A recent decision in the Supreme Court of Kenya between Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology (the "JKUAT decision") has sent ripples through the world of commercial leasing in Kenya.
Introduction
Though disputes between landlords and tenants are nothing new, this decision of the Supreme Court has garnered significant attention due to its implications for commercial landlords, tenants, and practitioners of land law. The decision clarifies a critical aspect of the law pertaining to party options in the event of unilateral breach by a party in the form of a unilateral termination notice.
Background: Commercial Tenancies in Kenya
Commercial tenancies in Kenya are primarily governed by several pieces of legislation and common law principles:
The Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act (Cap. 301)
This legislation sets out the framework for regulated ("controlled") tenancies. A commercial tenancy is deemed a "controlled tenancy" if:
- It is not in writing; or
- It is for a period not exceeding five years; or
- It contains a provision for termination (otherwise than for breach of covenant) within five years from the commencement date of the term.
Historically, parties often sought to either avoid or invoke the jurisdiction of the BPRT depending on whether they were a landlord or tenant, respectively. Landlords typically aim for leases that clearly exclude classification as a controlled tenancy—usually by ensuring a written lease for a term exceeding five years without an early termination clause—so they can exercise their rights more freely without the oversight of the BPRT.
Tenants, on the other hand, sometimes prefer the protections of a controlled tenancy, which provides more security of tenure and restricts the landlord's ability to arbitrarily increase rent or terminate the lease.
Overview of the JKUAT Dispute
The JKUAT dispute revolved around a commercial lease between Kwanza Estates Limited and its tenant Jomo Kenyatta University of Agriculture and Technology (JKUAT).
Key Facts
During the outbreak of the COVID pandemic and following the decision of the Government to absorb self-sponsored students which was JKUAT's primary revenue generator, JKUAT sent Kwanza Estates Limited a 3-month notice terminating the tenancy.
As the lease agreement lacked any termination clause, the Court considered the notice, a unilateral termination, to be a breach of the lease. Consequently, the Court considered what relief would be available to Kwanza Estates Limited as a consequence.
The Court's Decision and Reasoning
The Court proceeded to settle the issue of the termination of a lease entered into for a fixed term which lacked a termination clause. It noted that a landlord cannot impose or force themselves on tenants and vice versa.
The Court termed it unconscionable for a landlord to demand full rent for the remaining portion of the tenancy when the tenancy has been terminated and the tenant vacated the premises. In such an instance, the Court emphasised the need of the parties to mitigate losses that have been incurred.
Key Principles Established
Unconscionability Doctrine
The Court took the position that notwithstanding the absence of a termination clause, it would be unconscionable to compel a tenant to remain in the premises that they no longer wish to occupy.
Reasonable Compensation
Equally, the Court reasoned that it would be unreasonable to claim rent for the unexpired lease term after the tenant has vacated. Therefore, the remedy per the Court for such termination is rent due up to the date of vacating and damages for breach of contract.
Mitigation of Losses
The Court further emphasised the obligation of the parties to mitigate their losses and, in the case of landlords, this would be done by actively looking for new tenants.
Compensation Award
The Court considered the award of 3 months' compensation to be a fair duration for the necessary renovations and marketing of the premises to new tenants.
Important: The compensation award will likely vary from dispute to dispute depending on the unique circumstances of the case but the Court has set a firm precedent on what it considers reasonable compensation and has buried the common argument by landlords demanding rent be paid for the duration of the lease term in the event of a unilateral termination by the tenant.
Implications for the Commercial Leasing Landscape in Kenya
For Commercial Tenants
The Court's award may tempt commercial tenants who are locked into 5 year or longer commercial tenancies to consider giving unilateral termination notices where their leases do not contain termination provisions.
For Landlords
Conversely, landlords and their representatives may start explicitly excluding termination in their leases and might start including explicit penalty provisions in the event of early termination by tenants to strengthen claims to higher compensation sums.
Broader Impact
The Court determined that it would be unconscionable to require tenants to pay rent for the duration of commercial tenancies and, consequently, opted to interpret the provisions of section 57(4) of the Land Act to apply to commercial tenancies irrespective of the fixed term specified in the lease.
Summary of Impact
This we believe will weaken the standing of landlords but will come as reprieve for commercial tenants seeking to terminate their leases. The decision represents a significant shift in the balance of power between commercial landlords and tenants in Kenya.
Conclusion
The JKUAT decision marks a watershed moment in Kenyan commercial tenancy law. While it provides relief for tenants facing financial difficulties, it also creates new challenges for landlords and their legal advisors. Both parties must now carefully consider the implications of this decision when drafting and negotiating commercial lease agreements.
Legal practitioners advising on commercial tenancies should ensure that lease agreements clearly address termination scenarios and include appropriate compensation mechanisms to protect their clients' interests in light of this landmark decision.
