The enactment of the new Consumer Protection Act No. 68 of 2008 (CPA) introduces some far reaching changes to lease agreements for immovable property. Specifically for ordinary people, the changes affect the maximum duration of a lease agreement and grant the parties certain rights of cancellation.
It is important to note that Juristic Persons fall outside the ambit of the CPA. Juristic Persons includes:
• Closed Corporations,
• and Associations.
No distinction is made between commercial and residential property.The Maximum Duration Of Fixed-Term Agreement
The regulations promulgated in terms of the CPA prescribe that fixed-term agreements shall endure for a maximum period of two years.
This provision also applies to lease agreements which, therefore, are limited to a two-year duration period. This is unless the landlord is able to establish a “demonstrable financial benefit” to the tenant for the conclusion of a lease for a period exceeding two years.
After the expiry of the initial twenty-four month period the lease continues on a month-to-month basis unless and until a new lease is concluded between the parties.
The Tenant’S Right To Early Cancellation
In order to give content to a consumer’s right to choose, section 14 of the CPA provides that a tenant may cancel the lease agreement with 20 business days’ notice, without the need to prove that there was a breach (whether material or not) of the agreement.
Regardless of the reason for the cancellation of a fixed term agreement, the tenant will remain liable to the landlord (supplier) for any amounts owed in terms of the relevant agreement up to the date of cancellation, but not up to the end date of the contract under the relevant agreement.
Early cancellation of a lease agreement does not constitute a breach of the lease agreement, it is a right under the CPA. A tenant has the right to cancel a lease agreement.
The Landlord’S Rights
Once a tenant has exercised his right to early cancellation, the landlord has the right to in turn impose a reasonable cancellation penalty and demand all outstanding amounts owed in terms of the lease.
Whilst the draft regulations indicated that such cancellation penalty may not exceed 10 % of the value of the consideration that the consumer would have paid had the contract run its course, this provision was excluded from the final regulations.
Regulation 5(2) of the CPA
Regulation 5(2) of the CPA now provides that a penalty may not exceed a reasonable amount taking into account various factors such as:
• The amount that was still owing under the remainder of the period;
• The value of the transaction up until cancellation;
• The duration initially agreed upon;
• The length of notice of the cancellation;
• The potential for the landlord to find another tenant; and
• The general practice relevant to the industry
What can a landlord/agent charge the tenant that cancels early?
Credit checks for any prospective replacement tenants, advertising costs (only the actual amounts on the invoices) and rental – the exact number of days that the unit remains vacant after the tenant vacates.
It is important to keep in mind that all calculations of the penalty can only be made once a replacement tenant has been found. You cannot possibly give the tenant a penalty calculation on the day they cancel and it is important to understand and explain to them the reasons for this.
What about an agent’s commission?
Upfront commission must be separated from ongoing monthly management commission.
If an agent were paid an upfront commission, he/she may charge the tenant the balance of the placement commission as it is an expense you need to recover for your landlord.
If, however, commission is paid monthly for the management of the premises, finding a replacement tenant will cover the ongoing payment of this fee and there is no need to bill the outgoing tenant.
The idea behind the reasonable cancellation penalty is not to penalise the tenant, but to recover any actual loss suffered by the landlord as a result of the cancellation.
The principles behind cancellation penalties lie in our law of undue enrichment. A landlord/agent cannot make a financial gain or benefit off a tenant’s cancellation.
The penalty may further not have the effect of negating the consumer’s right to cancel.
Landlords may also cancel the agreement with 20 business days’ notice but will need to prove:
1. Material failure by the tenant to comply with the provisions of the lease agreement; and
2. That the tenant was asked to remedy the breach but failed to do so.
Landlords are also now obliged to furnish a written notice of the termination of the lease when that lease is nearing its end notwithstanding that the lease period is clearly indicated in the lease agreement. Such notice must be given to the tenant not more than 80 business days and not less than 40 business days before expiry of the lease.