Court Clarifies Termination Rules for Commercial Lease Tenants

By Adroit Law

In recent years, commercial space lessees in Kenya have been caught in a precarious balancing act, often succumbing to overwhelming landlord dominance. A prevalent loophole exploited by these landlords involves bypassing tenancy laws in their favour. This majorly involves omitting termination clauses in lease agreements, hence, leaving tenants in a highly disadvantaged position.

Ideally, commercial spaces rented out for business should be governed by the Landlord and Tenants (Shops, Hotels and Catering Establishments) Act as controlled tenancies. According to the Act, a tenancy qualifies as a controlled tenancy if it involves a shop, hotel, or catering establishment and either has not been reduced into writing or, if written, is for a period not exceeding five years and contains a provision for termination otherwise than for a breach of covenant within those five years.

The Act is designed to protect tenants by restricting landlords from arbitrarily altering the terms and conditions of controlled tenancies. It also provides an avenue for tenants to seek a reassessment of rent or modification of tenancy terms via the Business Premises Rent Tribunal (BPRT). Moreover, the Act defines the grounds on which the termination of a controlled tenancy may be sought by landlords.

To circumvent these protections, landlords have devised a practice of drafting lease agreements for periods exceeding five years while deliberately excluding termination clauses. This allows landlords to impose oppressive terms without the tenant’s recourse under the controlled tenancy framework.

Under such agreements, tenants often face: an inability to exit agreements even when circumstances so-demand; limited recourse to challenge unfair provisions or rent escalations; and greater financial and operational vulnerabilities caused by inflexible lease terms.

This loophole has put many tenants in precarious positions, as courts previously upheld landlords’ rights in such scenarios. A notable case is Kenya Commercial Bank Ltd v Popatlal Madhavji & Another [2019] eKLR where the court of appeal ruled that the absence of a termination clause bound the tenant to occupy the premises for the entire lease period and pay the agreed rent.

Game Changing Ruling from the Supreme Court

However, a recent Supreme Court Judgement in Petition E001 of 2024 – Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology [2024] KESC 74 (KLR) brought to light the plight of tenants trapped in such arrangements. The Lease lacked a termination clause, which Kwanza Estate Limited rode on demanding that JKUAT pay the rent for the remainder of the years, which was a year and two months in the lease and also barred them from vacating the premises. Thereafter, they refused to take in new tenants, arguing that JKUAT was obligated to continue to occupy the suit premises for the entire lease period and pay the rent.

Key Takeaways from the Ruling:

• The Supreme Court deemed it unconscionable to require tenants to continue occupying premises or pay rent for the balance period in such situations.
• The court highlighted the obligation of both landlords and tenants to mitigate losses. Specifically, Landlords should actively seek new tenants once the premises are vacated and Tenants must communicate challenges and attempt to fulfil obligations wherever possible.

1. The court clarified that landlords are entitled to rent only up to the date of vacating the premises and may pursue damages for breach of lease terms, provided the damages reflect efforts to minimise financial losses.

This decision is a significant step toward restoring balance in commercial tenancy agreements. It not only provides relief for tenants but also establishes a precedent promoting fairness and accountability.

Tips for Tenants Negotiating Commercial Leases

While the recent ruling provides a safeguard, it’s best to approach lease agreements with caution. Here’s how tenants can better protect themselves:

1. Understand Controlled Tenancy Protections

Whenever possible, structure your tenancy agreement to fall under the protections of the Landlord and Tenants Act. This ensures access to the Business Premises Rent Tribunal (BPRT) for dispute resolution and limits the grounds upon which your lease can be terminated.

1. Review Lease Agreements Thoroughly

Never rush into signing a lease. Ensure that all clauses, including termination conditions, are clear and fair. Engage a qualified legal professional to help interpret complex terms and identify potential risks.

1. Negotiate Key Terms

Seek to negotiate for: clear termination clauses allowing reasonable exit options, rent escalation limits to control future financial obligations and provisions for temporary or unforeseen circumstances (e.g., pandemic-related)

How Landlords Can Adapt

Landlords, too, can benefit from clear and effective lease agreements. Upholding fairness in lease terms not only builds trust with tenants but also reduces the likelihood of disputes. Landlords should focus on: fairly addressing tenants’ needs, including properly drafted termination clauses and mitigating losses in situations where tenants vacate.

Protecting Your Business in Changing Times

As recent judicial determinations aim to correct imbalances and uphold fairness, these changes provide an opportunity for business owners, real estate investors, and commercial landlords to approach lease agreements with greater confidence and clarity.

At its core, the Supreme Court ruling in Kwanza Estates Limited v JKUAT is a testament to the importance of mutual accountability. Whether you are negotiating a new lease or resolving a conflict, understanding your rights as a tenant under Kenya’s tenancy laws is the first step in safeguarding your business interests.

Want to know how these legal developments affect your lease agreements? Our team of legal experts is here to assist you. Reach out today to learn how we can protect your rights.