How the CPA Impacts Lease Agreements – Part III

Previously, on the topic of the Consumer Protection Act and Lease Agreements – Part II: 

We’ve ascertained that the CPA has an impact on lease agreements. But not all lease agreements. Lease agreements between legal entities are excluded from the Act, the basic premise being that they (or their Armani-clad legal team on their behalf) can hold their own during negotiations. The CPA provisions relating to lease agreements are restricted to lease agreements that are signed by individuals (like Granny – see Part I.)

(Missed parts I and II? Click here if we want to be brought up to speed!)

Now that we have clarified which lease agreements are affected, the next question is: what, exactly, does the CPA require in respect of those lease agreements that do fall under its ambit? There are a number of standard, age-old clauses in your average agreement of lease that have undergone an overhaul following the implementation of the CPA.

Duration and Renewal

In life before the CPA, the duration of the lease agreement was cause for some debate between landlords and their prospective tenants. Tenants typically seek a degree of flexibility in how long the lease agreement will run for. They prefer a little wiggle-room, just in case circumstances change in the foreseeable future. By contrast, landlords prefer longer-term leases. This reduces the schlep – and cost – of looking for new tenants, and used to have the added advantage that they could claim substantial damages from the tenant for early-termination.

The CPA has since changed this. The maximum period of a lease agreement is now 24 months. Period. No longer can the landlord strong-arm Granny into a five year lease when all she wants is a temporary haven while she contemplates her options.

And just in case the tenant loses track of time (Granny’s memory isn’t quite what it used to be) the landlord needs to notify the tenant, between forty to eight days before, of the impending expiry date of the lease.

This doesn’t mean that, come the end of the 24 month period, Granny suddenly finds herself unceremoniously booted out. If neither party has indicated their intention for the lease to terminate, the Act provides for the lease to continue in operation, on a month-to-month arrangement. At this point the landlord may also decide to negotiate a new lease with the tenant.

Notice of termination

On the subject of duration, before our legislature intervened with the CPA, when a tenant signed a fixed-term lease they were pretty much locked in. Any attempt to terminate the agreement early would result in the landlord gleefully slapping huge cancellation penalties onto the tenant. Even if a replacement tenant was lined up to move in within hours of the landlord’s receipt of the termination letter.

This, too, has changed, courtesy of the CPA. The Act now allows for a tenant to cancel a lease agreement on 20 business days’ written notice, regardless how long the original lease period is. Now this prospect may strike fear into many a landlord’s heart. Visions of tenants changing their minds for no rhyme or reason flash through their minds. Their fists tighten around their wallets as they contemplate the possibility of paying agents commission far in excess of what was originally budgeted for. To all the landlords out there…. Breathe! There are some positives in this clause.

• Firstly, by making early termination permissible, it enhances the channels of communication between landlord and tenant. In the past, a tenant wishing to terminate early may have scheduled a stealthy midnight departure for fear of the repercussions, or defaulted in paying a month’s rent in order to indirectly claw back their deposit. Leaving the landlord with an empty property and scrambling to find a new tenant as quickly as possible. With the provisions of the CPA, the tenant can now feel more at ease talking to the landlord about terminating early, possibly giving even more notice than statutorily required, secure in the knowledge that they’re doing nothing wrong.
• Secondly, in majority of cases, (barring a few that may be in need of professional help) tenants really don’t like moving. Terminating a lease early is equally costly and time-consuming for a tenant. Most are consequently loathe to move out too soon after having moved in.
• Thirdly, if the landlord and tenant have built up a good relationship, it is unlikely that the tenant will merely move out on a whim. Plenty of notice is usually provided in an amicable relationship, allowing the landlord time to put in place suitable contingency measures to minimise the potential for loss.

To be fair, there will always be landlords who fail to provide the requisite maintenance, expecting tenants to live in a hovel. The tenant can hardly be blamed for terminating early in such an instance. And there will always be tenants with dire financial problems who terminate early, which should cause the landlord more relief than anger: the financially-constrained tenant could have chosen to squat while the landlord attempts, at great cost to his mental and financial health, to evict them.

The net effect is that if Granny decides on a whim to start ticking off her bucket list items (starting with a walking tour through the Andes and ending with a stint in an Indian ashram) all she needs to do is give the landlord 20 business day’s written notice of termination, pack her backpack, and hop on the next flight out.

