Effects of the Consumer Protection Act on Commercial Property rentals in SA
With the implementation of the Consumer Protection Act (CPA), South African consumers may now very well be amongst the most protected in the world.
However the Act does come with potential problems for commercial property owners due to the onerous requirements it places on the management of lease agreements and tenancies.
Marc Edwards, the Managing Director of Spire Property Management explains that there are several important factors for property owners to take note of:
“Lease Agreements fall under Section 14 of the Act (the same section which deals with cell phone contracts etc). However, the provisions of Section 14 do not apply to lease agreements concluded with companies, close corporations, trusts, partnerships etc, as tenants.
It only applies to lease agreements entered into with individuals. Under this section of the Act lease periods are restricted to a maximum term of two years with the individual being able to cancel their lease agreement with 20 days notice at any time within the leased period.”
“Similarly, breach clauses and the remedy of any breach of lease must offer the tenant 20 days within which to rectify the breach of lease. Penalties may be raised against tenants who cancel their lease agreement during the lease period, however these penalties need to be “reasonable” - this clause will no doubt get challenged as the term “reasonable penalty” will greatly differ for both tenant and landlord.”
“The Act also insists that all Lease Agreements need to be written in easy to understand language—no difficult legal terms and jargon that the average person would not understand. ”
So what does this mean for property rentals?
“The Act is likely to affect the retail and light industrial sectors the most, given the number of smaller tenants who operate in these areas,” says Edwards.
“Property owners and landlords are unlikely to want to enter into a lease agreement with smaller retail tenants such as an individual starting a business, mom and pop stores or boutiques etc. as these tenants will generally enter into a lease in their private capacity and therefore bring the onerous conditions of the Act with them to the negotiating table.
Banks will in all likelihood become even stricter when financing landlords and developers as exposure to leases which fall under the control of the Act will increase the landlords, and the banks, risks.”
Edwards cautions that if Landlords shy away from smaller tenants in favour of the larger retailers signing leases in a company name, then we may see tenant mixes in retail centres becoming less diverse with centres being dominated by large chain store tenants which will be to the detriment of the consumer and retail landscape in general . “The irony is the consumer whom the Act is seeking to protect may be sidelined as a result of the Act.”
“At Spire we have begun to advise our clients on the effects of the CPA and offer our advice on the way forward. Our team are relooking at all of our lease agreements as well as relooking our disclaimer boards, as these too are affected by the CPA.”
“Whilst we are certain the Act will be challenged in the courts for some time to come, it will be interesting to see how the resilient and adaptable commercial property market adapts to these new changes – time will tell,” concludes Edwards.