For a lease to be binding there are various essential conditions which need to be defined and agreed upon between the parties. If any one or more of these essential conditions are missing, there is no binding lease.
These essentialia include the thing leased, the rental amount to be paid, and the duration of the lease itself. Usually, particularly where the lease has an economic significance to the parties concerned, the essentialia of the lease (and the other supplementary terms and conditions), are reduced to writing in an agreement which is then signed by the parties.
When Is a Lease Binding?
Our Courts recognise that, even where an essential term has not been specifically defined, if a procedure has been incorporated into the lease which sets out a method in which the essential term can be established in a definitive way, there is a binding lease.
For example, if the rental amount payable has not been defined, but there are appropriate clauses which give the authority to a third party to establish the rental in due course, then the lease is valid.
Generally, this situation would involve a lease to be commenced at some time in the future, and the document would include a clause which would state that the parties would, at a specified time, agree the rental.
Failing agreement between the parties, the establishment of the rental would be handed over to a designated arbitrator. It is worth remembering that an “agreement to agree” without a third party mechanism is almost always of little or no use because if agreement cannot be reached, the agreement is void.
Arbitrator: Good or Bad?
It is not suggested that the use of an arbitrator with such wide authority is an ideal method of entering into a lease agreement.
To some extent, both parties to the lease are placing their future business arrangement in the hands of a third person, albeit, hopefully, a person with some experience. That being so, it is an acceptable form of contracting, particularly where a lease shall only commence when it is not possible at the time of its signature to confidently agree a rental.
The Principle
The principle is this: any agreement, including a lease agreement, must contain primary (essential) terms which are ascertainable. The word ascertainable in this context means objectively ascertainable by a Court.
The saftest way of avoiding going to Court for a ruling is by way of a carefully drafted agreement which adequately caters for the essential clauses of a lease agreement.