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fixed term lease duration

 If the consumer has not made the election by the expiry date, the agreement will continue automatically on a month-to-month basis.

Section 14 of The Consumer Protection Act No 68 of 2008 (CPA):

In our last blog, we looked at the wording of the whole of section 14 (1) and commented on its content and the background to the section.

Today we will concentrate on section 14 (2) of the CPA and also regulation 5.

 Section 14 (2) reads as follows:

 (2) If a consumer agreement is for a fixed term—

                (a) that term must not exceed the maximum period if any, prescribed in terms of subsection (4) with respect to that category of consumer agreement;

                (b) despite any provision of the consumer agreement to the contrary—

                (i) the consumer may cancel that agreement—

                (aa) upon the expiry of its fixed term, without penalty or charge, but subject to subsection (3) (a); or

                (bb) at any other time, by giving the supplier 20 business days’ notice in writing or other recorded manner and form, subject to subsection (3) (a) and (b); or

                (ii) the supplier may cancel the agreement 20 business days after giving written notice to the consumer of a material failure by the consumer to comply with the agreement unless the consumer has rectified the failure within that time;

                (c) of not more than 80, nor less than 40, business days before the expiry date of the fixed term of the consumer agreement, the supplier must notify the consumer in writing or any other recordable form, of the impending expiry date, including a notice of—

                (i) any material changes that would apply if the agreement is to be renewed or may otherwise continue beyond the expiry date; and

                 (ii) the options available to the consumer in terms of paragraph (d); and

                 (d) on the expiry of the fixed term of the consumer agreement, it will be automatically continued on a month-to-month basis, subject to any material changes of which the supplier has given notice, as contemplated in paragraph (c), unless the consumer expressly—

                (i) directs the supplier to terminate the agreement on the expiry date; or

                (ii) agrees to a renewal of the agreement for a further fixed term.

                (a) the maximum duration for fixed-term consumer agreements, generally, or for specified categories of such agreements;

                (b) the manner and form of providing notices to the consumer in terms of subsection (2) (c);

                (c) the manner, form and basis for determining the reasonableness of credits and charges contemplated in subsection (3); and

                (d) other incidental matters as required to provide for the proper administration of this section.

Then:

Regulation 5:

Maximum duration for fixed-term consumer agreements

(1) For purposes of section 14(4) (a) of the Act, the maximum period of a fixed-term consumer agreement is 24 months from the date of signature by the consumer—

                  (a) unless such longer period is expressly agreed with the consumer and the supplier can show a demonstrable financial benefit to the consumer;

                 (b) unless differently provided for by regulation in respect of a specific type of agreement, type of consumer, sector or industry; or

                 (c) as provided for in an industry code contemplated in section 82 of the Act in respect of the specific type of agreement, type of consumer, sector or industry.

(2) 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 the 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.

(3) Notwithstanding sub-regulation (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.

The above is the full text of section 14 (2) and regulation 5 and the two must be read together interpreting their content.

Section 14(2) (a): deals with the Maximum period:

 Section 14(2) (a) provides that fixed-term agreements may not exceed a maximum period prescribed by the Minister. The regulation prescribes a maximum period of 24 months from the date of signature by the consumer for all fixed-term agreements but allows this maximum period to be exceeded if certain requirements are met. 

There are exceptions to the 24-month limitation.

The maximum period prescribed in regulation 5(1) can be exceeded if a regulation authorises it in respect of a specific type of agreement, consumer, sector or industry. This sub-regulation is in line with section 14(4) (a) which provides that the Minister may prescribe the maximum duration of particular categories of agreements. The maximum can also be exceeded if it is authorised in an industry code of conduct. The 24-month limitation can also be exceeded if the longer period was expressly agreed with the consumer and the supplier is able to “show a demonstrable financial benefit to the consumer”. 

The Act is silent on what would constitute a “demonstrable financial benefit”, but the remainder of section 14 provides a clue. Section 14(3) (b) (i) regulates the penalties which a supplier may impose for the early cancellation of the agreement. The supplier is allowed to “impose a reasonable cancellation penalty with respect to any goods supplied, services provided, or discounts granted, to the consumer in contemplation of the agreement enduring for its intended fixed term”. A supplier would therefore be able to meet the requirement of a “demonstrable financial benefit” if it shows that discounts are granted because the agreement is of longer duration or that this resulted in the provision of goods or services which the consumer would not otherwise have been entitled to. 

