The termination of a fixed-term contract

A common question that is received regarding contracts is when a legally binding agreement may be validly terminated when it has yet to expire. This occurs very commonly regarding fixed-term lease agreements for immovable property and we shall use this as an example for this article.

We can distinguish here between two different scenarios, the first is when the Consumer Protection Act (“the Act”) applies and the second is when it does not apply.

We shall start with the second scenario.

When the Act does not apply the relationship, rights and duties of the parties are determined by the agreement entered into between them and the common law. The right to terminate the agreement will therefore be found in the agreement if this indeed exists. If the agreement contains a provision that a party can terminate the agreement by providing notice with a specified time limit then the agreement can be terminated following this provision and complying with any conditions.

Should the agreement not contain such a provision then the agreement may only be validly terminated should a party be in breach of the agreement. If the agreement contains a default or breach clause the conditions in these provisions must be complied with before an agreement may be terminated. It should also be noted that in this instance a breach or default cannot be trivial and must be material to the agreement. In our example of a fixed-term lease agreement, a material breach will be when a tenant fails to pay rent as this goes to the heart of the agreement.

Should a party attempt to terminate an agreement unlawfully they may face action for breach of contract and may be liable for any damages that the innocent party may incur. Legal advice should therefore be obtained beforehand to mitigate any potential risk.

We shall now deal with the first scenario.

When the Act does apply to a contract the relationship, rights and duties of the parties are determined by not only the agreement but also the Act.

To determine whether the Act applies to a particular contractual relationship kindly refer to our article ‘Consumer Protection Act - when does it apply.

Should the Act apply to a contract the consumer (a tenant in our example) may terminate the fixed-term lease agreement by providing 20 days’ notice (Section 14). Should the agreement make specific provisions regarding how such information is to be provided this must be complied with. However please note that the consumer remains liable for any outstanding amounts and a reasonable termination penalty may be charged by the supplier. What constituted a reasonable termination penalty is determinable based on the consideration set forward in the Act.

***Kindly note that the contents of this article are intended for information purposes only and do not constitute legal advice. Consult an attorney.