What happens when you wish to cancel a lease agreement before occupation?

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.

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. 

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.

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.

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.

Extract from Property 24