of the respondent –
their tenant -- to pay a pro rata share of the increase in rates payable on their
property. They also sought an order to direct the respondent to pay them an amount
of R2 086 766. 75, being the pro rata share of the rates increase that, on their
interpretation of the lease agreement, the respondent was liable to pay.

Before the SCA the appellants’ case was that the term ‘the initial valuation date’ in
clause 7.3 of the lease meant the date of commencement of the lease. If that was
so, it followed that the respondent was liable to contribute its pro rata share of the
increase in rates from R627 871 to R13 425 400, being the amount of R2 086
766.75 claimed by them. The respondent’s case was that ‘the initial valuation date’
referred to the first valuation after the completion of the building and this was a
valuation of October 2002. This, it argued, was the base from which future increases
in rates were to be measured.

The SCA held that despite its drawbacks, a sensible meaning could be attributed to
clause 7.3. It court found important indications in the agreement that the parties
intended the lease to become operative only when the building was completed.
Clause 7.3 is a mechanism for the landlord to make provision for the tenant to
contribute, not to rates and taxes per se, but to increases in rates and taxes as and
when they arise.

The court held that it would have been logical, equitable and would have made
business sense for the parties to have agreed that the respondent would only be
liable for increases in rates on the basis of an increased valuation of the completed
building. In other words, the base from which increases were to be determined is a
valuation of the completed building. The court held that ‘initial valuation date’ in
clause 7.3 referred to 1 July 2002, the implementation date of the General Valuation
of October 2002.

-- ends --