What happens when you wish to cancel a lease agreement before occupation?
A Property24 Reader says her son and his fiancé signed a lease agreement and were supposed to take occupation. However, due to the wedding being cancelled and the two of them splitting up her son cannot afford the rental on his own.
READ: How to safely cancel your residential lease agreement
"He did not take possession of the property and wishes to cancel the lease before occupation. The agency informed him that he must give 20 business days' notice and that a penalty of the 50% of rental must be paid and that the landlord can ask for 3 months' rental. Please advise," she asks.
Prenola Naidoo, Commercial Law attorney at Herold Gie Attorneys responds: At the outset, the cancellation of a fixed-term lease agreement before taking occupation of the rental premises amounts to an early termination of the said lease agreement.
"It is therefore important to consider the terms and conditions of the lease agreement signed by the parties and the implications of early termination. Your lease agreement will, in most cases, make provision for early termination as well as any consequences thereof," says Naidoo.
The Consumer Protection Act 68 of 2008 (hereinafter referred to as "the CPA") also provides for the early termination of a fixed-term lease agreement. The CPA cannot be excluded through the terms of the lease agreement. However, one will need to determine the applicability of the CPA.
Naidoo says the CPA applies to all leases, except where such lease is concluded between a landlord and a juristic entity which has an annual turnover or asset value which equals or exceeds R 2 million; or where the landlord is not leasing the property in the ordinary course of business.
READ: What happens when a lease is cancelled early?
If the CPA does in fact find application to the fixed-term lease agreement, section 14(2)(b)(i)(bb) of the CPA provides that a tenant may cancel a fixed-term lease agreement, by giving 20 (twenty) business days' notice in writing to the landlord, subject to sections 14(3)(a) and (b) of the CPA.
Section 14(3)(a) of the CPA provides that upon cancellation of the fixed-term lease agreement, the consumer will remain liable for any amounts owed in terms of the lease agreement up to the date of cancellation, whilst section 14(3)(b) of the CPA further provides that the landlord is entitled to charge a reasonable cancellation penalty if the lease is cancelled prior to the end of the agreed upon period.
"The next step would be to establish what constitutes a "reasonable cancellation penalty". The guidelines in Regulation 5(3) of the CPA prescribe what a "reasonable cancellation penalty" entails. Most contracts now stipulate a reasonable penalty payable by the tenant.
"When determining a reasonable cancellation penalty, the factors listed in Regulation 5(3) of the CPA need to be taken into account. These factors include any amounts which the tenant is still liable to the landlord up to the date of cancellation, the rental payable, duration of the lease, the loss suffered by the landlord, the length of notice of cancellation provided by the tenant, whether or not the tenant has found an alternative tenant to enter into a new lease agreement with the landlord as well as general practice," says Naidoo.
READ: 5 things tenants should check before signing a lease
"The reasonable cancellation penalty to be charged by the landlord constitutes a charge for the anticipated losses suffered as a result of the early termination of the fixed-term lease as the landlord will need to find an alternative tenant to take occupation of the rental premises.
"The cancellation penalty should however not be exorbitant, excessive or unfair. If a tenant feels as if his/her landlord's claim is excessive and unfair, they may approach the National Consumer Tribunal or the Rental Housing Tribunal.
"Therefore, in terms of the CPA, a tenant will always be entitled to terminate a fixed-term agreement at any time provided he/she has given the landlord 20 (twenty) days' written notice, despite the provisions of a concluded lease agreement. However, should a tenant exercise their right to early termination, the tenant will be liable for a reasonable cancellation penalty imposed by the landlord for such early termination," says Naidoo.
Additional information:
In a previously published article, Tiaan Pretorius, manager for Seeff Centurion, said It is not always possible to see out the full term of your lease agreement. There may come a time when you need to cancel it for whatever reason. Not following the correct procedure can be costly though.
The cancellation of residential lease agreements is governed by the CPA (Consumer Protection Act) and the RHA (Rental Housing Act).
Rochelle Holland, rentals manager for Seeff Sandton advises that in the case of a fixed term natural lease the tenant may cancel by providing 20 business days' notice subject to a reasonable penalty fee. In the case of a month-to-month lease, a calendar month's notice (30 days) is required from each party.
Pretorius says that provided the cancellation is done correctly, the landlord must accept it and cannot insist on the balance of the rental payments for the rest of the lease period. However, the landlord would be entitled to reasonable cancellation costs.
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This would include loss of rental income between the current tenant leaving and a new tenant starting their lease plus procurement costs of a new tenant, including advertising expenses. He says it is advisable that this is provided for in the lease agreement to avoid issues arising.
The landlord also cannot withhold the deposit if the cancellation is done correctly, unless there is property damage caused by the tenant. Pretorius recommends that in addition to a maintenance fund, the landlord should keep a reserve. This is to cover the unlikely case of a property being vacant while waiting for the next tenant.
READ: Tenant Rights | Cancelling your fixed-term lease when you've been retrenched
John O'Reilly, rentals manager for Seeff Randburg says tenants must read their lease agreement carefully and ensure they understand all the conditions and responsibilities. This includes what costs may be applicable.
There are various ways in which the landlord can protect itself against potential losses due to cancellation. Pretorius says an experienced rental agency can provide a lease agreement that protects their interest and complies with the CPA and RHA regulations. This can ensure that situations such as a cancellation cost as minimally as possible, or could even be a non-event if a replacement tenant is found quickly.
READ: 5 things tenants should check before signing a lease
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*article updated 24 January 2024
26 Feb 2024
Author Property24