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Tuesday Oct 25, 2011

Property leases can now be cancelled at short notice

Attorneys throughout South Africa are now working at providing clients with some means of protection from the ramifications of the new Consumer Protection Act - and nowhere will this be more necessary than in lease agreements, especially those pertaining to property leases.

This is the view of Trudie Broekmann, a director in Gunstons Attorneys' commercial division. Broekmann says that Section 14 of the new act makes it possible for any tenant who is not a juristic person (i.e. any individual or individuals acting on their own behalf, and not a close corporation, company, trust or partnership) to cancel any fixed term lease simply by giving 20 business days' notice in writing.

This section of the act, says Broekmann, is likely to play havoc with landlords' financial planning and may prevent them from using long term leases as security for finance.

Provision is made for a cancellation fee, but this, the act stipulates, must not be 'more than is reasonable'.

This wording, says Broekmann, is very vague, even though the regulations include a fairly long list of criteria by which to evaluate what a 'reasonable' fee might be.

"Perhaps the most important criterion here," says Broekmann, "is that the fee has to take into account 'the reasonable potential for the landlord acting diligently to find another tenant' - and the time that this is likely to take in the current rental market."

"As things stand," says Broekmann, "it does seem that it will not be possible to calculate the cancellation fee upfront. We recommend that the lease simply indicates that the landlord is entitled to charge the maximum permitted cancellation fee. It may also be possible to insert a clause requiring the tenant to keep on paying rent until a replacement is found, where this is reasonable from the perspective of the tenant and does not have the effect of negating the tenant's cancellation right."

The likely consequences of the new rulings, says Broekmann, will be that landlords will bend over backwards to get tenants who are juristic persons and therefore do not have the right to this arbitrary cancellation of a lease.

An additional difficulty here, however, which very few commentators have so far picked up, is that juristic tenants will still have the right to cancel leases at short notice if their landlord is an individual and not a juristic person.

"In general, however," says Broekmann, "the effect of the Act, I predict, will be to make landlords insist that tenants lease via a company, close corporation or other legal entity. With the new Companies Act in place, acquiring and running a company is far less complicated than it used to be and need not be expensive."

Gunstons Attorneys is now working on the redrafting of of many lease agreements. In particular, she says, they want to limit the legal risk for landlords as much as much as is permitted under the Consumer Protection Act. Where we are acting for tenants, we are inserting provisions to protect against the automatic renewal of fixed-term leases which the Act appears to introduce.

"Obviously this act is still in its early days and it is likely that we will find other ways in which we can protect clients contractually," says Broekmann.

Another problem likely to arise from the new legislation, she says, is that the 20 business day cancellation clause will inevitably cause many leases to end midway through the month.

"This will complicate payment and administrative matters and make it harder for landlords and estate agents to fill the empty properties promptly."

Broekmann assumes that, on cancellation some discussion between the landlord and the tenant will have to ensue, but nothing is laid down on this matter in the Act. She says she has noticed that landlords and estate agents see the new legislation as disastrous, particularly if they are handling large portfolios. However, with the assistance of an attorney who understands the Consumer Protection Act, a landlord or agent can formulate and implement a simple procedure which avoids many of the legal risks created by Section 14.

Gunston Attorneys Press Release

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