A Landlord's rights under Section 14 of the CPA

A Landlord’ rights in terms of Section 14 of the Consumer Protection Act, 2008 in the event that a Tenant prematurely terminates a fixed-term lease agreement in respect of commercial property

For purposes of this discussion, it is assumed that the Landlord is a juristic person, the Tenant is a natural person and the lease agreement which was concluded between the parties was for a fixed-term period of five years in respect of commercial property owned by the Landlord.

In the scenario set out above, section 14 of the Consumer Protection Act, 2008 (“the Act”) will apply to the lease agreement relationship between the parties and will govern the rights, duties and obligations of the Landlord in the event of the premature termination of the lease agreement by the Tenant.

In the normal course and in terms of the Act, a lease agreement which is concluded between a Landlord and its Tenant is limited to a maximum duration of 24 months. The duration of the lease agreement may be concluded for a longer period on condition that such longer period is expressly agreed between the parties and that the Landlord can show a demonstrable financial benefit to the Tenant.

The Tenant may cancel the lease agreement at any time by giving the Landlord 20 business days’ notice in writing. The Tenant remains liable to the Landlord for any amount owed to the Landlord as at the date of cancellation of the lease agreement.

The cancellation by the Tenant is subject to a “reasonable cancellation penalty” in favour of the Landlord. The various considerations to be considered when determining the reasonableness of the cancellation penalty is set out in Regulation 5 of the Act.

In calculating the cancellation penalty, the following is to be taken into consideration:

• amount for which the Tenant is still liable to the Landlord up to the date of cancellation of the lease agreement;
• value of the rental paid by the Tenant until date of cancellation of the lease agreement;
• value of the goods which will remain in the possession of the Tenant after cancellation of the lease agreement (if any);
• duration of the lease agreement as initially agreed between the parties;
• losses suffered by or benefits accrued to the Tenant as a result of the Tenant entering into the lease agreement;
• the length of notice of cancellation provided by the Tenant to the Landlord;
• the reasonable potential for the Landlord, acting diligently, to find an alternative tenant between the time of receiving the cancellation notice and the time of the cancellation of the lease agreement; and
• the general practice within the commercial property rental industry.

The Act’s draft regulations suggested that the reasonable cancellation penalty should not exceed 10% of the value of the total rental that the Tenant would have paid to the Landlord, had the lease agreement run its course. The final regulations do not contain this provision, but it is suggested that the draft regulations be considered as a guide when determining the value of the “reasonable cancellation penalty”.

The provisions of the Act stipulate that the Landlord may not charge a penalty which would have the effect of negating the Tenant’s right to cancel a fixed term consumer agreement as afforded to the Tenant by the Act.

The Landlord has a duty to mitigate its damages flowing from the premature cancellation of the lease agreement by the Tenant and to attempt to take all reasonable steps to find a new tenant as soon as possible.

It is suggested that, in order to avoid the application of the Act and the consequent regulations pertaining thereto to a lease agreement, the Landlord concludes a lease agreement with a juristic person (being a company or close corporation). Section 14 of the Act does not apply to transactions between juristic persons regardless of their annual turnover or asset value.

Disclaimer

This article is not intended to provide legal advice; it is for general information purposes only and to provide a general understanding of the law.  It is advisable that advice relating to the specific circumstances of your matter be sought from an attorney before acting upon the content of this article.  This article is written at a particular point in time and accordingly may not always reflect the most current legal developments, legislation and/or judgments which may be applicable from time to time. The author and/or Rushmere Noach Incorporated are not responsible for any errors or omissions in the content.