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The Consumer Protection Act and how it applies to lease agreements

1 Aug 2024

It can often be the case that whilst a tenant is leasing a property from the owner, the property is subsequently sold to a third party. The case of Venter and Another v Els and Another (2024) dealt with this situation and a dispute which arose when the owners attempted to cancel the lease agreement subsequent to the sale of the property. The case further provides an interesting discussion around section 14(2)(b) of the Consumer Protection Act and its applicability to once off lease agreements.

Image source: Vitaliy Vodolazskyy – 123RF.com

Facts of the case

The first and second applicant (the applicants) owned a residential property in South Africa and after their move to Australia in 2018, they decided to lease out their property. In September 2020, they entered into a written lease agreement with the first respondent which lease was effective from 1 December 2020 to 31 December 2023.

By February 2023, the applicants had decided their move to Australia was permanent and chose to sell the property. They informed the respondent that any new lease agreement would require a three-month notice period for termination, despite the respondent preferring a four-month notice. This arrangement was subsequently formalized in the lease agreement.

In late October 2023, the applicants marketed the property for sale and subsequently entered into a sale agreement with a provision for vacant possession by 1 April 2024. They then notified the respondent in accordance with the lease agreement's termination clause.

The dispute arose when the respondent claimed that under section 14(2)(b) of the Consumer Protection Act (the CPA), the lease could not be terminated early, despite the agreed notice period. This led to a series of communications and legal correspondence between both parties, resulting in the applicants seeking urgent relief from the court to enforce the agreed termination terms of the lease.

The court had to determine whether section 14(2)(b) of the CPA applied to the lease agreement and whether it restricted the early termination clause agreed upon in the lease.

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Huur gaat voor koop

In terms of an agreement of sale entered into by the applicants and the purchasers of the property, they were to give the purchasers vacant occupation by 1 April 2024, which was six weeks away at the time the urgent application was brought. If the matter was not heard on an urgent basis, the applicants risked being in breach of the agreement of sale, which could have had significant financial implications for them and the purchasers.

The respondent disputed that the application was urgent and that if any such urgency existed, it was self-created urgency on the part of the applicants. The respondent argued that by 21 December 2023 in his exchange with the applicants after the notice was served, the applicants knew what his position was based on his reference to the principle of ‘huur gaat voor koop’.

"Huur gaat voor koop" is a legal principle which asserts that a tenant's rights under a lease agreement are protected even if the property is sold to a new owner. Therefore, a tenant's leasehold rights continue to exist and are enforceable against the new owner who purchases the property, regardless of whether the tenant was aware of the imminent sale or not.

Under this principle, the tenant has the right to continue occupying the property until the lease agreement expires, even if the property is sold to a new owner. With respect to the new owner, the lease agreement remains valid and enforceable against them, and they assume the role of landlord upon registration of transfer. This principle helps ensure stability and continuity for tenants, protecting their rights to occupy the property and enforcing the terms of their lease agreement despite changes in property ownership.

The court, in reading the correspondence between the parties, did not find that the respondent had already conveyed his intention not to accept the three-month notice by 21 December 2023 and deemed the matter was in fact urgent.

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The Consumer Protection Act

The issue before the court was whether section 14(2)(b) CPA applied to the lease agreement between the parties. The CPA aims to promote fair business practices and protect consumers from unfair treatment and exploitation. Section 14 specifically addresses fixed-term agreements and allows consumers to cancel such agreements early under certain conditions.

The interpretation of the CPA must align with its overarching goals of fairness, accessibility, and consumer protection. However, as pointed out by the court, "any interpretation of the CPA must give effect to the objectives it strives to achieve."

The CPA is not intended to disrupt legitimate business practices but rather to prevent exploitation and ensure balanced treatment between consumers and suppliers.

The court quotes an extract written by Henk Delport which provides –

'…section 14 is not directed at fixed-term agreements where the period of the agreement is open for negotiation between the parties and the consumer enjoys the freedom to determine the duration to suit his needs. The section is aimed at fixed-term agreements offered to consumers on a take-it – or – leave-it basis, where the supplier unilaterally determines the period and customers have no choice but to accept the fixed term offered to them. This is typically the case on health-club contracts and mobile-telephone agreements. It is fair in these situations to allow the consumer to cancel the agreement early, subject to the payment of a reasonable penalty, since the consumer is from the outset locked into the fixed-term dictated by the supplier, without having any bargaining power. This would explain why the fixed-term agreements are limited to two years and why the onus is on the supplier to show a “demonstrable financial benefit" to the consumer if the term is to exceed two years. However, bringing lease agreements and sole mandates under section 14 would not in any way promote the purposes of the Act but would in certain circumstances actually prejudice the consumer.’

The court considered whether the lease in this case was part of the applicants' ordinary business activities. As provided by the court, for section 14 to apply to lease agreements, they must be conducted as part of the lessor's ongoing business activities, regardless of whether leasing is their primary business. The court concludes that lease agreements concluded by lessors who do not let in the ordinary course of their business are not subject to the CPA.

Therefore, the applicability of CPA to lease agreements depends on whether the lessor's activities qualify as consistent and ongoing business practices rather than occasional or isolated transactions. The court determined that the lease was not entered into "during the Applicants’ ordinary course of business and that they do not lease out their property on a continual basis nor to derive an income." As such, the CPA did not apply to the lease agreement.

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The court provided that if the CPA were to apply to the lease agreement, specifically under section 14(2)(b), it should not be interpreted as the sole condition under which the lease may be terminated. Such a narrow interpretation does not necessarily align with the broader objectives and principles of the CPA, nor does it strictly adhere to the literal wording of the provisions.

Instead, section 14(2)(b) should be viewed as providing additional protections for consumers by invalidating contractual terms that restrict their ability to terminate fixed-term agreements. This section aims to nullify clauses that unfairly bind consumers to fixed-term contracts without allowing them reasonable termination options, such as providing notice or terminating without penalty. If section 14(2)(b) were strictly interpreted to limit cancellation rights only according to its provisions, it could unfairly disadvantage suppliers and potentially encourage irresponsible consumer behavior.

The court found the clause in the lease agreement relating to the termination notice period was indeed valid and binding on all parties and the three-months’ written notice given to the respondent validly cancelled the lease agreement.

Concluding remarks

As shown by the interpretation and analysis of the court of section 14(2)(b) of the CPA and the overall objective of the CPA, the court emphasises that consumers cannot seek to use the CPA as a means to subvert agreements and clauses therein when the agreement already provides sufficient protection to the consumer.

The Act is there to protect consumers from being taken advantage of when entering into fixed-term agreements that attempt to restrict their right to cancel the contract. It is therefore important for all parties to a lease agreement to read the agreement and take note of any notice periods required for termination and ensure that all parties adhere to them to avoid any disputes.