CPA: WHAT IS REASONABLE LEASE CANCELLATION FEE

The Consumer Protection Act (CPA) has introduced some far-reaching consequences to suppliers and consumers.  The CPA has created numerous new rights and obligations for parties entering into contracts.  This is applicable to lease agreements.  The CPA, allows, in certain circumstances, the early cancellation of a lease agreement by a tenant.  The landlord’s only remedy is the ability to charge a reasonable cancellation fee.  This article explores the circumstances under which a tenant may prematurely cancel a lease agreement and what a reasonable cancellation fee is, in these circumstances.

Early Cancellation:

Where a tenant is a natural person, the CPA confers certain rights, namely:-

1. The duration of the lease cannot exceed twenty four months unless a longer period is expressly agreed to and the landlord can show a demonstrable financial benefit to a tenant; and

2. The tenant is entitled to cancel a lease agreement at any stage thereof by simply giving the landlord twenty business days’ written notice.

Landlord’s Recourse:

As a result, a landlord’s rights to enforce the duration of a fixed term lease agreement have certainly been diluted.  This does not mean however, that a landlord has no remedy against a tenant who cancels a lease agreement prematurely.  The CPA allows a landlord to claim:-

1. For any amounts owed to the landlord in terms of the lease agreement up to the date of cancellation; and

2. A reasonable cancellation penalty in contemplation of the agreement enduring for its intended fixed term.

The question that is being repeatedly asked in these circumstances, is what constitutes a reasonable cancellation fee?

Reasonable Cancellation Fee:

The CPA read together with the Regulations to the Act, prescribe a list of factors which must be taken into consideration to determine a reasonable cancellation fee.  These factors include, amongst others:-

• The amount which the tenant is still liable for to the landlord up to the date of cancellation;

• The total value of the lease up to cancellation;

• The duration of the lease, 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 between the time of receiving the cancellation notice and the time of the cancelled reservation;  and

• The general practice of the property industry.

Notwithstanding the aforesaid considerations, the landlord may not charge a charge which would have the effect of negating the tenant’s right to cancel a lease agreement in terms of the CPA.  This provision has been interpreted by many in the legal field as implying that the CPA alters the pre-CPA common law position in terms of what a landlord can claim in damages for a breach of contract should a tenant prematurely cancel a lease agreement.

Pre-CPA Position:

Prior to CPA, alternatively, should the CPA not apply, a landlord, in instances of a premature cancellation by the tenant, may claim for arrears, damage caused to the property and for the monthly rental payable until such time as the landlord finds a new tenant up to a maximum of the balance of the duration of the lease agreement.

While a number of the aforesaid have been incorporated into the CPA, it appears that the CPA has sought to limit the damages or penalty claimable by a landlord.  I am of the opinion that while one would still claim for arrears and damages effected by the tenant, the landlord is curtailed in terms of claiming for the balance of duration of the lease agreement with the factors listed above being the new factors contributing to the reasonable cancellation penalty.

It is important to note however, that the reasonable cancellation penalty would include any discounts which have been offered to the tenant.  So, for example, if a lower rental has been negotiated by virtue of a longer period being concluded, it appears that the landlord would be able to claim for the difference between the initial negotiated rental and such discounted rental on that basis.

Is it worth having a written lease agreement?

As a result of the tenant’s right to prematurely cancel a lease agreement, many critics have asked whether it is worth having a written lease agreement.  I am of the opinion that one should not throw out the baby with the bathwater.

There is still great value in having a written lease agreement.  A written lease agreement still provides clarity to both parties as to the terms agreed upon.  It would also facilitate legal claims in respect of other types of potential breaches by either party.  It is also important to highlight that while the landlord’s claim may be partly diluted, depending on the circumstances, the tenant does certainly not escape censure and is still liable for the cancellation penalty.

Calculation of Reasonable Cancellation Penalty:

Various industries, alternatively companies, within such industries have adopted different policies in respect of the calculation of the cancellation penalty.  It has been reported, for example, that in the cellular telephone industry, that companies have utilised an “across the board” thirty or forty percent cancellation penalty.

In my opinion, this clearly is not in compliance with what is required in terms of the Regulations to the CPA, as outlined above.  It is clear from the method prescribed by the Act and its Regulations, that one has to adopt a case by case consideration of the cancellation penalty.

Recommendation:

I recommend the following to a landlord:-

• A re-analysis of one’s leasing strategy, considering the dilution of security of a long term fixed lease.  This would include considerations of an amount towards tenant allowance, commission paid to estate agents and leasing brokers, discounts afforded to a tenant, etc.;

• A specific inclusion in a lease agreement should the tenant receive such discounts, tenant’s allowances, etc. and an acknowledgment by the tenant that such amounts would be part of a reasonable cancellation penalty should there by an early cancellation of the lease agreement;

• Continued use of written lease agreements;

• Obtain necessary legal advice whether the CPA applies to a lease agreement;

• Obtain necessary legal advice from a legal specialist as to what a reasonable cancellation penalty should be in a specific circumstance.

PREPARED BY RUI MARTO

MARTO LAFITTE & ASSOCIATES INC

30 April 2012