Tenants want to cancel a fixed term lease: Legal implications
MAIN IMAGE: Paul Stevens, CEO Just Property; Cilna Steyn, managing director SSLR Inc.
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 your tenants must cancel their lease due to jobs lost?
“Sadly, the latest official unemployment rate stands at 32.5%,” says Paul Stevens, CEO of Just Property. “We have certainly seen an increase in the number of tenants cancelling their lease agreements before term as a result of financial hardship.”
Cilna 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 the legal requirements of a tenant?
Stevens: 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?
Steyn: 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?
Steyn: 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.
Stevens: Leases are one of the most important reasons to work through an agent. Robust lease agreements like the ones take into account all eventualities.
Can these be subtracted from the deposit?
Steyn: Yes, definitely. The deposit is there to be utilised for any amounts that the tenant is responsible for in terms of the lease agreement.
Stevens: Deductions from and repayment of deposits are a common pain point and reason for customer complaints. 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.
Steyn explains its application in this situation: “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,” says Stevens.
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,” Steyn explains. If he is successful, the landlord may only claim an amount equal to any actual damages suffered.
Steyn gives the following example. If the parties 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.
Steyn and Stevens are aligned in their views that 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.”