How to Terminate Commercial Leases in Kenya: A Strategic Guide
Introduction.
A commercial lease is an agreement between a tenant and a landlord to occupy a business premise. Good commercial leases in Kenya will typically outline the rights and obligations of both parties involved.
Commercial leases in Kenya are required to be reduced in writing and have a fixed term duration of at least 5 years and 3 months. Another common feature about leases in Kenya is that they do not contain termination clauses. They are structured in this manner to eliminate the risk of creating a controlled tenancy.
According to the Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act, when a termination clause is included in a lease agreement, a situation of “controlled tenancy” is created. Section 2 of the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act defines a controlled tenancy to mean “a tenancy of a shop, hotel or catering establishment that is either not reduced in writing, or if it is in writing, is for a period not exceeding five years, is determinable within five years from commencement, or is specified by the Minister, to be a controlled tenancy.”
Amidst escalating economic challenges and rising inflation, the cost of living has surged dramatically. The real estate sector, in particular, has felt the brunt, with soaring building and construction expenses, elevated rents, and increased maintenance and operational costs. This confluence of factors presents significant challenges and requires strategic legal and financial navigation to mitigate the impact on stakeholders.
In light of this, the Court in the case of Chimanlal Meghji Naya Shah & Another vs Oxford University Press (EA) Limited [2007] eKLR, asked itself the following questions;
“What happens if the tenant cannot afford to pay the rent agreed and he wants to vacate the premises? What happens if the market is depressed and due to that economic depression, the tenant is unable to meet his obligation? It is because of such circumstances that landlords of premises vacated by tenants are required to look for other tenants. The landlord cannot perpetually wait and waste the premised simply because he had a fixed lease with no termination clause.”
In a nutshell, the Court ruled that it is unconscionable for a landlord to demand full rent for the remaining part of the tenancy/lease period when such lease/tenancy has been terminated. This is, according to the Court, the landlord reserves the right to offer the same premises to another tenant.
The Termination Strategy
- Negotiations.
This option is available and open to both the landlord and tenant, where they negotiate and come up with mutual terms to effect the early termination of the lease. While in the process, the tenant can propose finding a replacement tenant for the landlord to ensure that there is continuous rental inflow.
A tenant may propose buying out the remainder of the lease term by either offering the landlord a payment or allowing the landlord to retain part or all of the security deposit as compensation for agreeing to an early termination. This could be done while citing the lack of a termination clause, as its absence could imply a right to terminate under reasonable circumstances.
Where there is an obvious demand for the premises, the landlord may be willing to accept an early termination without any penalty or at a minimal fee. If, on the other hand, the demand is scarce, the landlord may fervently push a hard bargain and negotiate the high compensation.
2. Side Letters (“Gentleman’s agreement).
In Re Estate of John Mutua (Deceased) [2022] eKLR, reference was made to the Collins English Dictionary which defines a gentleman’s agreement to mean an informal agreement in which people trust one another to do what they have promised.
Also, in the case of Urbanus Kyalo Wambua vs Briggitta Ndila Musau [2019] eKLR, Justice H. I Ong’udi cited with authority a passage from Halsbury’s Laws of England 4th Edition Vol.12 which stated as follows;
“Where the intention of the parties has been reduced to writing it is, in general not permissible to adduce extrinsic evidence, whether oral or contained in writings such as instructions, drafts, articles, conditions of sale or preliminary agreements either to show that intention or to contradict, vary, or add to the terms of the document.”
In this instance, where the parties are yet to enter into a commercial lease, the landlord and the tenant can mutually agree to discuss the early termination procedures. Then, these agreed-upon terms for early termination can be captured in a side letter.
Parties should be keen while drafting such letters since the letter should clearly state that the intention of the parties is not to create a controlled tenancy to safeguard a landlord but to allow an option for an early exit to the tenant.
The parties should also state in the side letter that they intend the side letter to be legally binding for it to constitute a contract. The contents of the side letter should not appear on the face of the
lease.
Conclusion.
Commercial leases in Kenya require meticulous attention to detail. Each clause holds significant implications for both landlords and tenants. To safeguard your interests and avoid potential pitfalls, it is crucial to thoroughly review and understand all terms before signing.
“The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.”
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