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Commercial and Residential Lease Agreements: Cancellations:

We currently find ourselves in really tough and challenging economic and financial times in South Africa.

This situation will continue for the foreseeable future and one has to box clever.

Business owners and entrepreneurs in retail leased spaces are finding it more and more difficult to meet their financial obligations and to service their overheads.

One of their largest monthly overheads is their rental and we get many weekly inquiries for legal advice and assistance in finding ways and means of legally dealing with the early termination or cancellation of a lease agreement.

This does not only apply to business owners but also to individual tenants in residential properties who are also finding the going tough.

Some are in arrears with their rent and yet cannot afford to move.

Others have been given notice by their landlord and have nowhere else to go.

We have almost daily inquiries about legal ways to terminate or cancel current commercial and residential leases.

As a result, we intend today to revisit this topic.

.A summary:

The termination or cancellation of both a commercial lease agreement and a residential one is always a legal and factual issue.

One of the matters that we specialise in at The Legal Advice Office is Consumer Law and one of the two topics that we concentrate on is lease agreement cancellations and early terminations.

We deal with both residential leases and commercial lease cancellations.

We get many enquiries from tenants who are under considerable financial pressure in these tough economic times who seek our advice and assistance regarding their leases.

Firstly; let me comment in more general terms.

You cannot just cancel a lease agreement.

It is a valid and binding contract; and if you want to cancel it; that process must be dealt with correctly, professionally and legally. Most queries we get relate to tenants wishing to cancel a lease or terminate it early ie before its expiry date.

If you breach the lease and simply vacate and abandon the premises the High Court can grant the landlord an order for what is called “specific performance” and will order you to comply fully with the terms of the lease and hold you to the contract. There are a number of reported Court decisions in this regard.

This can mean if you have vacated, that the Court orders you to return to the premises and pay the rent for the balance of the lease period.

Alternatively; the Court may grant the landlord the right to cancel the lease because of your breach and grant an order for damages in favour of the landlord being in effect equivalent to the rent due for the balance of the period of the entire lease.

Usually, the landlord will have to make a choice as to which remedy he wants and clauses to this effect are generally found in the lease agreement itself.

Therefore; when it comes to you wanting to cancel a residential or a commercial lease; get expert legal advice and assistance.

Do not try and deal with this yourself.

There are different ways of doing it; and most of them involve alternative dispute resolution measures like interventions, mediations and arbitrations; but litigation can also be the answer if the landlord has himself breached the lease or where the landlord or its agents have oversold the property to you, exaggerated the foot traffic and have induced your signature to the lease through undue influence and in some cases even duress.

We reiterate; you will need expert professional help when you wish to cancel or terminate a commercial lease early.

In all leases; one always has to draw a clear distinction between lease agreements for residential properties and those that are for commercial properties.

Residential property termination of lease agreements is normally easier to deal with than those that relate to commercial properties.

The lease agreement and its specific terms and conditions are the foundation document for the agreement between yourself and the landlord.

In terms of the common law of contract, both the landlord and the tenant are bound by the terms of the lease agreement.

Legislation however also plays an important role in this area of the law and both the Rental Housing Act and the Consumer Protection Act may very well be applicable in any particular set of facts.

Each case must be looked at on its own facts and its own merits.

It is for this reason that you need an expert in your corner who can advise you and assist you in dealing with the matter properly, legally and professionally.

You do NOT want any blowback, and it will be worth both the money spent and the time saved in the long run.

Here is a recent query that was received by The Legal Advice Office last week:

Hi Hugh, I have a long term (5 year) lease agreement in a commercial property in Port Elizabeth. I own a company which is the actual tenant and I am a surety. The Landlord is a company as well and although I have approached him regarding my financial difficulties he has told me he will hold me to my lease. I am now losing money every month and I cannot afford to continue to do so. Please help me resolve this matter with both advice and your legal services.”

I replied to our client and I will try to answer this query in this blog.

The first important factor is to distinguish between a lease signed by a tenant who is a natural person like say, Anne Brown and a tenant which is a company, close corporation or a Trust and is therefore defined as “a juristic person.”

A clear distinction is also drawn by The Consumer Protection Act No 68 of 2008 (CPA) between an early termination of a lease by a natural person using section 14 of the CPA; and the position of a juristic person which cannot use section 14 as it may not do so in terms of section 14(1) which states: “this section does not apply to transactions between juristic persons regardless of their annual turnover of asset value.”

This begs the question, however. What happens if the landlord is not a juristic person but a natural person?

If that is the case; in my view section 14 can still be used to terminate the lease early despite the fact that a tenant is a juristic person.

Furthermore; one should note that 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 requirements and provisions of the CPA; 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.

In terms of the Consumer Protection Act,

Tenants have the RIGHT to cancel their residential and commercial lease, as long as they do so while fulfilling ALL the cancellation criteria or requirements

and only certain tenants can use section 14 to do so.

Tenants who are natural persons can use section 14 and 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. If it is not done correctly; the landlord can ignore the tenant.

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 tenant's cancellation penalty costs. He is simply reimbursed.”

On this basis; penalty clauses in lease agreements which purport to agree to 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.

When you want to cancel a commercial lease between two juristic persons however you are going to definitely need legal advice and assistance as you cannot use section 14 and you need an expert to intervene and mediate a termination or early cancellation on your behalf as with the person making the enquiry above.

Once again; both landlords and tenants must be aware of their rights in this regard and would be well advised to contact us in the event of wanting to terminate a lease early.

 

Please visit our website at www.legaladviceoffice.co.za or send us an email to This email address is being protected from spambots. You need JavaScript enabled to view it. and we will respond to your legal queries within 48 hours.

About our author:

Hugh Pollard (Legal Consultant), has a BA LLB and 42 years’ experience in the legal field. 22 years as a practicing attorney and conveyancer; and 20 years as a Legal Consultant.

082-0932304 (Hugh’s Cell Number)

This email address is being protected from spambots. You need JavaScript enabled to view it.

www.legaladviceoffice.co.za

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