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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.

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

“Hi, Hugh. My company is the tenant in a Commercial Property in Centurion. We were led to believe by the landlord’s agent that the foot traffic in our new Mall would be considerable, but this is simply not the case. The Mall parking is incomplete as is the final building completion and promises made to us at the time of the negotiations with the agents for the lease have simply not materialised. We feel that we were misled into signing this lease for 5 years and still have 4 years and six months to run and are simply not able to keep afloat as we have run at a loss for the last 6 months. Is there any advice you can give us to assist us in terminating this lease?”

One of the aspects of Consumer Law that has been radically altered since the introduction of the Consumer Protection Act No 68 of 2008 and which came into effect at midnight on the 31st March 2011 is the way in which Lease Agreements, in general, are negotiated, interpreted, renewed and terminated or cancelled.

Prior to the 1st April 2011, it was mainly the common law of contract which governed these agreements. Now the CPA plays an important role in each aspect of lease agreements as enumerated above.

At The Legal Advice Office, we specialise in is Consumer Law and lease agreement terminations.

In residential lease agreements, the process of cancellation and early termination of the lease is more straightforward and legally transparent; but this is not so when it comes to Commercial Lease Agreements; particularly when a tenant is a juristic person ie a company, trust, close corporation etc. You will then need expert legal assistance; as it is a complex and convoluted process.

Most commercial landlords and agents when negotiating a Commercial Lease for a business premise now insist that the tenant must be a registered juristic person and they do this for their own good reasons and self-interest. It is because it is much more difficult, but still possible, for a juristic person to terminate a Commercial Lease Agreement by using the CPA or the common law.

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

“Hi, Hugh. My company is the tenant in a Commercial Property in Centurion. We were led to believe by the landlord’s agent that the foot traffic in our new Mall would be considerable, but this is simply not the case. The Mall parking is incomplete as is the final building completion and promises made to us at the time of the negotiations with the agents for the lease have simply not materialised. We feel that we were misled into signing this lease for 5 years and still have 4 years and six months to run and are simply not able to keep afloat as we have run at a loss for the last 6 months. Is there any advice you can give us to assist us in terminating this lease?”

We will try to answer this question in this blog.

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

Leases for Commercial properties are more often than not in the name of a company nowadays. Commercial landlords and agents almost invariably insist on this now.

As we have seen before; a very clear distinction is drawn in the CPA between an early termination of lease by a natural person using section 14 of the CPA; and the position of a juristic person which cannot normally 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?

Can section 14 still apply because the lease is not between two juristic persons?

It is clear that if the landlord and the tenant are both juristic persons that one cannot normally simply rely on section 14 of the CPA.

As we have also seen; 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, private individual 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 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 you are advised to get an expert to assist you as you more often than not as stated above cannot use the CPA at all.

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.

An expert in the field of a commercial lease, like The Legal advice Office, will need to do both an intervention and a mediation to get you out of a commercial lease in most instances. This might cost you some money but will be worthwhile in the long run.

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 practising 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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Legal Advice Office

South Africa

Kandelaar Street, Vermont, Hermanus
Phone: +27 (028) 316 2832
Email: info@legaladviceoffice.co.za

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