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Cancelling your fixed-term lease when you’re retrenched

What are the legal implications?
Image: Shutterstock

There has been a dramatic increase in the number of retrenchments brought on by the economic effects of the Covid-19 pandemic. What are the legal implications if you have to cancel your lease?

Sadly, the latest official unemployment rate stands at 32.5%. As a real estate company with probably South Africa’s largest rental division, we have certainly seen an increase in the number of tenants cancelling their lease agreements before term as a result of financial hardship.

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Clina Steyn, Managing Director of SSLR Incorporated, notes that the early cancellation of a lease agreement is regulated by legislation, specifically the Consumer Protection Act and the Rental Housing Act.

“If a tenant wishes to end a fixed-term lease agreement during the fixed term, this constitutes a cancellation in terms of Section 14 of the Consumer Protection Act,” Steyn explains. “The tenant (as the consumer) is allowed to cancel the fixed-term agreement by giving the landlord (the supplier) 20 business days’ notice. The landlord has the right to claim a reasonable cancellation penalty from the tenant. Even if the lease agreement is silent on this, the landlord may claim the full damages suffered within certain legal limitations,” Steyn notes.

Steyn and Stevens answered some frequently asked questions from tenants in the context of cancellation (and not the termination of a month-to-month agreement):

What are my legal requirements as a tenant?

The only requirement is to give the landlord 20 business days’ notice of cancellation and to pay the early cancellation penalty. This should be specifically outlined in your lease agreement, and your agent should remind you of these requirements.

What does ‘full damages mean?

The full damages would be the actual damages that the landlord suffers, meaning the full remainder of the lease agreement and the value of that occupation as set out in terms of the lease agreement. However, if the lease agreement limits the reasonable cancellation penalty to, for instance, three months’ rental, the landlord would be limited to that cancellation penalty and would not be entitled to claim any more than that amount.

How must these damages be proved to the tenant in terms of legislation?

Since this will be a contractual claim, the landlord would provide the court with a copy of the lease agreement, which would be sufficient proof of the amount of rental that the parties agreed to as well as the originally agreed terms between the parties,” says Steyn.

Robust lease agreements like the ones used by Just Property agents take into account all eventualities. These are just among the many services that professional rental agents and portfolio managers provide to safeguard landlords and tenants alike. Leases are one of the most important reasons to work through an agent.

Can these be subtracted from the deposit?

Yes, definitely. The deposit is there to be utilised for any amounts that the tenant is responsible for in terms of the lease agreement.

Deductions from and repayment of deposits are a common pain point and reason for customer complaints,” says Stevens. “In our experience, clear communication regarding tenant and landlord obligations, reasons for deductions, recommended remedial action and tightly managed timescales are critical to maintaining positive relationships with tenants and landlords.

How would the principle of Ubuntu be applied in such a case?

The principle of Ubuntu is “Umuntu ngumuntu ngabantu”, which could be explained as “I am because of you and you are because of us”. This means we form one community and each person in this community is required to see the other community members as human beings. The effect of this is that we need to be able to demonstrate humanness.

For example: Say a tenant approaches a landlord in time and gives him sufficient notice that as a result of retrenchment or another personal circumstance the tenant needs to cancel the lease. Without ruining himself financially, the landlord would be required to attempt to accommodate the tenant by, for instance, not claiming the full penalty or at least find a way for the two parties to meet halfway. This is not a requirement in law, but it could be greatly beneficial for both parties to attempt to resolve the matter rather than simply enforcing the terms of the lease agreement.

“The sooner a tenant communicates difficulties, the sooner we can work together to reach acceptable outcomes for both parties,” says Stevens. “Our agents are indeed contracted with landlords, who are therefore our primary clients, but without a paying tenant, landlords and agents alike have no income. It is in everyone’s interest to secure sustainable tenancies and, in troubled times like these, negotiations based on a clear understanding of market conditions are key. Our agents are there to provide objective advice.”

What should agents be advising landlords in cases where the tenant gives early notice?

It is important first to consider the terms of the lease agreement. Our standard lease agreements specifically outline what happens when a tenant cancels the lease at any stage during the initial lease term. There are measures to deal with any damages suffered by the landlord and the tenant will be held liable for reasonable cancellation costs.

The landlord would be entitled to claim that amount and deduct it from the remaining deposit once repairs have been carried out after the tenant vacates the premises. The landlord should mitigate his damages, though. On receipt of the early cancellation notice, the landlord is obliged to market the property actively in an attempt to find and place a replacement tenant. If he is successful, the landlord may only claim an amount equal to any actual damages suffered.

If the parties, for example, agreed that the early cancellation penalty would be three months’ rent but a replacement tenant is found after six weeks, the landlord is only entitled to six weeks’ rental. On the other hand, if the landlord cannot find a replacement tenant within three months, he will still be limited to the agreed three months’ rental.

We believe agents should advise their tenants in this regard before accepting the cancellation notice.

Agents need to be upfront and open with the tenant and explain the exact financial implications of early cancellation,” says Stevens. “And it is just as important to advise the landlord of his obligations and, in the current environment, to suggest he considers whether a rent reduction for the current tenant is more advantageous than having the property standing empty.

Paul Stevens, CEO of Just Property.

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South Africa has a higher unemployment rate

Is the landlord allowed to keep the three month damages whether or not the space is filled by a new tenant almost immediately?

In a 5y commercial/industrial lease it is not uncommon for the lease to provide that the tenant can give for example 6 month notice (and importantly remain in the premises for that time). Variations include that tenant gives six month notice but if landlord finds a new tenant the old tenant must vacate with clear month warning to vacate.

Almost no lease is worth trying to take through courts, plus you can’t get blood out of a stone, so far better to work out a mutually fair scheme.

Commercial leases work a little differently from personal lease agreements.

But I agree… generally it’s best (as a tenant on particular) to talk to your landlord & not just ignore the problem or run into arrears

End of comments.

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