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Both tenants and landlords may occasionally find themselves in circumstances necessitating the early termination of a commercial lease agreement. In the event that this happens, it is advisable to seek legal advice from an experienced attorney who will be able to guide you through the process, get you the best result and ensure that the law and proper legal procedures are followed.
Lease agreements are legally binding contracts that cannot simply be terminated before the expiration date. Merely attempting to cancel a lease agreement may constitute a breach of the lease, which can get a party to the lease into further trouble.
A lease agreement consists of two main components. The first is that the landlord allows the tenant to occupy and use the property. Second, the landlord receives rent from the tenant. In other words, a lease is a reciprocal agreement wherein both parties have certain rights and responsibilities.
The same principles apply to commercial leases, which is simply a lease agreement between a landlord and a tenant for a commercial property, that is a property that is intended for and will be used by the tenant for a commercial endeavour such as offices, a retail store, industrial premises, etc.
In South Africa, landlords and tenants are bound by the terms of a commercial lease agreement, in accordance with the common law of contract. In addition, commercial leases, and the cancellation thereof, is to a limited extent, as will be explained below, governed by the Consumer Protection Act No. 68 of 2008 (CPA).
The CPA is applicable to and grants rights and protection to all tenants who are natural persons (Section 5(1)(a) of the CPA). The CPA however only affords protection to a tenant who is a juristic person if the juristic person’s asset value and annual turnover are below R2 million (Section 5(2)(b) of the CPA).
As such insofar as the CPA is concerned, it may be within a tenant’s rights to prematurely terminate a commercial lease agreement. However, it is important to determine whether the lease agreement was signed by the tenant in his capacity as a natural person, i.e. as an individual, or as a juristic person i.e. as a company. Based on this, the CPA may or may not be applicable.
Furthermore in terms of Section 14 of the CPA, so long as the CPA affords protection to the tenant as set out above, and both parties to the commercial lease agreement are not juristic persons (regardless of their turnover or asset value), then the lease agreement may be cancelled by the tenant before its expiration date on 20 (twenty) business days notice to the landlord, subject to the tenant paying a reasonable cancellation penalty to the landlord and subject to the other requirements of Section 14 of the CPA.
Lastly, noteworthy in terms of the CPA is that the maximum duration of a commercial lease to which the CPA applies to, is 24 (twenty-four) months from the date of signature by the tenant (Section 14(2) of the CPA).
If a commercial lease was signed by an individual/natural person, such person has the right to terminate the lease at any time by giving to the landlord written notice of a minimum of 20 (twenty) business days.
Upon receiving notice of the cancellation, the landlord is responsible for finding a new tenant to rent the property. However, to recoup losses suffered as a result of the early cancellation, a landlord has the right to charge the tenant a reasonable penalty fee. Penalty fees for early termination include, for example, the rental amount that the landlord loses as a result of a vacant property. A landlord must attempt to reduce or mitigate their losses and must prove that they have incurred financial damages in order to recover such penalty fees.
Section 14 of the CPA does not apply to tenants who are juristic persons (if the landlord is a juristic person, which is commonly the case). Thus cancelling a commercial lease that was signed by a company as the tenant is considerably more complex than is the case where an individual is the tenant. Professional legal advice is highly recommended in such cases. It is imperative that parties read and comprehend the rental agreement before signature, including the fine print, as the content of the agreement determines whether early termination is permitted. Ideally, a commercial lease should contain an early cancellation clause.
However, lease agreements rarely stipulate the conditions for early termination, in which case in this scenario the tenant does not automatically have the right to early termination. The tenant may enter into a negotiation with the landlord, but the landlord has the final decision to determine whether or not the rental agreement may be cancelled before it expires. The best solution for both parties is to include in the written agreement provision for the conditions of early cancellation.
In the event that you need to terminate a commercial lease, whether as a natural or juristic person, it is wise to consult with an attorney to ensure that proper procedures and legal requirements are adhered to. Alan Levy Attorneys offer industry-leading legal assistance for matters related to cancelling commercial lease agreements. Contact Us for expert advice and exceptional outcomes for all your legal matters.
This article is intended as an educational summary of the applicable legislation and procedures pertaining to commercial lease agreements and the process of early cancellation in South Africa. This article does not provide legal advice of any sort. It is advisable to consult an experienced lawyer before pursuing legal action. For professional legal assistance to cancel a commercial lease, or related matters contact Alan Levy Attorneys.