A tenant has a legal right to cancel a lease agreement early subject to a cancellation penalty. Picture: 123RF/RALF KLEEMANN
A tenant has a legal right to cancel a lease agreement early subject to a cancellation penalty. Picture: 123RF/RALF KLEEMANN

The thorny issue of what lease cancellation penalty a landlord can charge a tenant if he or she gives notice to exit the lease early, has become a hot potato during the Covid-19 pandemic.

Peter Mennen, head of Legal at TPN Credit Bureau, says lease cancellation penalties have been a bone of contention between landlords and tenants since the Consumer Protection Act came into operation in 2008.

The Consumer Protection Act (CPA) allows you, as a consumer, to give 20 business days’ notice to exit any fixed-term contract, including a rental agreement. The 20 business days exclude Saturdays, Sundays and public holidays.

Your landlord, in turn, has the right to charge a reasonable cancellation fee if you exercise your right to terminate your lease before the end of an agreed term.

Emile Myburgh, a Johannesburg lawyer at Emile Myburgh Attorneys, says Covid-19 didn't change the law. “You still have to pay your rent, you have to give 20 business days’ notice to terminate a lease early and you can be charged a reasonable penalty.”

However, the reality is that many South Africans are losing their jobs and don’t have the money to pay for the 20 business days’ notice period, let alone a penalty, he adds.

One social media commentator was threatened with the loss of her deposit and three months’ rental when she gave notice to the landlord of her child’s private university residence in Stellenbosch.

In Pretoria, agents quote the Pretoria Rental Tribunal, which holds the view that a reasonable penalty is three months’ rent.

But a Rental Tribunal's ruling does not create binding case law, Myburgh says. Determining what the penalty should be is key, as the Consumer Protection Act only states that the penalty must be reasonable.

Mennen says reasonable cancellation penalties are regulated by Section 14 of the CPA as well as Regulation 5, which details the factors to be taken into consideration when determining the penalty.

The factors are the amount still owing to the landlord on the date of cancellation; the agreed lease term; the length of notice given by the tenant; the general industry practice; and the reasonable potential for the landlord, acting diligently, to find an alternative tenant during the notice period.

Lutfiyya Kara, a real-estate practice associate at Cliffe Dekker Hofmeyr, says confusion arises because the “reasonable cancellation penalty” is not a penalty for a breach of contract. Most landlords believe it is and threaten to retain the deposit received from the tenant.

“A tenant has a legal right to cancel the agreement early and this cancellation fee is to cover costs incurred by the landlord in having to replace the tenant at such short notice,” she says.

A fair penalty

Kara says if there is no cancellation penalty in a lease agreement, the provisions of the CPA and its regulations apply and will govern what is a fair and reasonable cancellation charge.

The CPA prohibits the landlord from charging an excessively high cancellation penalty to prevent the tenant from terminating the agreement early, she says.

It has become common practice by landlords to charge a cancellation fee of two months’ rent if tenants terminate early with more than six months of the lease remaining, and one month rent if less than six months remain, Kara says.

This is not a rule but it has been viewed within the industry as ''fair'', she adds.

Myburgh’s view is that a reasonable penalty would be one month’s rent in addition to the 20 business days notice.

“I just don’t think that three months [rent as a cancellation fee] is reasonable,” says Myburgh.

Kara says a reasonable charge must be determined case by case depending on the actual loss suffered by the landlord in finding a replacement tenant.

A landlord needs to act diligently and be committed to finding a new tenant within the 20 business-day period. It is then that the landlord can use the factors in the regulations to determine a bigger or smaller cancellation penalty.

Mennen agrees, adding that “invoking a blanket cancellation penalty as reasonable is not common practice, nor is it correct”. 

He says before the State of National Disaster, residential landlords were claiming between one and three months rental as a penalty.

Recently, more landlords and tenants agree to a penalty before the tenant actually cancels as the  landlord and tenant can agree to a mutually beneficial date of exit and payment of arrears as well as other charges (including the penalty). 

Mennen says the lockdown regulations make the failure of a landlord or tenant to “engage reasonably and in good faith” to make arrangements to cater for issues arising as a result of the disaster an unfair practice.

Cancellation clauses

While the CPA is silent on whether landlords should include a cancellation penalty clause in their lease agreements, it is a good idea to have a written one, Kara says.

She suggests including either the exact amount to be charged or the way in which it will be calculated.

In addition to the penalty, Kara says the CPA stipulates that the tenant is liable for costs the landlord will incur on cancellation.

This would include outstanding rental, service expenses and other costs the tenant owed before termination.

A landlord can also include charges for advertising, credit and background checks done on prospective tenants and rental for the number of days the property remains vacant after the tenant leaves the property until a new tenant moves in, she says.

If the landlord paid agent’s commission upfront then the tenant may also be charged a portion of the commission, she says.

In addition to the penalty, Kara says the CPA stipulates that the tenant is liable for costs the landlord will incur on cancellation.

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