SKIRTING THE CONSUMER PROTECTION ACT IS IT LEGAL TO TRY TO BYPASS THE CPA?

Every reader will surely agree that South Africa’s Consumer Protection Act is aimed at doing just that: protecting South African consumers. So, what would the courts say about a company that tries to sidestep this law by insisting that someone who signs a lease with them should first register as a ‘juristic person’ (as a business, like private company for example) so that the CPA wouldn’t apply? A recent decision of the Supreme Court of Appeal suggests that the answer isn’t as obvious as you may expect.

The story begins in 2018, with Cape Town doctor, Darren Levin, practising from rooms in the Promenade Centre, Camps Bay. His five-year lease with Xtraprops, signed in his personal capacity, ran until 1 December 2019. But a more than a year- and-a-half before the lease was to end, he was notified that major renovations will be carried out in the centre and so his lease would end earlier (something provided for under the lease contract). Because of that, from 31 October 2018, Levin continued in his rooms at the Promenade Centre, but on a month-to-month basis.

Finally, at the end of January 2019, he was given notice that the lease on the rooms would end as of 28 February 2019. However, he had already indicated to Xtraprops that he would like to continue practising in the Promenade Centre, and so he was offered alternative premises in another part of the centre.

On 26 January 2019, a month before he had to quit the first set of rooms, Levin received a message from Jeffrey Solomon, with whom Xtraprops was affiliated.

Evidence of WhatsApp messages
In the court case that would later hear the dispute that developed between Levin and the Promenade Centre, several WhatsApp messages formed part of the evidence. The exchange between the two men on 26 January 2019 began with Solomon writing to Levin: ‘Darren, do you have a company or trust? We no longer enter into leases with individuals. Please confirm urgently.’

A few minutes later Levin replied that ‘at present’ he was a sole proprietor. Though he intended to register as ‘an incorporated entity’, he couldn’t do so until he had secure rooms for his practice. (A juristic person like a company has its own life before the law; it can conclude contracts and it can sue or be sued in the same way as a natural person and does so quite independently of the natural person who might have set it up.)

No more leases with individuals, to ‘avoid CPA’ applying
Two days later the discussion continued when Solomon explained to Levin that Promenade had decided it would no longer sign leases with individuals renting shops in the centre. This was ‘to avoid the application of the Consumer Protection Act’.

In further written communication between them, Solomon confirmed there had been discussions about the ‘formation of Dr Darren Levin Inc’ (DDL). Solomon noted that Levin had undertaken to do this ‘immediately’, and that his registration number was needed within seven to ten days, so that the lease could be signed and the alternative premises could be made ready before he had to leave his old rooms at the end of February.

Levin said he would do what he could to expedite the process, and indeed, incorporation of DDL went ahead three days later.

But there was a problem: the offices earmarked for him weren’t immediately available because they were still leased to another entity. So DDL arranged a sublease with those tenants. This sublease would continue for about 18 months, until 1 October 2020, when the lease of these other tenants would expire. After that, on 1 October 2020, the lease already signed directly between DDL and Promenade would start. At the request of Levin, this lease was to run for ten years, because he wasn’t satisfied with a five-year lease like he’d had before.

No windows, patients unhappy at losing sea views
Levin duly moved into the new premises under the sublease. But he wasn’t happy there. For one thing, there were no windows, while patients had enjoyed the ocean view from his previous rooms in the Promenade Centre. So, he began to look around. On 10 September 2020, less than a month before that ten-year lease between DDL and Promenade was due to start, Levin signed another lease, this time in his own name (rather than as DDL). The agreement was with Camps Bay Investment Trust, to rent premises elsewhere in Camps Bay for five years from 1 October 2020, with the option to renew for another five years.

Now practising from the Camps Bay Investment Trust property, Levin didn’t pay rent, rates and operating costs to Promenade for October 2020. So, Promenade cancelled the lease and began legal action against DDL and Levin for the damages it claimed to have suffered because of the breach and consequent cancellation of the 2020 lease.

Promenade wanted to hold Levin personally liable for the damages in his capacity as director of DDL. But in January 2021, DDL and Levin filed a counterclaim, saying that the 2020 lease was void, invalid and unenforceable because it infringed the Consumer Protection Act, alternatively because the lease was contrary to public policy.

