Does s 14 of the CPA create an unreasonable disadvantage to the owner?

December 1st, 2014
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By Cilna Steyn

The Consumer Protection Act 68 of 2008 (CPA) has had a substantial impact on the rental property market since its commencement on 31 March 2011. More specifically s 14, which applies to all fixed term agreements, unless entered into between juristic persons, regardless of their asset value or annual turnover. In the majority of cases, lease agreements would be entered into for a fixed term. Considering the above, it is apparent that s 14 would be applicable to many, if not the majority of lease agreements relating to immovable property, especially lease agreements concerning residential property.

The Act does not refer to specific agreements to which s 14 applies, apart from that the agreement must fall within the definition of a consumer agreement, which is entered into for a fixed term. From this we can only infer that the legislature intended to leave this open in order to encapsulate a wide array of fixed-term agreements, which would include lease agreements relating to immovable property. The Act does not distinguish between leases for residential, commercial, retail or industrial properties; in fact, the Act does not refer to lease agreements of immovable property per se. However, from the definitions and the purpose of the Act it is clear that it was the intention of the legislature to have lease agreements fall within the ambit of the Act. The nature of the transaction being established between the lessor and the lessee is one of subservience and therefore in need of regulation and protection. It is therefore only prudent to assume that the section is intended to apply to all lease agreements regardless of the specific property type.

In order to assess and interpret the CPA properly, one must take cognisance of the ambit, intention and purpose for which the Act was passed. The CPA aims to:

‘… promote a fair, accessible and sustainable marketplace for consumer products and services and for that purpose to establish national norms and standards relating to consumer protection, to provide for improved standards of consumer information, to prohibit certain unfair marketing and business practices, to promote responsible consumer behaviour, to promote a consistent legislative and enforcement framework relating to consumer transactions and agreements, [and] to establish the National Consumer Commission …’.

The Act should be interpreted in a manner that promotes and advances the social and economic welfare of consumers in South Africa. Considering the somewhat vulnerable position that a lessee finds himself or herself in, relative to the lessor, it is clear that the lessee, as a consumer would require the protection of the CPA. This would be the position of the lessee regardless of the type of property the lease agreement relates to namely, residential, commercial, etcetera.

Fixed-term agreements

Section 14 relates to fixed-term agreements only, meaning that the agreement is concluded for a specific term. Hence lease agreements entered into on a month-to-month basis would not fall within the ambit of this section. It is important to appreciate that s 14(2)(d) determines that on expiry of the fixed term, the agreement would automatically continue on a month-to-month basis. Even though the agreement was governed by s 14 during the fixed term, after the expiry date the agreement will continue on a month-to-month basis and no longer be regulated by this section. For this reason, it is prudent to make provision for both situations in the lease agreement, with specific reference to the breach clause of the lease agreement.

Section 14(1) states the following:

‘Expiry and renewal of fixed-term agreements –

(1) This section does not apply to transactions between juristic persons regardless of their annual turnover or asset value.’

According to the definitions of the CPA, a juristic person includes a body corporate, a partnership, an association and a trust. This broader definition of juristic persons would be very relevant, especially in commercial, industrial and retail properties where a natural person would enter into a lease agreement, but where he or she is in fact, acting in his or her capacity as a partner. Assuming that the lessor is a juristic person, on face value it would seem as if s 14 would apply to the agreement. However, since the lessee is in fact a partnership and according to the CPA a juristic person, the agreement would be entered into between juristic persons and s 14 would not apply to the agreement.

On plain reading of the above subsection, it is clear that transactions between juristic persons, regardless of their asset value or annual turnover, would automatically be excluded from the provisions of s 14 in its entirety. It would be logical to construe that in a situation where the lessor is a juristic person and the lessee a natural person, that s 14 would apply to the agreement between the parties. What would the position be where the lessor is a natural person, but the lessee a juristic person? In this relationship it would seem as if the lessee, as a juristic person, does not require the protection of the CPA. However, the wording of the subsection is very clear – ‘[t]his section does not apply to transactions between juristic persons’. The word ‘between’ would imply that both parties would have to be juristic persons for the agreement to be excluded from the provisions of this section.

