Introduction

On 6th December 2024, the Supreme Court rendered a seminal judgment that will undeniably affect how commercial leases in Kenya are drafted and enforced. The decision of the apex court should be considered in the context of the Landlord and Tenants (Shops, Hotels and Catering Establishments) Act (the Act).

Despite  the  changing economic land-scape and significant increase in business premises in the country, the Act has survived repeal or drastic overhaul since it was initially enacted in 1965. It has been amended only five times, between 1968 and 2015, which pales in comparison to other statues affecting Kenyan commerce.

The Act is important as it was intended to protect business owners from capricious landlords that would arbitrarily evict them or increase their rents. This protection was provided by the creation of protected tenancies within certain parameters. The history of litigation on protected tenancies shows that such tenancies were extremely difficult to vary or terminate and generally considered by landlords to be unfairly advantageous to tenants of business premises.

As a reaction to this and in adapting to changing economic times, the drafters of commercial leases representing landlords attempted to seal legal loopholes for conversion of commercial leases to protected tenancies by providing for terms longer than 5 years and excluding the notorious breakout clause.

This quickly became the touch- stone for commercial leases in the country, which meant tenants could not break out of their leases before the specified term expired.

Early termination became extremely difficult, and the courts would consistently issue steep penalties against tenants that violated this standard provision by requiring them to pay the rent due for the remainder of the term. This engrained practice retitled the scales heavily in favour of land- lords.

In this article, we analyze the decision of the Supreme Court which has now disturbed the previous order of things and attempted to strike a balance in the protection of both landlords and tenants in commercial leases.

Summary of the Case

In this case JKUAT (referred to herein as the Tenant) signed a lease for a business premises owned by Kwanza Estates Limited (referred to as the Landlord) for a period of 6 years set to expire in April 2022. However, in July 2020 the Tenant gave the Landlord 3 months’ notice of its intention to terminate the lease and vacate the premises. At the lapse of the notice period when the Tenant was in the process of vacating the premises, the Landlord restrained them from forcing so by placing security guards and goons at the entry and exit points of the premises.

The Landlord also demanded rent for the subsequent quarter during which rent was payable. The Tenant failed to pay the rent, and the Landlord levied distress by attaching the Tenant’s property as is typically provided in commercial leases as a remedy for default in payment of rent.

The Tenant eventually vacated the premises in January 2021.

Proceedings in the Environment and Land Court

Against this backdrop the Tenant instituted legal proceedings in the Environment & Land Court (ELC) seeking orders that the commercial lease be declared as terminated on account of frustration. The Tenant detailed various issues that had caused it financial hardship that made it impossible for it to continue meeting its obligations under the terms of the lease key among these being the attendant effects of the COVID-19 pandemic. The Tenant argued that the pan- demic had forced it to close its doors to students in obedience to government directives which had severely impacted its finances. As such the premises could not be used for several months and the purpose for which the lease was entered into could not be fulfilled.

A consent was recorded in the ELC for the Tenant to pay to the Landlord a staggering Kshs.40 Million for restoration of the premises to its original condition as a condition for the Tenant to vacate the premises in January 2021. In the end however, the ELC took the view that the lease having no break clause as is wont of commercial leases, was binding to the parties for the entirety of the lease period ending in 2022. The ELC awarded the Landlord the balance of the rent payable up to the agreed end date totaling over Kshs.71 Million making the total liability of the Tenant to the Land- lord a whooping Kshs.111 Million.

Appeal to the Court of Appeal

The Tenant was dissatisfied with the decision of the ELC and lodged an appeal to the Court of Appeal.

The Tenant argued that the phrase ‘or sooner determination’ contained in the lease meant that the parties envisaged a scenario where the lease could be deter- mined before the end of the specified term. The Court of Appeal rejected this argument on the basis that this issue of interpretation of the lease had not been raised before the ELC and could therefore not be raised for the first time in the appeal.

The Court of Appeal, however, agreed with the Tenant on frustration of the performance of the lease noting that the COVID-19 pandemic and decreased government funding had adversely affected the Tenant’s ability to continue to use the premises and pay rent under the lease. The court criticized the Landlord’s action of restraining the Tenant from vacating the premises in 2020 and later on demanding rent from the Tenant.

