THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Not reportable
Case No: 1177/2015

In the matter between:

URBAN HIP HOTELS (PTY) LTD

APPELLANT

and

KCARRIM COMMERCIAL PROPERTIES (PTY) LTD
RESPONDENT

Neutral citation:  Urban Hip Hotels v KCarrim  (1177/2015) [2016] ZASCA

173 (25 November 2016)

Coram:
Lewis, Shongwe, Petse, Willis and Van der Merwe JJA

Heard:
9 November 2016

Delivered:
25 November 2016

Summary:
Contract ─ interpretation ─ term contended for by the appellant
excluded by clear terms of the agreement ─ clear terms cannot be altered by
contextual evidence of implementing the contract.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from Gauteng Division of the High Court, Pretoria (Ismail J sitting
as court of first instance):

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

JUDGMENT
______________________________________________________________

Van der Merwe JA (Lewis, Shongwe, Petse and Willis JJA concurring):

[1] The issue in this appeal is whether the appellant, Urban Hip Hotels
(Pty) Ltd, was entitled to deduct certain operating costs from rental income
payable to the respondent, KCarrim Commercial Properties (Pty) Ltd, in terms
of an agreement between them. The appellant had in fact made such
deductions and when it discovered this, the respondent applied for an order in
the Gauteng Division of the High Court, Pretoria that the appellant pay it the
sum that had been deducted plus interest. Ismail J in the court a quo ordered
the appellant to pay the amount of R2 248 156,29 plus interest and costs to
the respondent. It granted leave to the appellant to appeal to this court. The
quantum of the respondent’s claim is not in issue. The issue is whether, on a
proper interpretation of the contract between the parties, the appellant was
entitled to make the deductions that it did.

[2] The appellant operates a number of hotels in sectional title complexes.
In terms of its standard business model, a rental pool is established in which
the owners of sectional title units in the particular complex participate. The
units in the rental pool are marketed and administered by the appellant.

[3] A participating owner becomes a member of the particular rental pool
and is liable to pay an annual membership fee. The owner is generally

required to enter into the appellant’s standard memorandum of agreement
(standard agreement). In terms of the standard agreement the participating
owners share in the total net rental income of all the units in the pool, in
proportion to the percentage of interest that they have in the rental pool, as
determined by the surface area of the respective units.

[4] The net rental income is determined by the deduction of expenses
specified in the standard agreement from the gross rental income of the units
in the pool. These expenses are a monthly rental pool levy per unit, a monthly
management fee payable to the appellant calculated at 20 per cent of the
gross income derived from the letting of the unit and a proportion of the
operating costs of the pool determined by the percentage interest of the unit in
the pool. The rental pool levy is intended to cover what the appellant terms
fixed costs. The fixed costs include only the costs of provision of DSTV to a
unit and a proportionate share of the salaries of the appellant’s staff in the
particular complex. The amount of the levy would fluctuate in accordance with
the costs of the fixed cost items. The operating costs are regarded by the
appellant as variable costs and include expenses in respect of cleaning of
units, repairs and maintenance, electricity and administration costs. In short,
the owner of a participating unit receives a monthly amount consisting of its
proportionate share of the total rental pool income, less the rental pool levy,
the management fee and a proportionate portion of operating costs.

[5] The appellant managed such a hotel rental pool at the ICON building in
Cape Town (ICON). By March 2011 approximately 36 residential units in the
ICON formed part of the appellant’s rental pool. Its offices were situated on
the fourth floor of the building and it had only a reception desk at the entrance
to the residential units. The respondent owned 50 residential units and 12
corporate and retail units (for offices and shops) in the ICON. Its residential
units were managed by an entity called VIP Living. The respondent had an
attractive reception area at the entrance to the residential units in the ICON.
As a result there were effectively two competing hotels in the ICON, namely
the appellant’s operation and the respondent’s units managed by VIP Living.

[6] It is common cause that the appellant was keen to obtain the
respondent’s residential units and superior reception area at the ICON for its
rental pool. It accordingly entered into negotiations with the respondent.
During the negotiations the appellant was represented by its managing
director, Mr Kobus Botha. Mr Zaheed Carrim, the director and chief executive
officer of the respondent, acted for the respondent, assisted by its operations
manager, Mr Dick Putter. There can be no doubt that during these
negotiations the respondent was in a strong bargaining position.

[7] On or about 31 March 2011 the negotiations resulted in the conclusion
of a written agreement between the parties entitled Memorandum of
Understanding (MOU). The MOU was to serve as an interim arrangement for
the period from 1 April 2011 to 31 January 2012, in anticipation of entering
into a more comprehensive and lasting agreement.

