The Consumer Protection Act ("Act") specifically regulates fixed-term agreements (contracts of definite duration) and the expiry and renewal of such agreements.

The Act provides that fixed-term consumer agreements must not exceed a certain maximum period. The current set of draft regulations prescribe this maximum period as a period of 24 months. There is no differentiation between various categories of consumer agreements, despite the fact that the Act empowers the Minister to prescribe different maximum periods for different categories of agreements.

In addition, notwithstanding any contrary provision in a fixed-term agreement, a consumer may cancel such agreement before the expiry of the originally agreed fixed term on 20 business days' written notice (or on notice in other recorded form) to the supplier. It appears that the consumer need not provide any reason for the cancellation. The Act also provides for the supplier's right to cancel prior to the expiry of the fixed-term agreement, but this right may only be exercised if the consumer has failed to remedy a material breach on his part, after having been placed on terms to do so.

The provisions relating to fixed-term agreements are also applicable to leases (where such leases qualify as consumer agreements) and create some interesting issues in this regard.

Leases in respect of which the fixed-term provisions apply may not be concluded for periods longer than the prescribed maximum period. Furthermore, upon expiry such lease agreements will automatically renew on a month-to-month basis, subject only to any material changes in respect of which the supplier has given notice. This is contrary to the common law position where a lease would terminate finally on the expiry thereof and the tenant would be obliged to immediately vacate the leased premises. The Act provides that a month-to-month renewal will be effective upon expiry unless the consumer expressly directs a supplier to terminate the agreement on the expiry date or agrees to a renewal for a further fixed term. It is accordingly recommended that landlords incorporate terms in lease agreements providing for immediate termination to avoid having to accommodate problematic tenants for at least a further month after the expiry of the lease. It is not clear whether including automatic renewal provisions in leases will be a similarly effective mechanism for extending the maximum period of the lease. These types of provisions may be considered as provisions that purport to override the effect of provisions of the Act, and would accordingly be prohibited in terms of section 51 of the Act. Agreements to renew may need to be separate and distinct agreements.

Regardless of the reason for the cancellation of a fixed term agreement, the consumer will remain liable to the supplier for any amounts owed to the supplier in terms of the relevant agreement up to the date of cancellation – but not up to the end date of the contract contemplated under the relevant agreement.

The Act further provides that the supplier is entitled to impose a reasonable cancellation penalty "in contemplation of the agreement enduring for its intended fixed term." However, the draft regulations indicate that such cancellation penalty may not exceed 10% of the value of the consideration that the consumer would have paid had the contract run its course.

While the common law duty to mitigate damages would still apply, a fixed term agreement may no longer provide the same level of certainty for landlords, who may find themselves out-of-pocket and without remedy where they are unable to find replacement tenants to take over the lease of the property for the remainder of the original lease period.

It is notable that the provisions relating to fixed term agreements are not applicable to transactions where the supplier and the consumer are juristic persons as defined in the Act, regardless of the consumer's annual turnover or asset value. This is likely to exclude application of the relevant provisions for most, if not all, commercial lease agreements regardless of size.

In light of the "one size fits all" approach to fixed-term agreements, suppliers who often enter into consumer agreements that have a fixed term must consider their current business models and processes carefully in order to ensure compliance with the Act. Landlords in particular need to think about the further potential consequences of the provisions relating to fixed-term agreements, for example the potential of these provisions to limit the effectiveness of lease agreements for use as security to banks and other financial institutions.

Written by Aneeka Savahl, Senior Associate, Corporate and Commercial at Cliffe Dekker Hofmeyr business law firm