Is it possible for me to get out of my commercial lease?

3rd October 2017

Is it possible for me to get out of my commercial lease?

Emma Jane Jones, a psychologist, and her friend Amy Bloggs, a paediatrician have rented premises from a company ABC Holdings (Pty) Ltd (“the Company”) in a commercial business park for a period of three years (1 March 2015 – 28 February 2018). The rented area consists of two “consultation rooms” and a common area that they share.  They are individually and mutually liable to the Landlord Company. Emma Jane and Amy are both natural persons, as opposed to juristic persons such as companies which are created in terms of legislation.  There is also no early termination clause in the lease agreement.

In mid-January 2017, 13 months before the lease agreement comes to an end Emma Jane falls on hard times and can no longer afford “her portion” of the rentable area.  Amy cannot afford to “take over” the entire rentable area and they are unable to find a replacement for Emma Jane.  They thus approach the Company and inform it that they are no longer able to lease the premises and give it approximately six weeks’ notice of termination (i.e. that they will be vacating by 28 February 2017).  The Company informs them that they cannot terminate their lease agreement as there is still another year to the lease and that should they proceed to do so, the Company will take legal action against them.  Emma Jane and Amy do not know what to do and so they approach their friend Belinda who is a consumer protection attorney.

Belinda advises them as follows:

Amy and Emma Jane would have various remedies available to them under section 14 of The Consumer Protection Act 68 of 2008 (“CPA”) as they are natural persons contracting in their personal capacity with the Company.  This section does not apply to transactions between juristic persons.  Even though the leased premises are commercial in nature, this has no adverse effect on Amy and Emma Jane to invoke the provisions of this section of the CPA as the definition of “consumer” includes not only individuals of residential leases, but also tenants of commercial properties. 

Firstly, Emma Jane and Amy would be able to cancel the lease agreement on 20 business days written notice.  In the event Amy and Emma Jane elect to terminate on this basis, the Company would be entitled to impose a “reasonable cancellation penalty”.  Section 14(3)(b)(i) regulates the penalties which a supplier may impose for the early cancellation of the agreement.  The supplier is allowed to impose a reasonable cancellation penalty with respect to any good supplied, services provided or discounts granted, to the consumer in contemplation of the agreement enduring for its intended fixed term. In determining what a “reasonable cancellation penalty” would be made up of, certain factors would be taken into account, such as, inter alia: the rental amount still owing to the Company up to the date of cancellation; the duration of the lease agreement initially agreed upon; the length of notice of cancellation provided by the tenant; the time within which the landlord would be able to find a new tenant and the like.

However, what Emma Jane and Amy were not aware of, is that, statutorily, the lease agreement that they entered into with the Company could not be for a period of more than 24 months.  This is governed by section 14(2) as read with regulation 5(1).  A fixed-term agreement may not exceed a maximum period prescribed by the Minister (however, this can be exceeded if certain requirements are met. These requirements are (i) if a regulation authorises it in respect of a specific type of agreement, consumer, sector or industry; (ii) if it is authorised in an industry code of conduct or (iii) the  consumer and supplier expressly agree and the supplier can show that there is a demonstrable financial benefit to the consumer.  Whilst the CPA is silent as to what a ‘demonstrable financial benefit’ constitutes, a supplier should be able to meet this requirement if it can show that a discount was granted because the agreement is of longer duration.)

Whilst section 14 is silent on the consequences of non-compliance, it is clear that breaching section 14(2) is prohibited in terms of section 51(1)(b)(iii) (i.e. a supplier cannot make an agreement subject to a term or condition if it directly or indirectly sets aside or overrides the effect of any provision of the CPA).  Thus, unless Amy Jane and Emma expressly agreed to the longer term contract, fully cognisable of their CPA rights and the supplier can show that there is a demonstrable financial benefit to them, the agreement, in terms of section 51(3) is void to the extent it contravenes the section and, specifically in terms of section 14(2)(b) the consumer may cancel the agreement upon the expiry of its fixed term without penalty or charge  (subject to subsection 3(a) which states that the consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of cancellation.)

Emma Jane and Amy would thus be entitled, at the end of the lease’s fixed term (i.e. 28 February 2017) to cancel the agreement without penalty or charge.  They would have to inform the Company prior to this date, otherwise the agreement would continue on a month-to-month basis.  However, the Company would not be able to force Amy or Emma Jane to continue with the lease beyond this date and would not be entitled to a reasonable penalty fee.

In the event the Company disagreed with the aforegoing proposition due to ambiguity and pushed for a reasonable penalty fee and/or wished to hold Emma Jane and Amy accountable for the remainder of the lease, it is submitted that as CPA was enacted with the purpose of maintaining a ‘consumer market that is fair, accessible, efficient, sustainable and responsible for the benefit of consumers generally.” With this in mind, section 4(3) of the CPA provides that where a provision of the CPA may be seen to be ambiguous, the meaning ‘that best promotes the spirit and purposes of the Act’ must be favoured.

Thus, as can be seen from the above, Amy and Emma Jane are entitled to cancel their lease agreement (on various bases) and the Company is being unreasonable in advising them that they will take legal action against them in the event they cancel the agreement – especially in light of the fact that Amy and Emma Jane provided six weeks’ notice that they would not remain party to the lease agreement post 28 February 2017 (which is when the agreement, in terms on the statutory provisions, effectively comes to an end).

Written by Sarah Haken, senior associate (Litigation), Knowles Husain Lindsay