Consumer Protection Act (CPA) eroding property profits
Desiree Nafte, Director of Hyprop Investments.
The real estate sector will be exempted from certain provisions of the Consumer Protection Act if industry players have their way.
Many believe the act is overly protective of tenants’ rights, to the detriment of landlords. Property owners, both residential and commercial, are particularly peeved about section 14 of the act.
This relates to the structuring of lease agreements between landlords and tenants. The most contentious issue is that consumers and small businesses with an asset value or annual turnover below R2m have the right to cancel fixed lease agreements by giving 20 business days’ notice. Furthermore, fixed lease agreements are not permitted to exceed 24 months.
Section 14 is making it potentially difficult for many property businesses to turn a decent profit, says Desiree Nafte, a director of JSE-listed shopping centre owner Hyprop Investments and deputy chair of the legal committee of the SA Property Owners Association (Sapoa).
Speaking at a workshop on the CPA convened by Sapoa and the Estate Agency Affairs Board, Nafte said that though there are variances in the way the act is interpreted, the general understanding is that tenants are entitled to cancel rental contracts willy-nilly . In stark contrast, landlords are allowed to cancel a lease agreement with 20 days’ notice only if there is a “material’’ breach of contract by the tenant.
Nafte says the financial implications for landlords are huge. Owners of commercial buildings in particular stand to make large losses from this provision given that hefty up-front costs such as broker commission and tenant installations are recouped over the full period of the lease, which typically is five years.
The 24-month restriction on the lease period also creates problems for both landlords and tenants. In fact, Nafte notes that smaller commercial tenants are severely prejudiced by this stipulation, as they may no longer be able to use lease agreements as security for bank loans to grow their businesses.
Though residential rental contracts are usually signed for shorter periods — typically from six to 12 months — buy-to- let investors are also left out of pocket when leases are cancelled prematurely.
“Money spent on agents’ commission, repairs and improvements is difficult to recoup when a tenant ups and leaves a month or two into the lease period,’’ says Dexter Leite, head of Pam Golding Properties’ rental division. Owners of upper-end rental homes that fetch more than R30000/month are the biggest losers, says Leite, as it is difficult to replace tenants in these properties.
Patrick Bracher, senior director at legal firm Norton Rose SA, believes there’s a good chance that an application to exempt the property industry from the provisions of section 14 will be successful. He argues that property leases shouldn’t have fallen within the ambit of the CPA in the first place.
Bracher’s understanding of the act is that the fixed-lease clause applies to the provision of goods and not services. And providing accommodation to either a residential or a commercial tenant should be regarded as a service, he says.
Sipho Tleane, a director in the office for consumer protection at the department of trade & industry, says any industry is welcome to challenge provisions of the act that they believe may stifle acceptable business practices, provided the industry in question already has a regulatory body or code of conduct in place to protect consumers from unfair business practices. “We know the CPA has created unintended consequences. And the only way to ensure the best interpretation of the act is to test contentious provisions through the national consumer commission.’’
Sapoa and the Estate Agency Affairs Board, the regulatory bodies that look after the interests of the commercial and residential property sectors respectively, are expected to lodge an application for exemption from section 14 with trade & industry minister Rob Davies within the next few months.
