Game-Changer for Tenants: Supreme Court Says You Can Exit a Commercial Lease Early!

Game-Changer for Tenants: Supreme Court Says You Can Exit a Commercial Lease Early!

Introduction

A landmark Supreme Court decision in Kwanza Estates Limited v. Jomo Kenyatta University of Agriculture and Technology has changed the rules of commercial leasing in Kenya. The Court ruled that a tenant can terminate a lease that lacks a break clause, provided they give notice equivalent to the rent payment interval. This ruling shifts away from strict enforcement of lease terms, offering tenants more flexibility.

Background of the Case

Kwanza Estates Limited leased its Nakuru property to Jomo Kenyatta University of Agriculture and Technology (JKUAT) for a six-year term ending in April 2022. However, in July 2020, JKUAT issued a three-month notice to terminate the lease, citing financial constraints and a decline in student enrollment exacerbated by the COVID-19 pandemic. Kwanza Estates Limited objected, arguing that the lease lacked a break clause and demanded rent for the remaining period.

Understanding Commercial Leases and Controlled Tenancies

Kenya’s Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act, 1965, governs commercial leases, distinguishing between general leases and controlled tenancies. A tenancy is controlled if:

1. It is not in writing, or
2. It is in writing but:
   • Does not exceed five years, or
   • Allows termination within five years, or
   • Falls within a category defined by the Cabinet Secretary.

Controlled tenancies offer tenants protection, limiting a landlord’s ability to increase rent or evict tenants without following legal procedures.

How Landlords Structure Commercial Leases to Avoid the Act

Since controlled tenancies give tenants strong legal protections, many landlords prefer to structure lease agreements in ways that fall outside the scope of the Act. The most common strategies include:

1. Longer Lease Terms – Landlords ensure lease agreements are for more than five years to avoid classification as a controlled tenancy.
2. Exclusion Clauses – Some leases explicitly state that the Act does not apply, although such clauses are not always enforceable if the lease falls within the Act’s criteria.
3. Limiting Early Termination Clauses – Landlords may draft leases that do not allow termination within five years to avoid triggering the controlled tenancy protections.

On the other hand, the tenants who the statute was intended to protect are forced to enter into long-term commercial leases, which they cannot terminate on a need basis.

Despite these strategies, the Supreme Court ruling now allows tenants to exit fixed-term leases, challenging landlords’ previous approaches to lease structuring.

How Commercial Leases Are Terminated Under the Law

In controlled tenancies, termination follows strict procedures:

1. The terminating party must give at least two months’ notice.
2. The recipient has one month to respond, indicating if they accept the termination.
3. The notice must state valid reasons for termination.
4. If the tenant disputes the termination, they can file a case with the Business Premises Rent Tribunal (BPRT).
5. If a dispute is filed, the lease continues until the Tribunal resolves the matter.

What Did the Supreme Court Decide?

1. Tenants Can Terminate Fixed-Term Leases
   • The Court ruled that even if a lease does not have a break clause, a tenant can still terminate it by giving notice equal to the rent payment interval.
2. Rigid Lease Terms Should Not Be Unfair
   • The Court emphasized that forcing tenants to pay for unused premises is unjust, especially when economic conditions change.
3. Landlords Must Mitigate Losses
   • A landlord should try to re-let the premises instead of demanding full rent from a vacating tenant.
4. COVID-19 Was a Factor, But Not a Legal Excuse
   • While financial hardship caused by the pandemic influenced the ruling, the decision was based on broader principles of fairness in lease agreements.

What This Means for Landlords and Tenants

• For Tenants: You are not locked into a lease indefinitely. If your lease lacks a termination clause, you can still exit with proper notice.
• For Landlords: This ruling reinforces the need for well-drafted leases with clear termination clauses to avoid disputes.

Is it time to reform the Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act, 1965, to reflect modern business realities? Share your thoughts!

*The information provided in this article does not constitute legal advice