LET GO AND SUE FOR DAMAGES: KENYA’S SUPREME COURT ADVISES LANDLORDS

KENYA’S SUPREME COURT ADVISES LANDLORDS WHERE A TENANT TERMINATES A COMMERCIAL LEASE BEFORE THE LAPSE OF THE LEASE PERIOD

EXECUTIVE SUMMARY

In a landmark decision delivered by the Supreme Court on December 6, 2024, it was held that a landlord cannot compel an estranged tenant who has unlawfully terminated a commercial lease to pay rent for the remainder of the lease term. However, the landlord retains the right to sue for damages for breach of contract.

Additionally, where a commercial lease lacks a termination clause, a tenant facing financial hardship or other frustrating events can opt out of the lease by serving the landlord with a notice. This notice must correspond to the period within which rent is payable. For instance, if rent is paid quarterly, the notice period would be three months. The tenant is required to pay rent for the notice period, after which the tenant can vacate the premises. Upon the tenant’s exit, the landlord should seek a replacement tenant to mitigate any losses that they may incur due to the early exit of the tenant.

Finally, the tenant remains entitled to a refund of their security deposit subject to their compliance of the terms of the lease agreement.

BACKGROUND

In its decision of December 6, 2024, the Supreme Court ruled on the case of Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology (JKUAT). The facts of the case were as follows:

In 2010, the parties entered into a six-year commercial lease agreement (the Lease) that expired in 2016. The Lease was renewed for another six years, set to expire on April 30, 2022. However, on July 10, 2020, JKUAT (the tenant) issued Kwanza Estates Limited (the Landlord) a three-month termination notice, citing financial distress due to changes in government funding policies for universities, reduced revenue from self-sponsored students, and the economic impact of COVID-19. JKUAT vacated the premises after the notice period.

The Landlord resisted, demanding that JKUAT pay rent for the remainder of the lease term, arguing that the Lease lacked a termination clause. Traditionally, a tenant terminating such a Lease was expected either to pay rent for the remaining term or provide a replacement tenant, as observed in Kenya Commercial Bank Limited v Popatlal Madhavji & Another [2019] eKLR.

AT THE ENVIRONMENT AND LAND COURT

The Court dismissed JKUAT’s case, ruling that the financial hardships cited were insufficient to render the lease commercially unviable. Additionally, the lack of a termination clause invalidated JKUAT’s notice. Consequently, the Lease was still as active as the Landlord’s argument.

AT THE COURT OF APPEAL

The Court of Appeal held that the ambiguous lease clause, “…or sooner determination…,” validated JKUAT’s early termination notice under the contra proferentem rule. This rule requires that ambiguities in a contract be interpreted against the party that drafted it. The Court further noted that the COVID-19 pandemic and changes in government funding policies caused significant financial strain on JKUAT, making it unfair and unjust to compel the tenant to pay rent for the remaining lease term.

AT THE SUPREME COURT

The Supreme Court overturned the Court of Appeal’s decision, noting that the lease lacked a break clause. Therefore, JKUAT could only invoke frustration, a common law doctrine that excuses further performance of a contract due to an unforeseen event causing absolute impossibility. The Court ruled that COVID-19 did not qualify as a frustrating event since JKUAT’s learning operations had resumed.

The Court also referenced Section 57 of the Land Act, which applies when a lease lacks a specified term or termination notice provision. Under this section, a lease is deemed periodic, and the notice period aligns with the rent payment period. JKUAT’s notice was invalid because it failed to comply with Section 54 of the Land Act.

However, the Court emphasized that forcing a tenant to remain in premises they no longer wish to occupy is unconscionable. Instead, landlords should seek damages for breach of contract and look for replacement tenants to mitigate losses. JKUAT was ordered to pay three months’ rent as compensation but was entitled to a refund of its security deposit.

EVALUATING THE PRACTICALITY OF THE LANDLORD AND TENANT (SHOPS, HOTELS, AND CATERING ESTABLISHMENTS) ACT

Enacted in 1965, this Act was intended to protect tenants from arbitrary exploitation and eviction by landlords in commercial properties. However, its effectiveness depends on the lease being classified as a controlled tenancy. A controlled tenancy is defined under Section 2 of the Act as a tenancy of a shop, hotel, or catering establishment that is either unwritten, for a term of less than five years, or contains a termination clause.

Landlords have found ways to exclude the Act’s applicability by drafting leases without termination clauses or ensuring that the lease term exceeds five years. This therefore means that in the event of a dispute with respect to the terms of the lease the Act would no longer be applicable and parties would have to fall back to the provisions of the Land Act which contains substantive provisions on leases.

OUR THOUGHTS

The Act no longer serves its original purpose of protecting tenants, as landlords can easily bypass its provisions. We believe the Act is outdated and should be repealed. A new law or amendments to the Land Act No. 6 of 2012 should be introduced to provide effective tenant protections.

However, it is worth noting that Kenya’s capitalistic economy, with its laissez-faire principles, leaves market forces to determine tenant outcomes—a perspective that Parliament may uphold.

CONCLUSION

The Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act of 1965 is no longer adequate for protecting commercial lease tenants or guiding landlord-tenant relationships. The Supreme Court’s decision of December 6, 2024, underscores this reality. Repealing the Act or amending the Land Act is necessary to address these shortcomings. The Supreme Court’s decision provides a silver lining in that a tenant is not bound to occupy the premises or pay rent until the expiration of the lease term. However, tenants must still navigate an increasingly challenging legal environment where they are liable for damages for breach of contract in the event they vacate before expiration of the term for no just cause.