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.
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 therefore, 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.
So what does this mean for property rentals?
Well it creates a bit of a catch-22 scenario: 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, 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, since the exposure to leases which fall under the control of the Act, will increase their risk profile. The Act is likely to affect the retail and light industrial sectors the most, given the number of smaller tenants who operate in these segments.
And should Landlords in turn shy away from smaller tenants in favour of the larger retailers signing leases in a company name, then an unintended consequence is that we may see tenant mixes in retail centres becoming less diverse, with large chain store tenants dominating to the detriment of the consumer and retail landscape in general (a trend already at play with the `cookie-cutter’ approach to retail development). The irony is that the consumer whom the Act is seeking to protect may be sidelined as a result of the Act.
Whilst the Act will no doubt be challenged in the courts for some time to come, it will be interesting to see how much resilience and adaptation is required of the commercial property market.