Gone are the days when the term “fixed” in “Fixed Term Contract” actually meant fixed.
Section 14 of the Consumer Protection Act (“CPA”), which came into effect in 2011, changed the way fixed term lease agreements are regulated.[i] The CPA, as the name suggests, protects consumers and gives them rights, which they did not have before. Explained below are some practical aspects of how the CPA will be applicable in your everyday lease agreements.
Duration of a fixed term agreement
The maximum duration that a lease agreement can be is 24 months. If a lease is for more than 24 months the agreement will be null and void, unless it is expressly agreed upon and the landlord can prove that a longer agreement is beneficial to the tenant. This means if your lease agreement is for more than 2 years it could be unenforceable.
Cancelling your lease agreement
In terms of section 14 of the CPA a consumer may cancel the lease agreement:
- upon expiry of the lease, without penalty or charge; and
- at any time during the contract by giving 20 business days written notice, subject to a reasonable cancellation penalty.
This means that irrespective of signing a 12 or 24-month lease agreement, the tenant may cancel the agreement for any reason by simply giving notice to the landlord, subject to a reasonable cancellation penalty.
What is a reasonable cancellation penalty?
The CPA does protect a landlord to some extent in that, when the tenant cancels a lease agreement prematurely, the landlord may impose a reasonable cancellation penalty. The question is what is a reasonable penalty?
Firstly, the penalty may not have the effect of negating the tenant’s right of cancellation. Thus it cannot be an amount equivalent to all the remaining monthly rent.
Regulation 5(2) to the CPA gives the following guidelines in determining a reasonable cancellation penalty, applicable to a lease agreement:
- the amount for which the tenant is still liable to the landlord, up to the date of cancellation;
- the value of the transaction up to cancellation;
- the duration of the agreement as initially agreed;
- losses suffered or benefits accrued by the tenant as a result of the tenant entering into the lease agreement;
- the length of notice of cancellation provided by the tenant;
- the reasonable potential for the landlord, acting diligently, to find an alternative tenant; and
- the general practice of the relevant industry.
If the tenant cancels the agreement, the following costs would be claimable as a reasonable penalty:
- the loss in rent income due to the property being unoccupied;
- advertising cost in order to get an new tenant; and
- any other actual loss suffered by the landlord.
The Regulations state the landlord must act diligently. The landlord must make a reasonable attempt to find a new tenant; he can’t just sit back and claim loss in rent income.
In determining a reasonable penalty all the above-mentioned factors will be taken into account and a value judgment would have to be made on what is reasonable in the circumstances. If the reasonableness of the penalty is in dispute the onus would be on the landlord to prove that the penalty is reasonable in the circumstances.
A tenant who exercises his cancellation right should insist on the landlord giving him a breakdown of how the cancellation penalty was calculated in order to assess the reasonableness of the penalty.
Minimizing the penalty
The problem is if you want to get out of your lease you might be liable for a cancellation penalty. There is however a way to prevent/minimize the cancellation penalty. This can be done by being proactive and helping the landlord find another tenant or giving a longer notice period, in order for the landlord to minimize his loss. It is thus possible to cancel the lease agreement without paying any penalty or, at worst, paying a small penalty.
The CPA protects the tenant, where in the past if a tenant signed a fixed term lease agreement he would have been bound to fulfill that agreement. The CPA has paved the way for tenants to escape out of their unwanted lease agreement, without suffering a substantial financial loss. Although the CPA is not a “get free out of jail card” it does provide the modern tenant with far more protection than they had in the past.
[i] Section 14 is only applicable where the consumer is a natural person.
Kim Rademeyer – Partner