Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology Petition E001 of 2024
Introduction
Commercial Leases come with very strict obligations on both the Landlord and the Tenant, these are over and beyond the quiet possession and rent payment obligations on the part of the Landlord and Tenant respectively. Equally, more than often, these Commercial Leases are structured to deviate from the provisions of the Landlord and Tenant’s Act Cap 301 which require their termination of commercial Leases to be subject to a legal process under the Rent’s Tribunal.
In view of this, the Supreme Court of Kenya (SCORK) recently issued a comprehensive judgement underpinning the express and implied obligational aspects of these Commercial Leases following a dispute between Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology (Petition E001 of 2024) [2024] KESC 74 (KLR) (6 December 2024) (Judgment) including relatable reference notes on what would be considerations on the part of the Tenant and Landlord in Commercial Lease arrangements.
Background
The dispute arose from fixed term commercial lease agreement (the “Lease”) between Kwanza Estates Limited (“Kwanza as the Landlord”) and Jomo Kenyatta University of Agriculture and Technology (JKUAT as the Tenant) over a lease for a commercial space (the “Suit Premises”) situate in Nakuru. The Lease was an extension of a six (6) year lease that expired on 30th April, 2016 where Kwanza Limited (being the Landlord) agreed with JKUAT to have an extension for a similar period expiring 30th April, 2022 (the “Exit Date”). This extension was also subject to enhanced terms on rental increment and interest on late payment of rent when due.
On 10th July, 2020 at the height of Covid 19 pandemic, JKUAT issued a three (3) month termination notice citing difficult business conditions and inability to meet its obligations on the Lease. Kwanza Limited thereafter insisted JKUAT pays rent in full including the attendant increments up to the Exit date and also issued an invoice to this effect.
Upon the expiring of the notice, JKUAT was however unable to vacate the premises as Kwanza Limited through a private security firm prevented it. Equally, Kwanza Limited through Pyramid Auctioneers served JKUAT with a proclamation notice of Kshs. 15,776,973/= together with the auctioneer’s fees seeking to recover rent for the remainder of the term. The Parties were subsequently not able to come to an agreement on if as per the terms of the Lease, JKUAT was required to pay rent up to the Exit Date despite issuing Kwanza Limited with an earlier termination notice. JKUAT thereafter filed a case at the Environment and Land Court (the “ELC”) in Nakuru vide Jomo Kenyatta University of Agriculture and Technology v Kwanza Estates Limited [2021] eKLR and thereafter an appeal at the Court of Appeal (the “COA”) vide Jomo Kenyatta University of Agriculture and Technology v Kwanza Estate Limited (Civil Appeal 64 of 2022) [2023] KECA 700 (KLR) (16 June 2023) (Judgment). The COA appeal ended up with a Supreme Court of Kenya (“SCORK”) decision on 6th December, 2024.
Outcomes of the SCORK ruling and take away for the parties in a Commercial Lease
Kwanza being dissatisfied with the COA decision filed an appeal at the SCORK citing disagreement with the COA interpretation on the implication of the phrase “or sooner determination” including the COA recognition of the Covid 19 pandemic being a force majeure event yet at same time also recognizing that JKUAT was liable to pay the restoration costs.
The Coram at the SCORK condensed its issues for determination to whether JKUAT decision to terminate the Lease on the basis of Covid 19 being a force majeure event was allowable under the terms of the Lease and the circumstances underpinning the same and if Kwanza Limited is entitled to the reliefs it sought. The SCORK in its decision noted that a party in a contract can rely on the doctrine of frustration as a reason for not being able to discharge its obligations but only to the extent that any event leading to or comprising the ingredients of the doctrine of frustration is included in the Contract. Equally, a tenant in a Lease agreement cannot solely rely on financial hardship as a reason to not pay rent.
The Coram at the SCORK also noted that while it is common practice for commercial leases to avoid including early termination clauses that would make the commercial lease a controlled tenancy, it is also prejudicial for a landlord to compel a tenant to the tenancy even where this need has diminished on the part of the tenant.
Equally, the SCORK also noted that where a breach arises from a tenant terminating a fixed term lease before its expiry the losses to be compensated should be based on the amount of time the landlord would take to secure another tenant for the premises and subsequently capped this term to three (3) months at most. This reasoning applying the doctrine of mitigation of loss requires a party who has suffered loss or damage to take reasonable steps to reduce or minimize that loss.
In view of the SCORK judgement above, below are some of the legal aspects to be noted when entering into commercial fixed term leases: –
- Financial constraints on the part of the tenant cannot be a basis for breach of terms of a fixed term commercial lease;
- Hardships on the tenant arising from the doctrine of frustration need to be noted in detail as clauses in the lease;
- Where a tenant terminates a fixed term lease before expiry of the term, the damages accruing on the landlord will be capped at three (3) month’s rent;
- Landlords are obligated to mitigate their losses where an early termination suffices and this is to include marketing the premises to other prospective tenants;
- Termination of a fixed term lease before its expiry amounts to breach; and
- Landlords cannot impose continuance of a tenancy where the tenant no longer needs the premises.
Conclusion
In conclusion, both landlords and tenants need to carefully consider the legal implications of terminating a commercial lease before its contractual term ends. Tenants must be aware that financial hardship alone is not sufficient grounds for breaching a fixed-term lease, and they cannot rely on the doctrine of frustration unless specifically outlined in the lease agreement.
On the other hand, landlords should understand that forcing a tenant to continue a lease when it is no longer necessary may be considered prejudicial. The SCORK ruling emphasizes the importance of including clear clauses in the fixed term leases regarding early termination, force majeure events, and the tenant’s obligations.
Additionally, landlords must mitigate their losses by actively seeking new tenants if early termination occurs, with any compensation capped at three months’ rent. Both parties should ensure that their lease agreements are well-drafted to address potential challenges and avoid disputes. By carefully managing these aspects, landlords and tenants can navigate the complexities of commercial leases more effectively.
In view of the SCORK ruling, it is also notable that other best practices have been in place to alleviate potential tenure disputes between tenants and landlords in a fixed term commercial lease on a commercial aspect. The use of a side letter as an accompaniment to the lease is one innovative way to allow for termination of a fixed term commercial lease without necessarily including a termination clause in the lease which would make it a controlled tenancy. A side letter allows the parties to this fixed term commercial leases to recognize the potential of an early exit while also evading a controlled tenancy situation if a termination clause is included in the lease. It is also advisable that this side letter should recognize that by dint of its execution and accompaniment to the lease, should not be construed to create a controlled tenancy noting that this option applies on a case to case basis and agreement between parties.
Marjorie Kivuva
Partner, Corporate and Commercial
marjorie@tarraagility.com
Valentine Gaya
Associate, Corporate and Commercial
valentine@tarraagility.com
