We looked in our last blog at “Fixed Term Agreements;” and in particular the provisions of Section 14 of the Consumer Protection Act No 68 of 2008 (CPA).
Prior to the commencement of the Consumer Protection Act, on the 1st of April 2011, the law of contract and the common law covered the issue of when and how a tenant went about cancelling a lease agreement. That has all now changed since the commencement date of the CPA; and tenants and landlords need to be aware of the statutory provisions of the Act; which now cover the early termination and cancellation of lease agreements.
Prior to April 2011; both parties were pretty much bound by the terms of the lease agreement and this was very weighted in favour of landlords and to a great degree disadvantaged tenants, especially as most lease agreements are drawn up for the benefit of the landlord and not the tenant.
It happens that incorrect terminology is sometimes used when leases are cancelled early. Landlords and their agents often refer to an early cancellation of a lease agreement by the tenant as “a breach of contract.” This is not the case.
In terms of the Consumer Protection Act, tenants have the RIGHT to cancel their leases, as long as they do so while fulfilling ALL the cancellation criteria or requirements. Tenants who do this must do so in writing and must give at least 20 days’ written notice. This MUST be done properly and correctly so as to fully comply with the CPA.
The rental for those 20 days is payable by the tenant; and they must pay same; pro rata, if applicable, to the landlord for that period. This action DOES NOT amount to a breach of contract.
Once the landlord or his agent have received the written notice of cancellation, they should make a note of the date on which the lease is now due to end; and should start advertising immediately for a new tenant for the property. This responsibility lies squarely on the shoulders of the landlord or his agent to find a new and suitable tenant. The costs of so advertising however should also be noted, as these costs can be charged to the tenant, as part and parcel of the “reasonable penalty” that the landlord is entitled to hold the tenant responsible for; as a result of the early cancellation of their lease agreement.
Although the landlord is entitled, in terms of the Act, to hold the tenant liable for a “reasonable penalty” fee for early cancellation of the lease; this does not and is not meant to be used to penalise tenants; but rather is intended to allow the landlord to recoup any losses he may have suffered as a result of the early cancellation of the lease agreement; and the tenant vacating before the lease has run its course.
The costs that may be included in such a penalty would for example include the credit check costs for a prospective new tenant; and any other reasonable incidental costs relating to the new tenant and which have been reasonably incurred by the landlord in finding that replacement tenant; such as advertising costs and would also sometimes include the rental lost by the landlord if and during the period that the property was to stand vacant. It is not however a carte blanche penalty which the landlord can simply impose as he sees fit; eg 3 months’ rent. That will not fly. It must be based on his actual financial damages. It has justifiably been described as “a penalty which cannot be charged upfront. They can only be calculated once a new tenant has been found and the landlord cannot gain financially or benefit from the tenants cancellation penalty costs. He is simply reimbursed.”
On this basis; penalty clauses in lease agreements which purport to agree a cancellation penalty in advance will simply not hold up in court.
The inconvenience for a landlord caused by an early cancellation will no doubt be both annoying and time consuming; but it is clear that a tenant has the RIGHT to cancel a lease. The landlord is only then entitled to recover his actual loses in an early cancellation penalty clause.
The CPA is however vague in that it does not define a “reasonable penalty;” and only states that a reasonable penalty may be charged for early cancellation. In practice however and in SA Law; a person who suffers damages as a result of another person’s actions is only ever entitled to recover those damages which he has actually sustained; and can prove. In practice also; it normally does not take more than a month to find another tenant.
Once again; both landlords and tenants must be aware of their rights in this regard.
The Legal Advice Office Team.