Deposits and cancellation of lease agreements in the time of COVID-19
MAIN IMAGE: Cilna Steyn, managing director SSLR Incorporated
There are so many questions from landlords, tenants, and rental agents alike. A particularly pressing issue is the legal implications of cancellation of lease agreements where the reason for the cancellation of the lease agreement was specifically that the tenant could no longer afford to pay the rent for the particular premises because of the financial pressures brought about by COVID-19.
These financial pressures could include a tenant that lost his job completely, who has been retrenched, the tenant that is a sole proprietor who has no income because his business cannot trade, or a tenant receiving a reduced salary.
Does the reason for cancellation impact the penalty the landlord can charge from the tenant?
Let’s begin with lease agreements that is governed by Section 14 of the Consumer Protection Act; this will be fixed-term lease agreements where there is a natural person involved in the transaction, this can be either the landlord or the tenant. In these agreements the tenant would be entitled to cancel the lease agreement by giving the landlord 20 business days’ written notice of such cancellation, the landlord will however be entitled to claim a reasonable cancellation penalty from the tenant. The reasonable penalty would be an amount that the parties agreed to in terms of the lease agreement or if the lease agreement is silent on this topic, the landlord will have a claim against the tenant for the actual damages (financial loss) suffered by the landlord, provided that he can show that he attempted to mitigate his damages as much as possible.
During lockdown, as well as the phased reopening of the country; the real estate industry is still mostly closed and not operational. This means that a landlord would not be able to place a new tenant since the landlord would not be able to show the property to prospective tenants and would accordingly not be able to conclude new lease agreements. The effect of this is obviously that the landlord has no ability to mitigate his damages and this will leave the tenant exposed to a damage claim for the full damages suffered by the landlord. A court will definitely consider the tenant’s personal circumstances when faced with an order like this. However, unfortunately for many tenants in a position like this, the laws regarding damages remains unaffected, even by the economic impact of the COVID-19 pandemic.
Landlord may claim from the deposit
Presumably the landlord will have a deposit from the tenant which can be used by the landlord to make good any damage to the property or restore any financial damages suffered by the landlord, for instance non-payment of rent or for that matter, damages suffered due to early cancellation of the lease agreement. A landlord would be entitled to hold and utilise the deposit in a situation where a tenant cancels the lease agreement early; and where the landlord is suffering financial loss as a result of this, the landlord might even have a damages claim over and above the deposit held by the landlord.
The principle of Ubuntu with cancelled leases
There has been a lot of talk about the legal principal of Ubuntu and its application in South African law, this is one of those instances where we would like to see landlords and tenants effectively meeting each other halfway. The tenant can surely not expect a landlord to allow him to cancel a lease agreement, nor pay rent any further where the landlord is not in a position to place a new tenant. On the other hand, a landlord can surely not hold a tenant to the full term of the lease agreement where the tenant indicates that he can no longer afford to pay the rent. These are not hard and fast rules in our law, but this is the principals of Ubuntu, which sets a very strong foundation in interaction between people, and the way our courts apply our set legal principles.
Landlords and tenants are implored to communicate in this time, keep the communication in writing and find middle ground to accommodate each other. If this is not possible unfortunately the parties will be left with litigation and the legal principals above will be applied by our courts.
About the author: Cilna Steyn is an award-winning businesswoman and the managing director of the property specialist law firm, SSLR Incorporated, which she co-founded in 2008. She also acts on the panel of experts for the Law Society of South Africa’s Legal Education and Development, is one of the drafting attorneys of the TPN (Tenant Profile Network) Residential LeasePack and authored “The Landlord’s Guide – Property Rental and Eviction” in 2015. Cilna regularly publishes articles in newspapers and peer review magazines. She also regularly presents training sessions to rental agents and tenants and often participates in TV and radio discussions relating to property law, in particular evictions.