Consumer Protection Act - Its Impact on Lease Agreements
Many of you may be wondering about the implication of the new Consumer Protection Act (“The Act”) on your Lease Agreement, whether Landlord or Tenant. The Act introduced some important changes to the law governing Lease agreements when it came into operation on the 1st April 2011. It is important to note that the Act only applies to leases entered into after 1st April 2011.
DOES THE ACT APPLY TO ME?
The Act regulates the activities of suppliers and creates rights for consumers. Therefore an agreement between the parties for the supply of goods and services within the Republic of South Africa falls within the ambit of the Act. Although Landlord and Tenant are not specifically defined in the Act, they do fall within the definitions of supplier and consumer. However leases to Juristic Persons (Closed Corporations, Companies, Trusts, and Associations) fall outside the scope of the Act.
THE CONTRACT OF LEASE
When drafting a lease agreement it is important to adhere to the following principles:
1. If a lease agreement is written, it must be in plain language and applies even if the tenant does not sign the agreement. Plain language must be such, that an ordinary consumer with average literacy skills and minimal experience to understand the content, significance and import is able to do so.
2. The Landlord must draw the Tenant’s attention to any clause in the agreement that limits the risk of the Landlord, acceptance of any risk/liability by the Tenant, any obligation on the consumer to indemnify the Landlord or any acknowledgement by the Tenant. Typical terms found in standard leases include: Landlord’s exemption from liability to repair the premises and indemnity Landlord against liability arising from the use of the premises. We suggest the use of bolding or underlining the text or even using colour or arrows.
3. Unfair, unreasonable or unjust terms are prohibited. In particular a Landlord may not use provisions that waive any of the Tenant’s rights, assume any obligation or waive liability for gross negligence of the Landlord.
CANCELLATION, EXPIRY AND RENEWAL
Arguably the most controversial changes that the Act brought about appear in Section 14.
1. Lease Agreements may only exist for 24 months. The Tenant must expressly renew the lease, or expressly terminate the agreement upon the expiry date. Without any direction from the Tenant, the Lease will continue on a month-to-month basis, however should the Tenant cancel the lease upon the expiry of its fixed term the Tenant shall not be liable for a cancellation charge. It is the responsibility of the Landlord to bring to the attention of the Tenant between 40 and 80 days before the contract expires to determine whether the tenant wants to renew the lease or cancel it. Therefore the automatic renewal of leases after a fixed period will be a thing of the past.
2. Tenants may arbitrarily cancel the lease before the expiry date, by giving 20 business days notice. The Landlord is then in turn, entitled to impose a reasonable cancellation penalty and demand all outstanding amounts owed in terms of the lease. We contend that this provision is unduly harsh and not in accordance with the sanctity of contract. Accordingly we expect that it will be left to the courts to determine how to apply this section.
3. Landlords may similarly cancel the agreement if the Tenant commits a material breach of the agreement and has given the Tenant notice to comply. Should the Tenant still not comply, then the Landlord is entitled to cancel the Lease on 20 business days notice.
Harsh Implications for Landlords:
A 'reasonable' cancellation penalty is not defined in the Act and may be problematic for Landlords when accessing how difficult it will be to replace vacating Tenants. The Act provides for the relevant Minister to prescribe the manner, form and basis for determining such reasonable penalty. This has not yet been done. Hopefully it will enable the Landlord to claim an amount equal to the common law damages, which it would have been entitled to claim in the event of a breach, but for the provisions of the Act.
The draft CPA regulations limited the penalty that the landlord could charge the tenant for early cancellation to 10%, but the final regulations state the penalty should be reasonable taking into account the following: the amount the consumer is still liable for up to date of cancellation; the value of transaction up to cancellation; the value of goods which will remain in possession of the consumer after cancellation; the value of the goods returned to supplier; the duration of initial agreement; the losses suffered or benefits accrued to the consumer; the nature of goods / service; the length of notice of cancellation provided by the consumer; the reasonable potential for the service provider, acting diligently, to find an alternative consumer and the general practice of the relevant industry.
It is also important to note that if a fixed term lease agreement was entered into before 1 April 2011, the provisions of the Act do not apply and the Lessee will not be able to cancel such an agreement. However the transitional provisions contained in Schedule 2 of the Act allow for the application of section 14 to pre-existing agreements if the fixed term of that agreement expires on 1 April 2013 or thereafter.
