LEGAL ALERT : LANDMARK SUPREME COURT JUDGEMENT THAT REDIFINES TERMINATION OF COMMERCIAL LEASES
Introduction
The Supreme Court of Kenya, on December 6th 2024, delivered a landmark judgment in the case of Kwanza Estates Limited vs. Jomo Kenyatta University of Agriculture and Technology (Petition E001 of 2024) that significantly impacts the termination of commercial leases in Kenya.
Background
Kwanza Estates Limited (the Landlord) and Jomo Kenyatta University of Agriculture and Technology (the Tenant) entered into two successive lease agreements for the same premised, the second of which ran from 1st May 2016 to 30th April 2022.
The Tenant issued a three-month notice on 10th July 2020, citing financial constraints exacerbated by the COVID–19 pandemic and changes in government policy, to terminate the lease, and subsequently vacated the premises on 31st January 2021. The Landlord contested this termination, demanding payment of rent for the remainder of the lease term, and took measures to prevent JKUAT from vacating. This dispute led to legal proceedings, culminating in the Supreme Court’s judgment.
Issues for determination by the Supreme Court
The apex court noted three issues for determination;
- Whether the respondent pleaded force majeure or frustration to be discharged from its agreement with the petitioner.
- Whether the COVID-19 pandemic constituted grounds for discharging the respondent from its contractual obligations.
- Whether the petitioner was entitled to the reliefs sought.
Frustration vs Force Majeure
The Supreme Court clarified that while the terms are often used interchangeably, they have different legal origins and applications. The Court noted that while they are similar, they are not the same.
Force Majeure is a contractual clause where parties specify events included in a contract, while frustration on the other hand, is a common law doctrine applied when unforeseen events fundamentally alter the nature of a contract, making performance impossible or radically different from what was agreed.
Application of the Land Act
The Court referred to section 57 of the Land Act, which implies that where a lease’s terms are unspecified and lacks a termination notice provision, it is deemed a periodic lease. In such cases, either party may terminate the lease by giving notice equal to the period of the tenancy. The Court disagreed with the Court of Appeal finding that the phrase “or sooner determination” did not amount to a break clause and that the lease did not have a termination clause.
Further, the Court held that the respondent’s notice of termination was invalid because the lease lacked a termination clause and that it constituted a unilateral termination and thus a breach of contract.
Mitigation of damages
The Court stated that it would be unconscionable to compel a tenant to remain in premises they no longer wished to occupy or for a landlord to demand full rent for the remaining lease term when the tenant has vacated. Instead, the Court emphasized the importance of mitigation of losses by both parties. The Court held that where a lease is terminated without a termination clause, the tenant must pay rent up to the date of vacating and may be liable for damages for breach of contract. Consequently, they found it was the petitioner’s obligation to attempt to find a new tenant rather than let the premises remain vacant for the remainder of the lease period.
Impact on termination of commercial leases
Clarity on frustration and force majeure;
The Supreme Court clarified the distinction between the doctrines of frustration and force majeure, emphasizing that force majeure is only applicable if explicitly included in a contract.
Rejection of COVID-19 as Automatic Frustration;
The judgment highlights that financial hardship caused by an event like the COVID pandemic is not an automatic ground for frustration of a commercial lease.
Lease termination without a clause;
This case establishes that where a fixed-term lease lacks a termination clause, a tenant cannot unilaterally terminate the lease before the end of its term. However, it is unconscionable to compel a tenant to remain in premises they no longer wish to occupy.
Damages for breach of contract;
The remedy for a tenant’s breach of a fixed-term lease without a termination clause is rent due up to the date of vacating, plus damages for breach of contract. Such damages, however, must be mitigated, and a landlord cannot claim rent for the entire unexpired portion of the lease.
This Supreme Court’s judgment provides important guidance on the termination of commercial leases in Kenya, particularly concerning the applicability of the doctrine of frustration and the impact of the COVID–19 pandemic. While the court acknowledged the disruption caused by the pandemic, it affirmed that the common law principle of the sanctity of contracts remains paramount and that financial hardship does not automatically discharge contractual obligations. The ruling also underscores the importance of including termination clauses in leases to avoid commercial property disputes and emphasize the duty of both landlords and tenants to mitigate their losses.