We have, over the last couple of months, experienced a large number of questions from landlords and tenants alike regarding the cancellation of their lease agreements. A particularly pressing issue is the legal implications of cancellation of lease agreements where the reason for the cancellation of the lease agreement was specifically that the tenant could no longer afford to pay the rent for the particular premises because of the financial pressures brought about by COVID-19.
These financial pressures could include a tenant that lost his/her job completely, who has been retrenched, a tenant that is a sole proprietor who has no income because his/her business cannot trade, or a tenant receiving a reduced salary.
The Consumer Protection Act (Act 68 of 2008) (“the Act”) applies to the supply of goods and services within South Africa. Residential leases fall within the definition of services where the landlord leases the property in the ordinary course of business.
The following lease agreements are governed by Section 14 of the Act; this will be fixed-term lease agreements where there is a natural person involved in the transaction, this can be either the landlord or the tenant. In these agreements the tenant would be entitled to cancel the lease agreement by giving the landlord 20 (twenty) business days’ written notice of such cancellation, the landlord will however be entitled to claim a reasonable cancellation penalty from the tenant. The application of the Act is excluded where the lease is concluded between two juristic entities and where the tenant has an annual turnover or asset value of more than R2 000 000.00 (Two Million Rand).
The reasonable penalty would be an amount that the parties agreed to in terms of the lease agreement or if the lease agreement is silent on this topic, the landlord will have a claim against the tenant for the actual damages (financial loss) suffered by the landlord, provided that he/she can show that he/she attempted to mitigate his/her damages as much as possible. However, unfortunately for many tenants in a position like this, the laws regarding damages remains unaffected, even by the economic impact of the COVID-19 pandemic.
In order to determine a reasonable cancellation penalty, the following factors must be considered: -
the duration of the lease agreement as initially agreed upon by the parties;
the remaining term of the lease agreement;
the rental amount which the tenant stills owes the landlord up to the date of cancellation (the tenant will always be liable for this);
losses suffered by the landlord or benefits accrued by tenant;
the length of the notice period given by the tenant;
the length of the period wherein the landlord would be able to find a new tenant;
the steps taken by the landlord to find a new tenant and/or if the tenant assisted the landlord with finding a tenant;
the industry practice;
this is not an exhaustive list and the industry has dictated that between one- and three-months rental would probably be considered a reasonable cancellation penalty (circumstance dependent).
Presumably the landlord will have a deposit (which ought to have been invested in an interest bearing account) from the tenant which can be used by the landlord to make good any damage to the property or restore any financial damages suffered by the landlord, for instance non-payment of rent or for that matter, damages suffered due to early cancellation of the lease agreement. A landlord would be entitled to hold and utilise the deposit in a situation where a tenant cancels the lease agreement early; and where the landlord is suffering financial loss as a result of this, the landlord might even have a damages claim over and above the deposit held by the landlord.
Furthermore, there has been a lot of talk about the legal principal of Ubuntu and its application in South African law (especially in these current circumstances that we all find ourselves in), this is one of those instances where we would like to see landlords and tenants effectively meeting each other halfway. Landlords and tenants are implored to communicate in this time, keep the communication in writing and find middle ground to accommodate each other. If this is not possible unfortunately the parties will be left with having to enforce their rights through the applicable forum and the legal principals above will be applied by our courts.
Even though the Act is vague with the definition of “reasonable cancellation penalties”, the landlord will only ever be entitled to recover those costs that have actually been incurred and can be proved. Practically speaking, it should not take a landlord more than a month to find a replacement tenant, depending on the property’s location and condition. Should you feel that a landlord is acting unfairly, or should you require assistance with a review of your lease terms or the the formal cancellation proceedings, contact a professional at Kern, Armstrong and Associates.