[8] In terms of the MOU the respondent placed 48 of its residential units in
the appellant’s rental pool at the ICON and the respondent let its reception
area to the appellant. The respondent thus became entitled to a proportionate
share of the rental pool income. Clause 3.4 of the MOU provided that the
repairs and maintenance in respect of normal wear and tear of the units would
be for the account of the appellant. In respect of the financial obligations of
the respondent the MOU provided as follows:
‘4.3
Expense Contribution
The parties agreed that a levy rate of R1,250.00 per rentable unit will apply for the
duration of the agreed initial term of the arrangement based on the number of units
made available by KCarrim Commercial Properties and defined in the monthly
Residential list to be supplied by Carrim for the month in advance. No other expense
or payment would be allowed and any deviation or adjustment hereof must be
recorded in writing with a reference to this provision, dated and signed by both
parties.
4.4
Management Fee
The parties agreed that the monthly management fee payable to Urban Hip will be
calculated on a rate of 14% of the turnover, excluding VAT and will be recorded on a
VAT Invoice submitted to Carrim for payment not later at the 25th of each month of
operation.’

[9] Clause 4.7 of the MOU read:
‘Final Agreement
The parties agreed to honour and respect these recorded terms, business standards
and practises until it would be replaced or confirmed by an Agreement of which the
final terms would be defined and agreed to not later than 20 January 2012 and that
the objective of the arrangement would be to establish a profitable arrangement as
the basis thereof. The final implementation date is agreed and set for 1 February
2012.’
Clause 6.2 provided as follows:
‘Variation
No variation or consensual cancellation of this MOU shall be of any force or effect
unless reduced to writing and agreed by all parties.’
The MOU was amended by two written agreements entered into on 31 May
2011, but it is not necessary to refer to their provisions.

[10] The MOU was thus very different from the standard agreement used by
the appellant. A fixed and not variable levy rate and a reduced management
fee were agreed upon. Importantly, according to the respondent it was, in
terms of clause 4.3 of the MOU, also not liable for operating costs in respect
of the rental pool.

[11] The envisaged comprehensive agreement did not materialise. It is
common cause that the MOU was terminated on 29 February 2012. The
respondent said that during March 2012, Mr Putter ascertained that over the
period from 1 April 2011 to 29 February 2012, the appellant had deducted
operating costs from income due to the respondent, over and above the
expense contributions/levy rate in terms of clause 4.3 and the management
fee. As a result the accounts of the appellant were analysed with greater care
by the respondent. It determined that the deductions in respect of operating
costs for the duration of the MOU amounted to R2 248 156,29 – hence the
application against the appellant for payment of this sum, interest thereon
from date of demand and costs.

[12] As I have said, the correctness of the amount is not in dispute. The
appellant opposed the application essentially on the ground that the standard
agreement formed part of the agreement between the parties. Its case was
that the relationship between the parties was governed by the standard
agreement save as otherwise provided for in the MOU. Therefore, so the
appellant averred, the respondent was in fact liable for operating costs and
the appellant was entitled to deduct the amount of R2 248 156,29.

[13] The application was referred for the hearing of oral evidence on the
following questions:
‘1.1
Did the Respondent’s standard memorandum of agreement  . . . form part of
the contract between the parties?
1.2
Did the three MOU’s constitute the exclusive memorial of what was agreed
between the parties?’
Only Mr Carrim and Mr Botha testified in the court a quo. It found for the
respondent in the following terms:
‘I am therefore of the view that the MOU was the sole memorial between the parties
for the period that it existed, albeit for a short duration of time, and that the
respondent’s standard pool agreement did not form part of the agreement between
the parties.’
It granted the relief claimed in the notice of motion.

[14] Before us, the appellant did not challenge the finding that the standard
agreement did not form part of the agreement between the parties. This
stance is no doubt correct. Although the standard agreement had been sent to
the respondent at the initial stage of the negotiations, it was never referred to
again. It is clear from the evidence that Mr Carrim would under no
circumstances have bound the respondent to the standard agreement. For
this reason the respondent prepared the MOU, which after the signature
thereof by Mr Botha, constituted the only document evidencing the contract
between the parties.

[15] The argument before us was that on an interpretation of the MOU, the
appellant was entitled to deduct operating costs. It was submitted that the

appellant’s normal practice in respect of deduction of operating costs applied
to the MOU as did its standard practice of allocating rental income. (The
respondent has no quarrel with the way in which rental income was
determined.) For this argument the appellant relied on an interpretation of
clause 4.3 read with clause 4.4, together with clause 4.7 and on the alleged
conduct of the respondent subsequent to the MOU.

[16] As I understood it, the argument went along the following lines.
Because clause 4.4 dealt with the payment of management fees, the phrase
‘no other expense or payment would be allowed’ in clause 4.3, could not
mean what it says. Clause 4.3 deals only with the rental pool levy for fixed
costs. As the MOU therefore contained no mechanism for determination of the
net rental income, it must have been intended that the appellant’s normal
practice in respect of both allocating rental income and deducting operating
costs applied. It was submitted that this conclusion was supported by clause
4.7 and evidenced by the subsequent conduct of the respondent.

[17] There is no merit in this argument. It is trite that the MOU must be read
as a whole. The subject of clause 4.3 is contribution to expenses and that of
clause 4.4 is the management fee. The wording of clause 4.3 makes it
abundantly clear that, apart from the levy rate of R1 250 per unit, the
respondent would not be liable for any other expense or payment unless
otherwise agreed in writing and signed by both parties. Seen thus, the MOU
indeed contained a method of determination of the net amount payable to the
respondent, ie its proportionate gross rental income less the expense
contribution and the management fee.

