Beware of penalty fees charged for early lease agreements termination

The COVID-19 pandemic continues to wreak havoc, emotionally and financially, with many people having lost their jobs or sources of income. This has resulted in many tenants of rental properties either defaulting on their monthly rental payments, or cancelling their lease agreements prematurely.

One reader says: I signed a 12-month lease agreement but three months into the lease, I was retrenched. My landlord insists that I must stay for the remainder of the lease term, otherwise I will be liable for cancellation costs. I am being threatened with legal action even though I have given 20 business days’ notice as per the Consumer Protection Act. Is my landlord correct? What can I do in this situation?

A lease agreement is a legally binding document that a tenant signs with the landlord before taking occupation of the property. Many rental lease agreements are fixed for 12 months; others may be for six or three months depending on the landlord.

It is important that before signing a lease agreement you go through the document carefully. Make sure that you fully understand the terms and conditions, and especially the section about terminating a lease agreement before the fixed period expires. Unfortunately, regardless of your financial situation, the landlord has the legal right to claim reasonable cancellation penalty fees, failing which, the landlord can take you to court.

In terms of section 14 of the Consumer Protection Act, a natural person tenant may cancel a lease on 20 business days’ notice for any reason, and the lease will terminate after the 20 business days’ notice expires.

According to Marlon Shevelew, director at Marlon Shevelew and Associates Inc., the cancellation on this basis will not excuse the tenant from paying all amounts due in terms of the lease to date of cancellation.

“The landlord is entitled to claim a reasonable cancellation penalty, and the amount that may be charged as a reasonable cancellation penalty is regulated by the Consumer Protection Act 68 of 2008.”

He explains that in terms of regulation 5 (2) of this Act 68 of 2008, several of the following factors will determine what is reasonable – bear in mind that these regulations will not always apply in totality, as these are generic regulations for all consumers falling within the Consumer Protection Act:

• the amount that the consumer is still liable for to the landlord up to the date of cancellation
• the value of the transaction (rental amount) up to cancellation
• the value of the goods (in this case, the property being rented by the tenant – and this will be the value of the lease agreement at the time of cancellation), which will remain in the possession of the consumer after cancellation
• the value of the goods that are returned to the supplier
• the duration of the consumer agreement as initially agreed (this could be 12 or six months)
• losses suffered or benefits accrued by the consumer as a result of the consumer entering into the consumer agreement
• the nature of the goods or services that were reserved or booked
• the length of notice of cancellation provided by the tenant (20 business days is all that is required; however, the more notice that is provided assists to potentially reduce the penalty charged)
• the reasonable potential for the landlord, acting diligently, to find an alternative tenant between the time of receiving the cancellation notice and the time of the cancelled reservation
• the general practice of the relevant industry (in this case, the residential rental sector).

Shevelew says, however, the penalty charged by the landlord should not be so large as to prevent a tenant from terminating when they would otherwise be entitled to do so, as this would not be financially viable.

The landlord will not be entitled to claim the outstanding rental for the entire term of the lease –  the landlord will likely be able to claim one or two months’ rental as a reasonable cancellation penalty fee.

In addition to the above amount, if there are any repairs to be done to the property, the tenant will be liable for these costs. These are covered by the rental deposit, in which case, the landlord will use what is needed from this deposit to cover the costs, (unless the damages falls under fair wear and tear, and assuming that the proper incoming and outgoing inspections have taken place), and under normal course of business (cancelling when the lease expires), the remaining balance plus interest is paid to the tenant.

Once the notice period expires, the tenant can vacate the property. If the landlord follows through with the legal threats initially made, then any summons served to the tenant can be defended at this stage.

Shevelew explains that a summons is a legal document stating that you owe the landlord money (for early cancellation of the lease agreement), and the details of this including the date and court in which this case will be heard.

He says the tenant can choose to defend themselves in court or get a lawyer to defend their case. His advice is to have a lawyer, as they have better understanding of the law and its application on various matters.

While times may be tough, it would be helpful for both parties (landlords and tenants) to communicate honestly, and find solutions that would suit both parties, especially in these times when many properties are vacant.

Edited by fellow-Safrean, Gudrun Kaiser.