Why should you care about cession clauses in lease agreements?

March 1st, 2023

When a lessor and a lessee enter into a lease agreement, there are rights and duties that arise from the agreement. The general rule is that rights arising out of contracts, including lease agreements, often may be ceded to third parties without consent from a counterparty. However, rare instances occur where the rights arising from agreements are intended for the benefit of a specific party to the contract.

General agreements

Generally, agreements allow for a third party to complete contract specific obligations. The absence of a no cession clause is enough to mean that cession of rights and duties of a contract is possible in such general agreements. In fact, where it concerns long term lease agreements, lessors often do not anticipate that one lessee would carry out the obligations throughout the whole term. However, this position has been altered by a recent Constitutional Court (CC) judgment in University of Johannesburg v Auckland Park Theological Seminary and Another 2021 (8) BCLR 807 (CC). The court noted that, where parties are considering whether a cession of duties is possible, they ought to consider a position that is a step ahead of the general rule around the absence of no cession clauses. The court held that parties should interpret agreements, such as the contract’s factual matrix, its purpose, and circumstances leading up to its conclusion.

A written no cession clause is often a distinct way to clarify that no party to a contract containing such a clause may cede their rights and/or duties. Such clauses are utilised where agreements are entered into with specific beneficiaries, or person to comply with the obligation, in mind. In instances where the no cession clause is not used, a highly personalised context of a contract is a valid indicator as to the inability to cede the contractual obligations. The common law principle of delectus personae prevents delegation of rights and/or duties of one party to another party in such instances. For example, where a patient consents to surgery being conducted by a specific surgeon, such surgeon is a specified person to complete the obligation. Thus, a right of this nature may not be delegated to another surgeon who may have a different set of skills.

The University of Johannesburg case

In University of Johannesburg, the focus of the matter was whether contractual rights and duties arising out of a lease agreement were lawfully ceded and whether ceding rights in a long-term lease agreement constituted termination of the agreement within context.

This matter concerned the University of Johannesburg (UJ) and Auckland Park Theological Seminary (ATS) concluding a 30-year lease agreement in 1993, which was registered in 1996. The agreement provided, among other rights and duties, that students who registered for theological degrees would be taught other courses by both UJ and ATS. In particular, UJ contractually agreed that ATS would be the lessee when UJ registered the lease agreement with the Minister of Education. In addition, this lease agreement was in terms of the Universities Act 61 of 1955, as well as s 4(2) of the Rand Afrikaans University Act 51 of 1966.

In 2011, ATS ceded its rights arising from the lease agreement to a third party, Wamjay Holdings Investments (Wamjay), for a once off payment of R 6 500 000 without the knowledge of UJ. Wamjay’s intention was to establish a religious-based school for primary and high school education on the premises leased by ATS from UJ. When UJ became aware of the cession by ATS, they took the view that the rights in the lease agreement were personal to ATS. In addition, they considered that ATS’s act to cede their rights to Wamjay was a repudiation of the original lease agreement between UJ and ATC.

The SCA and CC judgments

The Supreme Court of Appeal (SCA) found that the cession by ATS to Wamjay was legal, despite the personal rights alleged by UJ. The SCA highlighted that the restriction that is placed by the delectus personae rule on the cession of rights in long-term lease agreements does not expect that the obligations will be completed by one party. Therefore, the SCA held that there was nothing in the lease itself that indicated that ATS’s rights were delectus personae or not intended to be ceded at a later stage (see M Kader ‘Cession of rights under long-term lease’ (www.lexisnexis.co.za, accessed 1-2-2023)).

However, the CC took a contextual approach to the interpretation of the lease agreement. In its inquiry, the court discussed that evidence introduced to supplement contracts of a personal nature should be such that it considers the circumstances that were present when the contract was concluded. The decision was further informed by the legal principle of delectus personae on lease agreements to overturn the decision of the SCA.

It was concluded by the High Court that rights contained in long term lease agreements between specific parties may not to be ceded without specific consent. When determining whether rights under a lease agreement are delectus personae, the necessary inquiry is whether the rights are so personal that it makes a reasonable difference who will enforce the rights. If it does, in fact, make a material difference, the rights in an agreement are to be interpreted as incapable of being ceded. As a result of this inquiry, the court found in favour of UJ in that the rights granted through UJ and ATS’s lease agreement were personal and specific to ATS. The rights were severely personal in nature that it did make a difference that ATS were suddenly not the party entitled to enforce the rights. Therefore, the High Court concluded that UJ was reasonable to interpret that ATS had repudiated the lease agreement.

Ways to avoid cession without consent

Briefly stated, this judgment affirms that lessors should continuously ensure that their lease agreements contain a no cession clause, a clause that restricts cession of rights completely. Alternatively, lessors should require that lease agreements contain a written clause that restricts cession of rights to a third party unless the lessor consents. These are ways through which lessors can be protected from cession of rights and/or duties without their consent.

In conclusion, the CC judgment clarifies the responsibility to consider when entering into long-term and short-term lease agreements – to have cession clauses to protect oneself should there be a legal dispute over a cession of rights. It is now certain that courts have been directed to analyse contextual evidence of lease agreements to determine if rights are eligible for cession. Therefore, it is fundamental that lessors enter into lease agreements that do not leave the question of cession in doubt. Instead, clearly define the scope of cession of rights and approach an attorney to assist with this. (See D Thompson ‘Beware of lease cessions! A discussion of University of Johannesburg v Auckland Park Theological Seminary and Another (CCT 70/20) [2021] ZACC 13’ (www.cliffedekkerhofmeyr.com, accessed 1-2-2023) and SB Nxumalo ‘When are personal rights too personal to be ceded?’ (2022) 43 Obiter 617)).

Siyabonga Skosana LLB (Rhodes) is an Immigration Consultant at Fragomen in Johannesburg.

This article was first published in De Rebus in 2023 (Jan/Feb) DR 7.