[18] In the final analysis the appellant relies on nothing other than a tacit
term of the MOU to the effect that the appellant’s normal practice in respect to
operating costs would apply. Reliance on such a tacit term is unfounded for a
variety of reasons. It was not pleaded nor raised in the court a quo. As I have
pointed out, the MOU is complete and efficacious. The parties applied their
minds to the subject of operating costs. They excluded liability for operating
costs on the part of the respondent by the express provisions of clause 4.3

and the deliberate exclusion of the standard agreement from their agreement.
In these circumstances there is no room for this tacit term. See Robin v
Guarantee Life Assurance Co Ltd 1984 (4) SA 558 (A) at 567B-F. In any
event, on the evidence it can be stated with confidence that had the officious
bystander during the negotiations raised the question as to whether the
respondent would be liable for operating costs, Mr Carrim would have firmly
answered in the negative.

[19] On a proper interpretation of clause 4.7, the words ‘terms, business
standards and practices’ are all qualified by the words ‘these recorded’.
Clause 4.2 for instance provides as follows:
‘Service Delivery Standard
The parties agreed that the operational co-operation standard to be applied would be
similar to those standards that make up the total business of Urban as exercised in
all its rental pool premises.’
The submission that clause 4.7 refers to extraneous business standards and
practices can therefore not be accepted. The appellant’s interpretation in any
event takes its case no further. The alleged extraneous business standards
and practices are unidentified, but can certainly not refer to the standard
agreement.

[20] It remains to deal with the appellant’s submission in respect of the
alleged subsequent conduct of the respondent. The appellant relied upon the
evidence that for the duration of the MOU, the appellant furnished the
respondent with monthly accounts that reflected deductions of operating
costs. It is undisputed that despite discussions of these accounts by Mr Putter
with the appellant, the respondent did not, during the contract period, object to
the accounts on the ground that the deduction of operating costs was
impermissible.

[21] It is now well established that the meaning of a contract must be
ascertained by consideration of the words used, the contract as a whole and
the context or factual matrix in which the contract was concluded, irrespective
of whether there is an ambiguity in the meaning thereof. See Novartis SA

(Pty) Ltd v Maphil Trading (Pty) Ltd [2015] ZASCA 111; 2016 1 SA 518 (SCA)
para 28. I accept that in an appropriate case the manner in which the parties
to a contract carried out their agreement, may be considered as part of the
contextual setting in which the terms of the contract are to be determined. See
Unica Iron and Steel (Pty) Ltd & another v Mirchandani [2015] ZASCA 150;
2016 (2) SA 307 (SCA) para 21 and G B Bradfield Christie’s Law of Contract
in South Africa, 7 ed, at 254. The use of such evidence is, however, subject to
three provisos. First, the evidence must be indicative of a common
understanding of the terms and meaning of the contract. Second, as pointed
out by Bradfield, (supra) at 254, the evidence may be used as an aid to
interpretation and not to alter the words used by the parties. See also
Comwezi Security Services (Pty) Ltd & another v Cape Empowerment Trust
Ltd (759/2011) [2012] ZASCA 126 (21 September 2012). Third, as Harms JA
cautioned in KPMG Chartered Accountants (SA) v Securefin Ltd & another
[2009] ZASCA 7; 2009 (4) SA 399 (SCA) para 39, the evidence must be used
‘as conservatively as possible’.

[22] In this matter the evidence by no means established that the conduct of
the respondent is consistent only with acceptance of liability for operating
costs in terms of the MOU. The failure of both Mr Putter and the accounts
department of the respondent to raise the question of operating costs before
March 2012, may simply be ascribed to a mistake or misunderstanding. This
appears to be supported by the fact that the impermissible deduction by the
appellant of operating costs in respect of repairs and maintenance, was also
not picked up. It is clear that Mr Carrim was the directing mind of the
respondent. His evidence that he was not furnished with the appellant’s
accounts and that he was therefore unaware of the deduction of operating
costs before March 2012, cannot be rejected, to say the least. In any event,
as I have said, the clear meaning of clause 4.3 of the MOU cannot in the
circumstances be varied by evidence of conduct subsequent to the entering
into of the MOU.

[23] Accordingly, as the court a quo found, the appellant was not entitled to
deduct the operating expenses that it did and the respondent is entitled to
payment of the sum underpaid.

[24] The appeal is dismissed with costs including the costs of two counsel.

__________________
C H G van der Merwe
Judge of Appeal

APPEARANCES:
For Appellant:

B H Swart SC
Instructed by:
Joubert Swart Attorneys, Randburg
Rossouw & Conradie Inc, Bloemfontein

For Respondent:

A Gautschi SC (with him J Myburgh)
Instructed by:
Errol Goss Attorneys, Pretoria
Eugene Attorneys, Bloemfontein