There are many unforeseen circumstances that may result in a tenant exiting a commercial lease early and this process is less complicated than one would think.
Circumstances may arise that hinders a commercial property tenant’s ability to fulfil his or her obligations as per the lease agreement.
Although termination regulations for a commercial lease are naturally stricter than that of residential lease agreements, both share similar key principals.
The enactment of the Consumer Protection Act (CPA) in 2008 aims to provide fair grounds for both the landlord and the tenant.
Consequently, it is now necessary for both residential and commercial tenants and landlords to comply with the provisions of the CPA when it comes to early termination.
If both parties follow the correct procedures, the early termination would not be considered a breach of contract.
It’s more common for the tenant to terminate a lease agreement prematurely and if he or she wants to proceed with the termination, a careful examination of the signed lease agreement should be the first step.
Although not common, in some cases the lease agreement may not include an early termination clause. In this case, the tenant must refer to the CPA which is only necessary if the lease agreement falls within the scope of the CPA.
Section 14 of the CPA regulation the expiry, renewal and termination of lease agreements and stipulates that no fixed term contract may currently not exceed a period of 24 months.
Furthermore, it states that the tenant may terminate the lease agreement in any of the following ways:
Although it is possible to cancel a commercial lease prematurely, it does not come without its own set of implications.
Should a tenant cancel a lease early, he or she will be liable to pay any amount still owed to the landlord in terms of the agreement and up to the date of the cancellation.
In other words, the tenant will be required to continue paying the rental amount for the notice period on a pro rata basis.
Furthermore, the landlord is entitled to impose a reasonably fair penalty for the early cancellation.
The landlord must also credit the tenant with any amount that remains the tenant’s property as of the date of the cancellation. This is only applicable in cases where the tenant opts to terminate the lease agreement any time before the official expiry thereof.
The CPA included this provision as a means to protect the rights of landlord while finding fair grounds for the tenant to stand upon.
Although the CPA states that exiting a commercial lease agreement is possible for the tenant, there is still some uncertainty around the potential implications related to “reasonable cancellation penalties” as these are not clearly defined in the act.
However, the industry has adopted a certain approach which provides a clearer guideline regarding what could be considered a reasonable cancellation penalty.
Landlords must accept that it is their obligation to immediately begin advertising for a new tenant and that the current tenant is not in any way responsible for finding a replacement.
However, the landlord can include the costs related to the advertising as part of the reasonable penalty.
Previously, before the enactment of the CPA, landlords would determine the penalty fee based on their ability (or inability) to find a tenant to replace the previous one. Importantly, there was no standard obligation to find a replacement tenant, unless specifically agreed.
This opened up the opportunity for angry landlords to abuse tenants by:
According to the CPA, this is not allowed and the landlords will have to prove that they have made reasonable efforts to replace the tenant.
Furthermore, it will only be possible to calculate the damages once the landlord has found a new tenant.
Therefore, it’s important to note that the reasonable cancellation penalty serves to allow the landlords an opportunity to recover costs that they would not have needed to incur if the tenant did not exit the lease agreement early.
These costs may also include a reasonable amount due to lost rental income once the tenant has cancelled the lease and vacated the property.
However, the landlord still does not have the right to charge the tenant for an unreasonable number of months that the property has remained vacant.
The bottom line is that the landlord can use the reasonable cancellation penalty to recover from direct financial loss, expenses or damages suffered. It is not a means for financial gain or benefit.
Although the Consumer Protection Act is still relatively vague when it comes to defining reasonable cancellation penalties, the landlord may only be entitled to claim for costs that have actually been incurred and can be proved.
Exiting a commercial lease is possible as long as the landlords and tenants follow the correct procedure.
If you would like more information regarding early cancellation of commercial lease agreements, or if you feel your landlord is acting unfairly, please don’t hesitate to contact our property attorneys in Johannesburg and Cape Town.
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