What are the consequences if a supplier does not comply 

with section 14(2) (a) read with reg 5(1) (a) and concludes an agreement of longer than 24 months without demonstrable financial benefit to the consumer? Section 14 is silent on the consequences of non-compliance. However, breaching section 14(2) will be prohibited in terms of section 51(1) (b) (iii). Section 51(3) provides that a transaction, agreement, term or condition will be void “to the extent that it contravenes this section”. Section 52(4) provides that if it is alleged in any proceedings before a court that an agreement or a term of an agreement is void the court may “make an order . . . (aa) severing any part of the relevant agreement, provision or notice, or alter it to the extent required to render it lawful, if it is reasonable to do so having regard to the transaction, agreement, provision or notice as a whole; or (bb) declaring the entire agreement, provision or notice void as from the date that it purportedly took effect”.

On this basis, it could be argued that the term of the fixed-term agreement will only be reduced to 24 months instead of declaring the entire agreement void.

 Section 14(2) (b): deals with cancellation:

 Section 14(2)(b) provides that a consumer may cancel the agreement upon the expiry of the fixed term or at any other time by giving 20 business days’ notice, subject to the payment of any cancellation penalty which may be payable in terms of section 14(3)(b)(i). At common law, a consumer will only be entitled to cancel a fixed-term agreement where the supplier has committed a material breach of contract or where the contract gives the consumer the right to cancel. While giving consumers a general right to cancel fixed-term agreements may be desirable in some cases, it can also lead to undesirable outcomes as there are sound commercial reasons why parties enter into fixed-term agreements and why, often, longer notice periods are required. The Act does not generally oblige a supplier to inform a consumer of his or her rights. However, a fixed-term agreement which is silent on the fact that a consumer can cancel may be misleading depending on the formulation. For instance, providing that an agreement “will be valid until. . . “may suggest that an agreement cannot be cancelled. Such a term may contravene section 51(1) (a) (ii) which prohibits terms with the general purpose or effect of misleading or deceiving the consumer.

The supplier’s right to cancel a fixed-term agreement is more limited than that of a consumer as the supplier may only cancel the agreement in the event of “material failure” on the consumer’s part to comply with the agreement and the consumer failed to rectify such failure within 20 business days of receiving notice from the supplier to do so. Allowing consumers such a long time to rectify their breach seems unnecessary.

Take a lease as an example.

The implication of the sub-section is that a consumer will be able to make late payment by 20 business days every month and the supplier will not have the right to cancel the lease but will have to give notice to the consumer in respect of each breach. 

Section 14(2)(b) is listed in Schedule 2, item 3 as one of the sections which apply to pre-existing fixed term agreements if the agreement will endure until a fixed date on or after the second anniversary of the general effective date (31 March 2013). The Schedule has a column which explains the extent to which a particular section applies to the pre-existing agreement. In relation to section 14, it provides that the subsections will “apply with respect to the expiry and possible renewal of the agreement, on or after the general effective date”.

The question is whether “expiry” also refers to the cancellation of the contract.

“Expiry” can be defined as “the end of the period for which something is valid” or “the end of a fixed period of time”. 

  • The first argument is that section 14(2) (b) only applies to the extent that they relate to the “expiry and possible renewal” of the pre-existing agreement and that the use of the term “expiry” does not include “cancellation” in its legal technical meaning. This argument is aided by the fact that the term “expiry” is used in section 14(2)(c) and (d) and that it is coupled with “renewal” which suggests that it is referring to the end of the fixed period as opposed to the premature cancellation of the agreement.
  • The second argument is that the term “expiry” should be given a wide interpretation to include reference to the cancellation of the agreement in terms of section 14(2) (b) (i) (bb). It would therefore appear that an argument can be made that a consumer who entered into a fixed-term agreement before the CPA was enacted and which will only expire after 31 March 2013, will be able to cancel it by relying on section 14(2)(b). However, it would be preferable for the legislature to amend the Schedule to expressly include the premature cancellation of the agreement in terms of s 14(2) (b) (i) (bb) if that was their intention.