Cancellation Penalties

There is additional relief granted to the landlord. Contrary to popular perception, the tenant’s right to terminate early does not necessarily nullify the effects of a duration period in the lease. If the tenant terminates early the landlord can still require the tenant to pay early-cancellation penalties. In such instance, Section 14 requires the tenant to pay the landlord:

• all amounts which fell due up to the date of termination; and
• a reasonable cancellation penalty.

But what constitutes a “reasonable cancellation penalty”? Some guidance is provided in the regulations to the CPA Regulations.

Caution: Legalese! Skip to the next section for the English translation. 

Regulation 5(2) states: For purposes of section 14(3), a reasonable credit or charge as contemplated in section 14(4)(c) may not exceed a reasonable amount, taking into account –

(a) the amount which the consumer is still liable for to the supplier up to the date of cancellation;

(b) the value of the transaction up to cancellation;

(c) the value of the goods which will remain in the possession of the consumer after cancellation;

(d) the value of the goods that are returned to the supplier;

(e) the duration of the consumer agreement as initially agreed;

(f) losses suffered or benefits accrued by consumer as a result of the consumer entering into the consumer agreement;

(g) the nature of the goods or services that were reserved or booked;

(h) the length of notice of cancellation provided by the consumer;

(i) the reasonable potential for the service provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and

(j) the general practice of the relevant industry.

Regulation 5(3) states: Notwithstanding subregulation (2) above, the supplier may not charge a charge which would have the effect of negating the consumer’s right to cancel a fixed term consumer agreement as afforded to the consumer by the Act.

Huh?

In English

What is clear is that a landlord can still charge a cancellation penalty. But Regulation 5(3) means that he can no longer claim a penalty amounting to the monthly rental for the remainder of the lease period. The CPA limits cancellation penalties to reasonable cancellation charges that are sufficient to adequately compensate the landlord.

This begs the question: what, exactly, can the landlord charge? Unfortunately the Regulations as they stand do not provide a convenient, easy formula for calculating the penalty. Thus, pending the publication of a few nuggets of wisdom from South Africa’s esteemed panels of judges, the calculation of cancellation penalties remain the subject of debate and negotiation. Presumably, the landlord will be able to claim reimbursement for lost rental for the time the property stands empty while the landlord finds a new tenant. A word of caution: this does not mean that the landlord can rest on his laurels and allow time to quietly slip away without searching for a new tenant, expecting the tenant to reimburse him in the process. The Act requires the landlord to “act diligently” in finding a new tenant, thereby mitigating loss all around. As things stand, though, it appears that it will not be possible to calculate the cancellation fee with certainty upfront.

It is therefore hoped that before Granny hops on that plane, the cancellation penalty has been built into her budget! Alternatively, there’s nothing stopping her from assisting the landlord (and her budget) by finding a suitable alternative tenant to take over the lease. No harm in putting the word out at the bowling club.

Letter of demand

Of course, as many an experienced landlord can attest, not all tenants are as desirable as our quiet, introverted, financially-secure, fastidious, 80-year old Granny. If a tenant committed an unforgiveable offence (such as accidentally and on purpose missing the odd rent payment or three), then all it took in the pre-CPA era for the landlord to cancel the lease, attach the tenant’s possessions, and start eviction proceedings was seven days written demand. The CPA now requires the landlord to afford the tenant twenty business days to rectify the breach. Only if the tenant fails to remedy in this period can the landlord take further action against the tenant. And if the tenant comes up with the goods on day nineteen? The lease continues in effect, leaving the landlord praying to his chosen deity that this wasn’t a sign of things to come.

Ignorance is assuredly not bliss

Landlords who become enlightened often experience quite nasty allergies to the CPA. A common knee-jerk reaction is to embark on a nation-wide hunt for that elusive “water-tight” rental contract that circumvents such requirements and negates the tenant’s statutory rights. But beware the implications of non-compliance: in addition to the possibility of facing a few unwelcome fines, the inclusion of an unlawful condition in the lease could well have the potential of invalidating the entire lease agreement.

In Summary: When entering a Lease Agreement, consider whether the Consumer Protection Act has been complied with in respect of:

• the duration of the lease (not to exceed 24 months)
• the notice of early termination (twenty business days’ notice)
• the letter of demand (twenty business days’ notice).

 

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.