EARLY TERMINATION OF COMMERCIAL LEASES IN KENYA: A Legal Analysis

INTRODUCTION

In the wake of the ongoing COVID-19 pandemic, many businesses have been hit hard leading to a need to restructure and re-strategize.  For businesses that have entered into long term commercial lease agreements for premises, the restructuring and re-strategizing process may reveal a need for early termination of the commercial leases.

The purpose of this short article is to briefly analyze the law as it relates to the termination of lease agreements in Kenya. While facts of a case may vary, the principles set out in this article generally apply to all cases. I do encourage clients to seek professional legal advice on a case by case basis.

LEGAL REGIME GOVERNING LEASES

Leases in Kenya are governed by two major acts of parliament:

1. The Land Act Number 6 of 2012
2. The Landlord and Tenant (Shops Hotels and Catering Institutions) Act CAP 301 Laws of Kenya

LEASES UNDER THE LAND ACT

PART VI of the Land Act makes provision for leases in general. There is a distinction set between two types of leases under that part as follows:

1. Periodic leases
2. General leases

Periodic Leases

These are provided for under Section 57  of the Act. A periodic lease occurs where the term of the lease is not specified and the lease does not make provision for the giving of notice to terminate the tenancy. In such a case, under Section 57(3), the periodic tenancy shall be the period by reference to which the rent is payable.

This means that if a business owner is in possession of a lease agreement that does not have a definite term, or that does not give the business owner an opportunity to terminate the lease/tenancy by notice, then the law allows the business owner to give notice with reference to the period by which rent is payable. Thus if rent is normally payable on a quarterly basis, then notice must be at least for a quarter. If the rent is payable yearly, then a year notice is sufficient.

This is buttressed by Section 57(4) which states as follows:

“A periodic tenancy may be terminated by either party giving notice to the other, the length of which shall be not less than the period of the tenancy and shall expire on one of the days on which rent is payable.”

General Leases

General leases are leases that are not periodic in nature. Thus a lease that has a determined term, and which provides for an option of terminating the lease by issuance of notice, is a general lease. Thus a business owner who would wish to terminate a general lease would only need to rely on the provisions of the lease agreement with regard to the issuance of notice.

Short term Leases

These are leases made for a period of less than 2 years, with no option for renewal. All short term leases are periodic in nature and thus the provisions discussed above on periodic leases will apply to short term leases.

LEASES UNDER THE LANDLORD & TENANT (SHOPS, HOTELS AND CATERING INSTITUTIONS) ACT

This legislation creates leases/tenancies which are called controlled tenancies.

A controlled tenancy is a tenancy that meets either of the following conditions:

1. Is for a period not exceeding 5 years
2. Contains a provision for termination, otherwise than for breach of covenant, within five years from the commencement thereof; or
3. Relates to premises specified in the Act ( Shops, Hotels and Catering Institutions) as specified by the cabinet secretary by way of Gazette Notice.

If any of the following conditions exists, then the tenancy becomes a controlled tenancy and the tenant is allowed by virtue of Section 4(4) of the Act to terminate the tenancy by issuance of a 2-month notice.

Can a landlord claim full payment of rent for the remaining part of the lease period when a lease is terminated early?

There are landlords who claim payment of full rent for the full duration of the lease/tenancy even when such lease/tenancy has already been terminated. The High Court of Kenya in the case of CHIMANLAL MEGHJI NAYA SHAH & ANOTHER v OXFORD UNIVERSITY PRESS (EA) LIMITED [2007] eKLR ruled that it is unconscionable for a landlord to demand full rent for the remaining part of the tenancy/lease period when such lease/tenancy has been terminated. This is because the landlord reserves the right to offer the same premises to a different tenant for occupation.

CONCLUSION

It is possible to terminate a lease agreement early. If the lease amounts to a periodic tenancy, the tenant can terminate by giving of notice corresponding to the period by which rent is due. If the lease amounts to a controlled tenancy, notice of 2 months becomes sufficient to terminate the tenancy. Should the lease agreement have clauses for early termination of the agreement, termination may be made by reference to those clauses.

In case of doubt on the applicability of the law to your lease/tenancy agreement, please seek legal advice on the same.