 Section 14(2) (c): deals with the notice of expiry:

 Section 14(2) (c) contains an error. It reads: “(2) If a consumer agreement is for a fixed term . . . (c) of not more than 80, nor less than 40, business days before the expiry date of the fixed term of the consumer agreement, the supplier must notify the consumer in writing or any other recordable form, of the impending expiry date . . . “.

The reference to 80 and 40 business days refers to the maximum and minimum amount of notice which a consumer must receive of the impending expiry date of the fixed-term agreement, and not to the duration of the agreement. The correct formulation would be: a consumer must receive at least 40, but no more than 80, business days’ notice of the expiry date of the agreement.

This notice must include the expiry date, reference to any material changes to the agreement should it be renewed and must inform the consumer that he or she is entitled to either cancel the agreement effective from the expiry date or to agree to a renewal of a further fixed period or that, if he or she does not exercise either of those two options, the agreement will continue on a month-to-month basis. 

Suppliers may want consumers to exercise this election by a specified date before the expiry of the term in order to provide certainty regarding whether the supplier will have to continue performing.

When this paragraph is read with paragraph (d) it would appear that the consumer has time until the expiry date. If the consumer has not made the election by then, the agreement will continue automatically on a month-to-month basis.

What constitutes a material change to the agreement?

It could be argued that any change to a “material term” of the contract would constitute a material change. A material term is a term is central to the performance of the contract, that “goes to the root” of the contract. However, it is also foreseeable that a change to a non-material term would be equally worthy of a consumer’s attention. The plain meaning of the word is “important” or “significant” which does not shed any further light on the interpretation in this context. On the other hand, over-burdening consumers with notifications for every change in the contract, no matter how insignificant, will lead to situations where information that may have been important will be lost in the noise. The use of the term “material” here is unfortunate and should rather have been left out as it creates unnecessary uncertainty. It leaves suppliers with the unenviable task of deciding what may or may not be considered material in a particular situation.

The consequences of non-compliance of the notification obligation 

are not spelt out, but it would appear that any material changes of which no notice was given will not be effective. The wording of section 14(2) (d) (“subject to any material changes of which the supplier has given notice”) suggests that the original (unchanged) agreement will either continue on a month-to-month basis or for a further fixed term if the consumer agreed to a further fixed term. In any event, a modification of an agreement which becomes effective automatically unless the consumer objects will be considered negative option marketing in terms of section 31. A modification which is phrased in this way will be void. However, if the supplier failed to give notice of the expiry of the fixed term at all or failed to inform the consumer of their rights at the end of the term it may affect the validity of the entire agreement. An alternative interpretation would be that the agreement carries on, on a month-to-month basis, until such a time as the consumer is notified and informed of their rights. 

Section 14(2) (c) applies to pre-existing fixed term agreements if the agreement will endure until a fixed date on or after the second anniversary of the general effective date (eg 31 March 2013).

  Section 14(2) (d): deals with the expiry of the agreement:

 The automatic renewal of fixed-term agreements for another full term without the consumer’s express consent at the time will no longer be possible.

Section 14(2) (d) provides that such a renewal will only be possible if the consumer “expressly agrees to a renewal of the agreement for a further fixed term”. At that point (“on the expiry”) the consumer can also elect to terminate the agreement. A clause which provides that an agreement will automatically renew for a further term unless the consumer notifies the supplier that the agreement must not renew will be illegal as this amounts to negative option marketing. 

This election must be explained to the consumer in a notice which must be delivered at least 40, but no more than 80, days before the expiry of the agreement. In addition to alerting the consumer to the fact that the agreement is nearing its expiry date, the consumer must also be notified of any material changes to the agreement and the fact that the consumer can choose whether to renew the agreement or to terminate it. 

If the consumer does not exercise this election before the expiry date of the agreement it will renew automatically on a month-to-month basis. It would appear that this will be the case until the consumer exercises this election. The supplier can elect not to continue with the agreement at the end of the fixed term although the Act is silent on this.

Section 14(2) (d) applies to pre-existing fixed-term agreements if the agreement will endure until a fixed date on or after the second anniversary of the general effective date (31 March 2013). 

That concludes our commentary of section 14 (2).

In our next blog, we will look at section 14 (3) and also the effect of regulation 5 in the termination of lease agreements.

You can see clearly from the above that you need expertise and professional legal advice in dealing with lease cancellations.

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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