Invalid lease, valid debt: court orders Knysna municipality to pay up

The Western Cape high Court has declared a lease agreement between the Knysna municipality and Grey Elephant Investments unlawful.

It also issued a stern warning against the growing trend of organs of state using the courts to “clean up” their “administrative messes”.

The judgment, delivered by judge Constance Nziweni on Wednesday, centred on a “self-review” application, a legal mechanism where a government entity asks the court to strike down its own past resolutions and contracts.

The application has its genesis from a resolution by the municipality’s council that approved a lease agreement with Grey Elephants Investments. In doing so, the council bypassed the mandatory procurement process.

The municipality sought an order, which the court granted, that the council’s resolution taken on October 26 2023, to approve the conclusion of a lease agreement with Grey Elephant, without undertaking a competitive and open tender process be declared unconstitutional, unlawful and invalid.

The municipality also sought that the conclusion of the lease agreement between the municipality and Grey Elephant, on December 12 2023 and the resultant lease agreement be reviewed and set aside retrospectively. The court also granted that order.

The lease agreement related to 3,250m² of office space for a monthly rental of R546,000 at a rate of R168/m², which comprised a base rental of R120/m2 and a tenant installation cost of R48/m².

The municipality occupied the leased premises on May 1 2024 and vacated the leased premises at Knysna Mall on July 31 2025.

Nziweni said it was not in dispute that the services had been rendered by Grey Elephant by providing office space to the municipality. She said it was common cause that the municipality had not paid any rental to Grey Elephant.

“The municipality asserts that; in terms of the Municipal Finance Management Act, they are not allowed to pay rental and other charges stemming from an unlawful lease agreement, as this would constitute an irregular expenditure,” Nziweni said.

She said it was the municipality’s submission that Grey Elephant was at all times aware of the illegality of the disputed lease agreement. The municipality asserted that municipal manager at the time, Ombali Phineas Sebola, was not authorised by the council to enter into negotiations with Grey Elephant.

Grey Elephant argued it had contracted with the municipality in good faith and were therefore entitled to assume that the municipality had complied with its internal arrangement and the necessary legal formalities.

Grey Elephant maintained that the municipality was in breach of the lease agreement. The company said it would not be just and equitable for the court to set aside the decisions sought to be reviewed.

In the alternative, the company said the just and equitable remedy would be for the court to direct that the municipality compensate Grey Elephant for its loss.

Grey Elephant asserted that despite its substantial investment of over R14m into the leased property, the municipality has failed to pay any rental since the lease’s inception on May 1 2024.

In her judgment, Nziweni said this case was deeply troubling, particularly for a nation that is built upon a rule of law and a constitutional democracy.

She said the case highlighted a long-standing problem in the system. Courts had dealt with many similar cases over the years, including the highest courts. Even so, municipalities continued to challenge their own decisions through “self-review” applications.

“Judicial review cannot become a routine mechanism to clean up the administrative messes of government institutions. Organs of state and public officials must instead model the highest standards of ethics, accountability, and legal compliance in the execution of their duties,” Nziweni said.

She said for the municipality to permit a private entity to invest capital, allocate resources and alter its commercial position based on an active council resolution, only to attempt to escape its financial rental obligations years later thorough a self-review, was legally and constitutionally unconscionable.

“Grey Elephant has performed under the contract. Surely, Grey Elephant as an innocent lessor is entitled to payment for the performance done.”

The court ordered that the municipality pay the unpaid rental amounts and consumption charges for its period of occupation from May 1 2024 and ceasing on July 31 2025.

She ordered that the municipality shall pay the unpaid tenant installation costs as calculated by Grey Elephant.

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