It can, therefore, be concluded that s 14 would apply to all fixed-term lease agreements, regardless of the property type, unless the agreement is entered into between juristic persons.

According to s 14(2)(a) read with reg 5(1) of the Consumer Protection Act Regulations, a fixed term agreement may not exceed a period of 24 months, ‘unless such longer period is expressly agreed with the consumer and the supplier can show demonstrable financial benefit to the consumer’ (reg 5(1)(a) GG34180/1-4-2011). This limitation on the duration of a fixed term agreement could possibly create a level of apprehension for lessors. Especially with regards to commercial, industrial and retail properties since lessees of these types of properties would very likely desire an extended term. In the case of lease agreements an extended term would be to the financial benefit of the lessee, provided that the lease agreement does not contain, for instance, unreasonable rental escalations. The financial benefit to the lessee could be – among others – the lessee would not have to pay another deposit at a new premises. The lessee does not have to move and attend to the removal of tenant installations and re-installations at the new premises. The lessee does not run the risk of losing clients or customers as a result of their inability to locate the new business premises. There are many more examples of demonstrable financial benefit to the lessee. It would be essential to indicate specifically, as part of the lease agreement that the lessee desires to enter into a term exceeding 24 months. In order to avoid a situation where the lessor would have to prove the financial benefit, the parties may wish to include this in the lease agreement.

Cancellation

Section 14(2)(b) ‘despite the provisions of the consumer agreement to the contrary –

(ii) the supplier may cancel the agreement 20 business days after giving written notice to the consumer of a material failure by the consumer to comply with the agreement, unless the consumer has rectified the failure within that time.’

This subsection has the effect that the lessor will not be in a position to cancel the lease agreement during the term of the agreement, unless the lessee is in breach of a material term of the agreement and fails to remedy such breach within the allowed time after receiving written notice to that effect. This would imply, that should the lessor wish to take occupation of the premises or sell the property that he would not be permitted to cancel the agreement.

In order to be in a position to cancel the agreement in a situation where the lessee is in breach of a material term of the agreement, the lessor must give the lessee written notice in which the breach is described and the lessee should be allowed 20 business days to remedy such breach in full. The lessor would have to indicate in the notice that the failure of the lessee to remedy the breach within the allowed time would result in cancellation of the agreement. This subsection is particularly cumbersome. It effectively has the result that the lessee would be in a position where the rent can be paid one month in arrears instead of one month in advance. Many lessors have attempted to resolve this problem by requesting a higher rental deposit, instead of a one month deposit, lessors tend to require two months’ rental and some up to six months deposit. This is in return, places a probably unintended, heavy financial burden on lessees.

In conclusion, the CPA has substantial impact on fixed-term lease agreements. It is vital to be aware of its effect on lease agreements. It is vital for property owners and their attorneys to be aware of this effect to enable them to comply with the Act and have measures in place to mitigate the potential burden placed on property owners by the Act. For instance, recording the financial benefits the lessee would have when entering into a lease agreement for a term exceeding the prescribed term. In order to mitigate damages, when a lessee is in breach of a lease agreement governed by s 14, it is necessary for an owner to appreciate the need to place the lessee in mora as soon as possible.

The purpose of the CPA is to protect the consumer, however, it was not the intention of the Act to unjustly prejudice a property owner. The owner has a responsibility to comply with the Act, but this compliance does not have to be to the detriment of the owner. When dealt with correctly, s 14 meets the purpose of the CPA without creating an unreasonable disadvantage to the owner.

Cilna Steyn LLB (Unisa) is an attorney at SSLR Inc in Roodepoort.

This article was first published in De Rebus in 2014 (Dec) DR 25.

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