The South African Property Owners Association (SAPOA) has expressed concerns about the potential harmful effects on the commercial property industry if certain current draft regulations contained in the Consumer Protection Act (CPA) see the light of day.

In its submissions to the Department of Trade and Industry, the industry body said that, while it did not object to the implementation of the necessary legislation to protect consumers, in certain instances the CPA had taken “a one size fits all approach” and was attempting to regulate a broad spectrum of various industries while these industries operate in a different context to one another.

SAPOA is opposed to Section 14 of the Consumer Protection Bill, which deals with the cancellation and renewal of fixed-term agreements.

SAPOA members control about 90% of all commercial and industrial property in SA.

The general practice in the property industry was to enter into a lease with a prospective lessee for a period of between three and five years, depending on the nature of the lease, the size of the business of the lessee and the size of the leased premises, the industry body said.

If the lessee had a fairly large business and occupied a large amount of space, a longer lease of between five and ten years would be entered into.

“To limit a lease between the supplier and the consumer for a period of 24 months is not in the best interests of both the supplier and the consumer. Banks will not give credit to a consumer to start up their business if their lease agreement with the lessor is for a short period of two years as two years is insufficient time to enable the consumer to recover start-up costs for its business,” SAPOA said.

It argued that a long lease gave the consumer security of contract. The five-year lease agreement would provide certainty to the consumer, specifically regarding the leased premises and rental payment.

On the other hand, the shorter-term period of two years would bring uncertainty in that the consumer would not know whether it could remain on the leased premises after the expiry of the lease agreement. For instance, the lessor may not want to renew the contract, or worst still, if the lease was renewed, the two parties had to renegotiate the terms of rental.

“Section 14 read with Regulation 6 will have detrimental consequences on the sale price of immovable properties. The purchase price of a property is determined by value of the leases attached to the property. The longer the lease, the greater the value and the greater the rental income stream on the property.

“When banks consider advancing loans to prospective purchasers of a property, they consider the income stream derived from the leases attached to the property and the length of the leases. In addition, purchasers will be reluctant to purchase property if the consumer has a unilateral escape clause in the lease agreement,” it said.

The draft regulations provide that the consumer or tenant may cancel a fixed-term agreement at any time by giving the supplier or landlord 20 business days' notice in writing, subject to conditions that the consumer remains liable for any amounts owed to the supplier in terms of the agreement up to the date of cancellation.

The supplier may impose a reasonable cancellation penalty with respect to any goods supplied, or discounts granted, to the consumer in contemplation of the agreement enduring for its intended fixed term.

SAPOA contented that the penalty was so small that it invited people to cancel a lease agreement, and that there would not be certainty of contract.

“The provision that allows a tenant to terminate a lease early effectively destroys the landlord's security of tenancy and of income stream. Not having a secure rental income stream will have serious negative implications for property valuations and property industry as a whole.”

The supplier is also required to give the consumer notice of the impeding expiry date, and the consumer is, among other things, afforded an automatic right to have the agreement continue on a month-to-month basis. It is, however, not clear whether the supplier has the right to terminate such month-to-month renewals or whether it is only the consumer that has this right.

Giving recommendations, SAPOA said the duration of a lease should not be restricted and should not fall within the scope of Section 14 read together with Regulation 6. It also advised that any penalty to be paid by the consumer must include the commission paid by the lessor, the lessor's tenant installation allowance and at least rental equivalent to eight months of the unexpired portion of the lease. The CPA is expected to come into force on April 1. - I-Net Bridge