What is a reasonable cancellation fee when cancelling a lease agreement?

The new Consumer Protection Act (“CPA”) brought about extensive changes to business transactions in South Africa. Lease agreements have also been affected by the provisions of the CPA in that a tenant, who is a natural person, is now entitled to cancel a lease agreement at any stage thereof by simply giving the landlord twenty business days written notice of cancellation. As a result, a landlord may no longer be guaranteed of a long term fixed lease income.

The new Consumer Protection Act (“CPA”) brought about extensive changes to business transactions in South Africa. Lease agreements have also been affected by the provisions of the CPA in that a tenant, who is a natural person, is now entitled to cancel a lease agreement at any stage thereof by simply giving the landlord twenty business days written notice of cancellation. As a result, a landlord may no longer be guaranteed of a long term fixed lease income. 

This does not however mean that a landlord has no remedy against a tenant who prematurely cancels a lease agreement. The CPA also protects the landlord by providing that the landlord may reclaim from the tenant any amounts owed in terms of the lease agreement up to the date of cancellation, in addition to a “reasonable cancellation fee”. But what is such a reasonable cancellation fee?

In order to determine a reasonable cancellation fee, the CPA prescribes a list of factors which must be taken into consideration. These factors include, amongst others:

  • the rental amount which the tenant stills owes the landlord up to the date of cancellation;
  • the value of the lease transaction up to the date of cancellation;
  • the duration of the lease agreement as initially agreed upon by the parties;
  • losses suffered or benefits accrued by 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 of the landlord, acting diligently, to find an alternative tenant between the time of receiving the cancellation notice and the time of the cancellation;  and
  • any general practices relating to the relevant industry.

It must be noted that in terms of the CPA, a landlord cannot charge a cancellation fee which would have the effect of negating the tenant’s right to cancel the lease agreement. This means that a landlord cannot simply hold the tenant liable for the rental of the remaining lease period, and thereby negate the ability of the tenant to consider cancellation. The landlord is obliged to make an effort to find a new tenant and can only hold the current tenant liable for rental due during the time it takes a landlord, using his best efforts, to find a new tenant.

Before the CPA came into operation, our common law determined that a landlord may hold the tenant liable, in the case of breach by the tenant, for amongst others, arrears rental, damage caused to the property and for the monthly rental payable during the time it takes the landlord to find a new tenant.

It would appear as if a number of these common law principles, have been incorporated into the CPA with the effect that a landlord will in all probability not be able to charge a reasonable cancellation fee in terms of the CPA and also rely on common law remedies to recover additional damages.

What is clear from the CPA is that a tenant cannot merely prematurely cancel a lease agreement and walk away scot free. The CPA still provides the landlord with a right to recoup a number of his losses from the tenant albeit possibly being more limited than the damages that the landlord could have recovered under our common law. What a reasonable cancellation fee will be will however differ from case to case and will have to be determined with reference to the CPA factors set out above.

It would be advisable that a landlord that has a lease agreement which is subject to the CPA should seek advice and guidance from a legal specialist as to what a reasonable cancellation fee will be which he can impose in the case of the premature cancellation of a lease agreement. What this amount will be may affect the landlord’s leasing strategy and assist the landlord in not enforcing cancellation fees which contravenes the CPA.

April 17, 2012
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