The starting point when considering the imposition of a cancellation penalty in case of early termination of a lease by a tenant, is whether the tenant is a natural or juristic person.
If the tenant is a juristic person (a company, close corporation or trust) then it is not afforded protection under Section 14 of the Consumer Protection Act 68 of 2008 (“the Act”). In such circumstances, the tenant’s purported cancellation of a lease amounts to a breach of the lease and the tenant would be liable for damages equivalent to the monthly rental for the remainder of the lease period or until a suitable replacement tenant has been procured, whichever happens sooner. Any other lawful stipulations in the cancellation clause of the lease should also be taken into account.
In this regard, it is important to bear in mind that a landlord has a legal duty to mitigate its loss. Although it can claim damages from a tenant which cancels early, it must, nevertheless, take all reasonable steps to market the property and to thus replace the tenant as soon as possible.
If the tenant is a natural person, which is usually the position when it comes to residential leases, then the tenant is afforded protection under Section 14 of Act. Section 14 of the Act allows a tenant to cancel a fixed term residential lease agreement at any time by giving the landlord 20 business days’ notice in writing of its intention to cancel the lease agreement. Such a cancellation would be lawful and would not expose the tenant to the damages referred to above.
A tenant cancelling a lease in this manner, will of course remain liable for all amounts due, owing and payable in terms of the lease, up until the date of cancellation. In addition, the tenant will be liable for a reasonable cancellation penalty. The Consumer Protection Act does not define explicitly what a reasonable cancellation penalty is nor does it provide a formula to calculate the penalty which may be imposed.
However, Regulation 5 of the Act does set out a number of guiding principles to be considered when determining a reasonable cancellation penalty. These principles are, inter alia, as follows:
- The amount for which the tenant is still liable to the landlord as at the date of cancellation of the lease agreement;
- The value of the rental paid by the tenant prior to the of cancellation of the lease agreement;
- The duration of the lease agreement as initially agreed between the parties (in terms of the Act, a lease should not exceed 24 months unless it can be shown that there is financial benefit to the tenant in a longer lease);
- Losses suffered by or benefits accrued to the Tenant as a result of the Tenant entering into the lease agreement;
- The length of notice of cancellation provided by the tenant to the landlord;
- The potential for the landlord to find a suitable replacement tenant during the notice period; and
- The general practice within the property rental industry.
In addition to this, Regulation 5 (3) of the Act further provides that the cancellation penalty cannot equate to an amount higher than the amount that the tenant would have been liable for had it not chosen to cancel.
One way for landlord to avoid the onerous provisions of Section 14 of Act, where the circumstances allow, would be to enter into a lease with a juristic person and to secure a suretyship from the occupant of the leased premises.
Above all else, in order to protect themselves, it is imperative that landlords carefully screen potential tenants to reduce the risk of non-paying tenants as much as possible. Thorough tenant screening is one of the core functions performed by Etchells & Young when mandated by a landlord to secure a tenant.
This article was written by Harris Inc., in association with Etchells & Young Property Brokers.
Harris Inc. is a specialist property law firm, providing expert and cost-effective advice and services in all commercial and residential property related matters, as well as conveyancing.
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This article is not intended as legal advice. For legal advice, please consult with an attorney.