Attorneys throughout SA are working at providing clients with some means of protection from the ramifications of the new Consumer Protection Act.
Broekmann explains that Section 14 of the new act makes it possible for any tenant who is not a juristic person (any individual or individuals acting on their own behalf, and not a close corporation, company, trust or partnership) to cancel any fixed term lease simply by giving 20 business days’ notice in writing. This section of the act is likely to play havoc with landlords’ financial planning and may prevent them from using long term leases as security for finance.
According to Trudie Broekmann, director at Gunston’s Attorneys commercial division this is now more necessary than in lease agreements, especially those pertaining to property leases.
Broekmann explains that Section 14 of the new act makes it possible for any tenant who is not a juristic person (any individual or individuals acting on their own behalf, and not a close corporation, company, trust or partnership) to cancel any fixed term lease simply by giving 20 business days’ notice in writing.
This section of the act is likely to play havoc with landlords’ financial planning and may prevent them from using long term leases as security for finance.
“Provision is made for a cancellation fee, but this, the act stipulates, must not be more than is reasonable,” says Broekmann.
She points out that the wording is very vague even though the regulations include a fairly long list of criteria by which to evaluate what a reasonable fee might be.
Perhaps the most important criterion is that the fee has to take into account the reasonable potential for the landlord acting diligently to find another tenant and the time that this is likely to take in the current rental market, she says.
“As things stand it does seem that it will not be possible to calculate the cancellation fee upfront.”
She recommends that the lease simply indicates that the landlord is entitled to charge the maximum permitted cancellation fee.
It may also be possible to insert a clause requiring the tenant to keep on paying rent until a replacement is found, where this is reasonable from the perspective of the tenant and does not have the effect of negating the tenant’s cancellation right.
She says the likely consequences of the new rulings will be that landlords will bend over backwards to get tenants who are juristic persons and therefore do not have the right to this arbitrary cancellation of a lease.
“Another difficulty is that juristic tenants will still have the right to cancel leases at short notice if their landlord is an individual and not a juristic person.”
Broekmann predicts that the effect of the Act will be to make landlords insist that tenants lease via a company, close corporation or other legal entity.
With the new Companies Act in place, acquiring and running a company is far less complicated than it used to be and need not be expensive.
She says Gunstons Attorneys is working on the redrafting many lease agreements, in particular, to limit the legal risk for landlords as much as much as is permitted under the Consumer Protection Act (CPA).
“Where we act on behalf of tenants, we insert provisions to protect against the automatic renewal of fixed-term leases which the Act appears to introduce.”
She emphasises that because the Act is still in its early days, it is likely that they as attorneys will find other ways in which to protect clients contractually.
Another problem likely to arise from the new legislation, she says, is that the 20 business day cancellation clause will inevitably cause many leases to end midway through the month.
“This will complicate payment and administrative matters and make it harder for landlords and estate agents to fill the empty properties promptly.”
Furthermore, she says with the assistance of an attorney who understands the CPA, a landlord or agent can formulate and implement a simple procedure which avoids many of the legal risks created by Section 14.
Broekmann assumes that, on cancellation some discussion between the landlord and the tenant will have to ensue, but nothing is laid down on this matter in the Act.
She says she has noticed that landlords and estate agents see the new legislation as disastrous, particularly if they are handling large portfolios.
Furthermore, she says with the assistance of an attorney who understands the CPA, a landlord or agent can formulate and implement a simple procedure which avoids many of the legal risks created by Section 14.
Meanwhile, Viaan Wolhuter, managing director at Aximo, retail property management legal experts says the CPA is setting a new precedent in consumer rights and will have a dramatic effect on property owners.
“One of the major concerns with the CPA is that individuals can effectively exit lease agreements with a 20 business day notice period.”
Wolhuter says this is a concern for most landlords, particularly those within the retail sector because it exposes those properties to a higher risk factor and negatively impacts on the capitalisation/discount rate used to value the property creating a dilution of the asset’s value.
“Short-term lease agreements make it difficult to predict revenue streams making it that much harder for property owners to seek further investment from the banking sector.”
The CPA has no preceding case law, making accurate prediction and outcome of legal matters relating to lease agreements tough to determine.
It will change the nature of how lease agreements between retailers and tenants will be handled.
In order to secure their investments we see landlords pursuing safer options and entering into agreements with businesses rather than private individuals, he explains.
Before, landlords were willing to invest in private businesses, assisting new tenants financially.
Marc Zlotnick, managing director at Forsite, specialists in property leasing says the variety of stores in shopping centres might shrink as centre owners could shy away from entering lease agreements with natural persons because the risk factor is just too high.
He says often, these tenants would get assistance in the form of money or renovation assistance for new shop space, commonly known as a ‘Tenant Installation Allowance’, which the landlord could justify on the back of a long term lease from the tenant.
Now landlords might be less willing to take the risk, leaving these small businesses vulnerable.
Marc Zlotnick, managing director at Forsite, specialists in property leasing says the variety of stores in shopping centres might shrink as centre owners could shy away from entering lease agreements with natural persons because the risk factor is just too high.
“While this might not necessarily affect larger national centres, it might have an adverse effect on smaller consumer centres where family run businesses are more prevalent,” says Zlotnick. – Denise Mhlanga
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