There is something about Kenyan leases for commercial properties that foreign investors and Kenyan business-people alike find most intriguing: they generally have no termination clause and are invariably for a minimum period of five to six years. This presents various difficulties for businesses and particularly Non Governmental Organisations which normally operate on project-specific donor-funding lasting on average, one to two years yet they are forced to enter into five year leases with no option for termination.
In fact the courts have held that the remedy for a premature termination of a commercial lease is the payment of rent for the remainder of the term when the premises remain vacant.
It is not by accident that commercial leases are crafted in this way. The idea is to circumvent the provisions of a law with a mouthful of a title- the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act which governs commercial leases in Kenya.
This Act applies to commercial properties only. Unlike the Rent Restriction Act, which applies to residential properties where the rent is below Ksh.2,500 per month, this Act does not prescribe the rent payable for commercial properties.
The Act was passed in 1965, soon after independence, for the express purpose of protecting indigenous business-people, who by then did not own commercial properties, against exploitation by landlords through arbitrary rent increases and malicious evictions.
The Act achieves this purpose by creating what is called a “controlled tenancy”. This kind of tenancy arises where the lease is not in writing or, if it is in writing, contains a provision for termination or is for a period of less than five years. In such a lease, the powers of the landlord are severely curtailed by the law. For instance, he is not allowed to increase rent or evict the tenant (except for breach of the terms such as payment of rent) without first issuing a notice in the form prescribed under the Act. A tenant may object to such notice by filing a reference with the Business Premises Rent Tribunal and in such instance, the rent increment shall have no effect until, and subject to, the determination of the reference by the Tribunal.
Furthermore, if a tenant objects to an eviction notice issued by the landlord, he is entitled to remain in occupation, paying the same rent until the matter is determined by the Tribunal. As if this is not enough, if the tenant feels that the rent being charged by the landlord is too high, he can apply to the Tribunal for an assessment of the fair rent payable.
Due to the onerous nature of the provisions of this law, owners of commercial properties have, through the ingenuity of their good lawyers, devised various methods to avoid the application of the Act to their properties. This is achieved by drafting commercial leases in such a manner that all the elements of a controlled tenancy as defined in the Act are excluded. Accordingly, such leases will typically have no termination clause and will be for a term exceeding five years. This and other mechanisms enable landlords to operate outside the Act with the ability to take actions which would otherwise be prohibited under the Act.
This law poses several challenges to businesses and occupants of commercial premises, raising the question of its relevance in today’s liberalised economy.
On one hand, the landlords whom the law was intended to rein in have crafted clever ways of avoiding its application. On the other hand, the tenants whom it was meant to protect are forced to enter into long-term commercial leases which they cannot terminate on a need basis by giving notice before the expiry of the six-year term. By and large, therefore, the law serves neither the interests of the landlord nor of the tenant.
It is also arguable that the initial purpose for which the law was enacted no longer exists. Unlike in 1965 and the first two decades after independence when most commercial properties in River Road, for example, were owned by foreigners, the majority of commercial properties in Kenya today are owned by indigenous Kenyans. While exploitation can and does take place between Kenyan landlords and their tenants, the justification for the law on grounds of protecting tenants against exploitation by landlords may no longer be as critical as it was in 1965. At any rate, following the construction boom of the Kibaki era and the resulting increase in lettable commercial space across the country, it is arguable that the bargaining power between landlords and tenants is now fairly balanced and neither party requires statutory protection against exploitation by the other.
Unfortunately, the Tribunal has become the refuge of rogue traders who continue to occupy prime business premises while paying below market rents that were chargeable in the 1990s. They do this by filing frivolous cases before the Tribunal which take too long to be concluded. Such tenant is normally in no hurry to prosecute his case because the law is clear that once a reference has been filed before the Tribunal the rent cannot be increased or tenant evicted until the case is determined.
Given the huge investment expended in the development and maintenance of commercial properties in Kenya, it is no longer necessary to have a law that frustrates the landlord’s ability to manage his property on a commercial basis in order to make a reasonable return on his investment. In any case, since the law has been largely avoided by most owners of commercial properties, the relevance of its continued existence becomes moot.
It is fair to say that this law has probably served its purpose and is ripe for repeal.
The article was featured in the Business Daily on 13th June 2018 and can be accessed here.