Home / Legal  / Tenants can cancel leases prematurely

Tenants can cancel leases prematurely

wave goodbye resize

The Consumer Protection Act (CPA) grants many rights to consumers – South African consumers now among the most protected consumers on a global level. As a consequence, added protection for consumers invariably means a little less protection for landlords.

Application of the CPA

  1. The CPA does not apply to commercial entity tenants if their asset value or annual turnover is R2m or more per annum, irrespective of who the landlord is. For the purposes of this article, I refer to commercial entities as tenants who are above the threshold.
  2. Section 14 of the CPA does not apply between a landlord and a tenant if both are commercial entities.
  3. The CPA does apply if the tenant is a natural person and the lease is deemed to have been concluded in the ordinary course of business. For purposes of this article I am treating a lease as being in the ordinary course of business.

Complications

With the CPA, however, comes legal complications which many landlords are not always aware of.

From our experience as specialist rental property attorneys we are seeing landlords and managing agents attempting to circumvent the CPA (Section 14 of the CPA, in particular) even though they are not actually allowed to (Section 51 of the CPA).

For our purposes, however, it’s important to stress the following:

  1. Section 14 of the CPA provides, among others, that a natural person tenant is allowed to cancel the lease prematurely, and on 20 (twenty) business days’ notice, notwithstanding the agreed lease period. Of course, a commercial entity tenant, to which the CPA does not apply, does not have that luxury.
  2. The lease may not exceed 24 (twenty four) months with a natural person tenant, unless a longer period is expressly agreed to between the tenant and the landlord, and the landlord can show a “demonstrable financial benefit” to the tenant to justify this lease extension. Nowhere in the CPA or its Final Regulations is there any definition of what a “demonstrable financial benefit” is. A commercial entity tenant can sign any length lease the landlord wants – no restrictions exist.
  3. If the natural person tenant breaches the lease, the landlord has to give the tenant a period of time to remedy the breach and can only cancel the lease after expiration of 20 (twenty) business days from date that demand to remedy the breach was sent. While the tenant will remain liable to the supplier for any amounts owed to the landlord in terms of the relevant lease, up to the date of cancellation, at best the landlord may impose a “reasonable cancellation” penalty in lieu of obtaining the balance of the rental period of rental owed.

Even though a reasonable cancellation penalty is defined in Regulation 5 of the Final Regulations to the CPA, it is open to much interpretation. A commercial entity tenant can of course have its lease cancelled almost as early as 7 (seven) days after demand to remedy a breach, if not sooner.

In these circumstances, one could easily argue – why would I sign a lease with an individual? But what if you don’t?

The potentially ill-advised move

There has been a move on behalf of commercial and residential landlords to only enter into either commercial or residential leases with commercial entities to avoid the CPA applying at all, or to prevent section 14 of the CPA from applying.

This is done in order to deprive the commercial entity tenant of the ability to terminate its lease on 20 business days’ notice and of course giving the landlord the right to cancel for the tenant’s breach on a far shorter time period than 20 (twenty) business days.

However, the commercial tenant, such as a company, a close corporation or a trust, does not offer the infallibility the landlord thinks exists.

An example of the impact that a liquidation or business rescue application by a commercial entity tenant might have on the landlord is that the landlord may find itself with a tenant who cannot afford to pay rent and who the landlord cannot remove from its premises.

Business rescue

A business rescue practitioner must develop and implement a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and assets so that the company has a better chance of trading on a solvent basis.

A company undergoing this process may use business rescue to temporarily suspend legal action, payments and to use the law to renegotiate lease terms.

Liquidation

As for a liquidation of the commercial tenant, the liquidator must give written notice to the landlord in which he terminates the lease in writing. Failing that, within three months of the liquidator’s appointment, the agreement is terminated automatically.

 

Marlon Shevelew, director of Marlon Shevelew and Associates.

Marlon Shevelew, director of Marlon Shevelew and Associates.

Who is Marlon Shevelew?

Marlon Shevelew is the director of Marlon Shevelew and Associates Inc., a Cape Town-based law firm specialising in rental property, contractual, consumer and company law.

Trusted Tenant - #TenantPower

hometimes@pixelbaste.com

Review overview
4 COMMENTS
  • Alan Clow 14th October 2015

    What happens if the tenant is a company and turns over less than R2million and the owner of the business a natural person signs personal surety?

    • David A Steynberg 14th October 2015

      Hi Alan,
      Thanks for the question.
      Let me ask Marlon and get back to you.
      Will be in touch.
      David

  • Omar 15th October 2015

    Hi. I have signed a 3 year lease on a mini factory as a individual . We are now into toe second year of the lease anniversary in September. My business is doing so badly and I want to close the business and get out of the lease asap. Please advise. I am at a desperate situation.

POST A COMMENT