This counterclaim was decided first by the high court. The presiding judge said the question it raised was whether, as DDL and Levin claimed, the 2020 lease was unenforceable because Promenade wanted a contract with DDL rather than with Levin personally, to avoid falling under the Consumer Protection Act.

Is avoidance of the CPA contrary to public policy?
The argument of Levin and DDL was that Promenade’s decision only to contract with ‘large juristic persons’ even though it had previously had a ‘supplier-consumer relationship’, defeated the purposes of the CPA. This was because it deprived consumers of their rights and the contract was thus contrary to public policy.

According to this argument, if a supplier starts marketing a property for hire to a consumer in the consumer’s personal capacity, but midstream in negotiations changes tack saying it will only conclude the lease with a juristic person, then someone in Levin’s position would be protected by the CPA and the resulting lease would not be valid.

But in June 2024, the Western Cape Division of the High Court found against this argument of DDL and Levin and refused to declare the lease with Promenade invalid.

DDL and Levin then appealed. Now the five judges of the SCA who heard the matter have delivered their judgment, and they agreed with the high court.

CPA intended to ‘protect the vulnerable’ – appeal judges
They looked closely at the content of the CPA, including the section that sets out the purpose of this law. It was intended to protect ‘low-income persons’ in remote communities and other vulnerable people like those who can’t read. It was also intended to protect consumers from ‘unconscionable, unfair, unreasonable, unjust or otherwise improper trade practices’.

It would not, however, apply to transactions where the consumer is a juristic person whose asset value or annual turnover was above a level that the minister would decide. Currently that cut-off point stands at R2m. There was no dispute that DDL’s assets put it over that limit, so the CPA clearly could not apply to DDL.

What about Levin himself? Would the CPA apply to him?

The five appeal court judges said that in this case Levin was ‘a private medical practitioner, practising in an affluent suburb’. He was not ‘a low-income, vulnerable consumer’. There was no ‘evidence of disparity of negotiating power’ in relation to the lease.

Merely avoiding the CPA is not, on its own, unlawful
They pointed out that parties were entitled to ‘arrange their commercial affairs to avoid the application of legislation’, and that merely avoiding the CPA could not, on its own, make a consumer agreement void. Promenade’s refusal to contract with Levin as a natural person, to avoid the application of the CPA, could not be said to be an unfair business practice from which he needed to be protected under the CPA.

In addition, the lease was commercial, rather than residential.

Then the judges looked at the argument by Levin and DDL that it was against public policy for a party to insist on corporate structuring in order to avoid protective legislation. Was this correct?

Perhaps there might be circumstances where such a strategy could offend public policy, the judges said, for example if the agreement wasn’t genuine, but was a disguise intended to conceal the true agreement. In this case though, the 2020 lease did reflect the true nature of the agreement between the parties.

Further, the case didn’t involve efforts to get around the CPA in the context of a vulnerable consumer. Rather, it concerns ‘a commercial lease with a tenant who lacks the vulnerabilities the CPA aims to protect against.’

The insistence that Levin should contract via a juristic entity ‘merely reflects the commercial realities of the transaction and does not constitute circumvention,’ the judges said, adding that, in this case, it wasn’t necessary for them to consider what might happen if a tenant was in fact in the category that the CPA wanted to protect.

The court therefore dismissed the appeal, with costs.

What does this mean for you, the reader?
What does this mean? For one thing it means that the CPA can’t be called into action in just any commercial dispute. Even if you see yourself as a ‘consumer’, the court will carefully consider the facts, including the relative ‘power’ of the parties involved, their vulnerability and the need for protection.

It also means that if you are negotiating a contract, and the other party insists that you may not sign in your personal capacity for any reason – including the fact that they want to avoid the application of the CPA – then you really need to consider very carefully whether to go ahead with the arrangement.

Losing the protection of the CPA might be a real issue, or it might never have applied in the first place. But you are most unlikely to get out of the deal by complaining subsequently that you shouldn’t have been made to give up the right to access CPA protections.

It’s the old story: consider carefully, and take proper legal advice, before signing anything, including a document as apparently straightforward as a lease.