PENALTIES
Should one provision in the lease be unlawful it may render the entire lease agreement invalid. Failure to comply with any of the provisions of the Act can ultimately result in an Administrative fine of up to the greater of 10% of the Landlord’s annual turnover or R1 million. Therefore Landlords should do their best to adjust their standard lease agreements to reflect the provisions of the new Act.
DOES THE ACT APPLY TO ME?
The Act regulates the activities of suppliers and creates rights for consumers. Therefore an agreement between the parties for the supply of goods and services within the Republic of South Africa falls within the ambit of the Act. Although Landlord and Tenant are not specifically defined in the Act, they do fall within the definitions of supplier and consumer. However leases to Juristic Persons (Closed Corporations, Companies, Trusts, and Associations) fall outside the scope of the Act.
THE CONTRACT OF LEASE
When drafting a lease agreement it is important to adhere to the following principles:
1. If a lease agreement is written, it must be in plain language and applies even if the tenant does not sign the agreement. Plain language must be such, that an ordinary consumer with average literacy skills and minimal experience to understand the content, significance and import is able to do so.
2. The Landlord must draw the Tenant’s attention to any clause in the agreement that limits the risk of the Landlord, acceptance of any risk/liability by the Tenant, any obligation on the consumer to indemnify the Landlord or any acknowledgement by the Tenant. Typical terms found in standard leases include: Landlord’s exemption from liability to repair the premises and indemnity Landlord against liability arising from the use of the premises. We suggest the use of bolding or underlining the text or even using colour or arrows.
3. Unfair, unreasonable or unjust terms are prohibited. In particular a Landlord may not use provisions that waive any of the Tenant’s rights, assume any obligation or waive liability for gross negligence of the Landlord.
CANCELLATION, EXPIRY AND RENEWAL
Arguably the most controversial changes that the Act brought about appear in Section 14.
1. Lease Agreements may only exist for 24 months. The Tenant must expressly renew the lease, or expressly terminate the agreement upon the expiry date. Without any direction from the Tenant, the Lease will continue on a month-to-month basis, however should the Tenant cancel the lease upon the expiry of its fixed term the Tenant shall not be liable for a cancellation charge. It is the responsibility of the Landlord to bring to the attention of the Tenant between 40 and 80 days before the contract expires to determine whether the tenant wants to renew the lease or cancel it. Therefore the automatic renewal of leases after a fixed period will be a thing of the past.
2. Tenants may arbitrarily cancel the lease before the expiry date, by giving 20 business days notice. The Landlord is then in turn, entitled to impose a reasonable cancellation penalty and demand all outstanding amounts owed in terms of the lease. We contend that this provision is unduly harsh and not in accordance with the sanctity of contract. Accordingly we expect that it will be left to the courts to determine how to apply this section.
3. Landlords may similarly cancel the agreement if the Tenant commits a material breach of the agreement and has given the Tenant notice to comply. Should the Tenant still not comply, then the Landlord is entitled to cancel the Lease on 20 business days notice.
Harsh Implications for Landlords:
A 'reasonable' cancellation penalty is not defined in the Act and may be problematic for Landlords when accessing how difficult it will be to replace vacating Tenants. The Act provides for the relevant Minister to prescribe the manner, form and basis for determining such reasonable penalty. This has not yet been done. Hopefully it will enable the Landlord to claim an amount equal to the common law damages, which it would have been entitled to claim in the event of a breach, but for the provisions of the Act.
The draft CPA regulations limited the penalty that the landlord could charge the tenant for early cancellation to 10%, but the final regulations state the penalty should be reasonable taking into account the following: the amount the consumer is still liable for up to date of cancellation; the value of transaction up to cancellation; the value of goods which will remain in possession of the consumer after cancellation; the value of the goods returned to supplier; the duration of initial agreement; the losses suffered or benefits accrued to the consumer; the nature of goods / service; the length of notice of cancellation provided by the consumer; the reasonable potential for the service provider, acting diligently, to find an alternative consumer and the general practice of the relevant industry.
It is also important to note that if a fixed term lease agreement was entered into before 1 April 2011, the provisions of the Act do not apply and the Lessee will not be able to cancel such an agreement. However the transitional provisions contained in Schedule 2 of the Act allow for the application of section 14 to pre-existing agreements if the fixed term of that agreement expires on 1 April 2013 or thereafter.
PENALTIES
Should one provision in the lease be unlawful it may render the entire lease agreement invalid. Failure to comply with any of the provisions of the Act can ultimately result in an Administrative fine of up to the greater of 10% of the Landlord’s annual turnover or R1 million. Therefore Landlords should do their best to adjust their standard lease agreements to reflect the provisions of the new Act.