The court held this conduct to be “absurd, unfair and unjust” and had the Landlord allowed the Tenant an early exit, it could have entered into a fresh lease with another tenant. Consequently, the court set aside the award of rent for the remainder of the term of the lease and only upheld the award of Kshs.40 Million for restoring the premises to its original condition providing some reprieve to the Tenant.

Proceedings in the Supreme Court

The Landlord was dissatisfied with the decision of the Court of Appeal and moved to the Supreme Court. In the Supreme Court the Landlord argued that the Court of Appeal had erroneously interpreted the effects of the COVID-19 pandemic on the Tenant’s business as frustration of the lease instead of as a force majeure event.

According to the Landlord a force majeure event such as COVID-19 could only be relied upon if the contract between the parties -in this case the lease – provided for it. Additionally, according to the Landlord, the Tenant took up alternative premises after vacating the subject premises only as a means of unlawfully avoiding its obligations under the lease and not as a result of the alleged frustration. The Tenant maintained that the lease was frustrated by supervening events that radically changed what the parties had contemplated under the lease.

Frustration vis-à-vis Force Majeure

In view of these arguments, the Supreme Court accordingly delved into the distinction between force majeure and frustration. The court held that the decision of the High Court in Pankaj Transport PVT Limited v Transnami Kenya Limited [2017] eKLR is persuasive on the application of the doctrine of force majeure and held that:

“The doctrine of force majeure has expanded to include events caused by both human actions and natural occurrences, defining situations beyond the control of parties that prevent them from meeting contractual obligations. Further, the interpretation the courts give is dependent on the choice of wording and events de- lineated by the parties in their contract”

According to the apex court, the key distinction between force majeure and frustration is that force majeure must be recorded in the contract between the parties and frustration is implied into every contract and discharges parties from further performance of their respective obligations due to an unforeseen event making it impossible to carry out the purpose for which they contracted.

In other words, these events alter the circumstances such that performance is no longer possible or logical. The Supreme Court further held that the doctrine of frustration is not absolute and the party alleging it must prove that “the frustrating event occurred without their fault or contribution” to successfully rely on it.

Applying this principle to the facts of the case, the court noted that there was no provision for force majeure in the lease between the Landlord and the Tenant and it was therefore inapplicable. In the court’s view, the tenant had consistently raised the issue of frustration.

Was the Pandemic a Frustrating Event?

The next issue therefore became whether the COVID-19 pandemic and its effect of the Tenant’s business amounted to frustration of the lease.

The court took judicial notice of the effects of the pandemic on all aspects of life and commerce, including on business premises.

The court noted that as a result of the pandemic, government directives were issued on closing down of institutions of learning such as the Tenant which was forced to halt operations. However, such closure was temporary, and any financial hardship caused was transient noting that the Tenant eventually took up alternative premises from which to continue its operations. As such the court held that the effects of the pandemic and the attendant financial hardship occasioned to the Tenant did not constitute an event capable of frustrating the lease.

No Breakout Clause – Breach of Contract by Tenant

The apex court also held that the lease that was the subject of the litigation between the parties did not contain an early exit clause.

The court recognized that such a clause would have converted it to a protected lease under the terms of the Act, which modern leases tend to avoid. In view of this finding, the court held that the Tenant was in error by issuing an early termination notice and therefore in breach of the terms of the lease agreement between the parties.

Balancing Act – Early Termination & Reliefs Available

Nevertheless, and in what seems to be a final twist, the court was of the view that the absence of an early termination clause notwithstanding, it would be unconscionable for a commercial landlord to compel a tenant to remain in occupation of premises the tenant no longer wishes to occupy.

The court further held that requiring a tenant under a commercial lease to pay the rent for the remainder of the lease period is also unreasonable.

According to the learned judges, the remedy available to a landlord whose tenant has exited a commercial premises before the expiry of the term is rent up to the date of vacating and damages for breach of contract which must be specifically pleaded and proven by  the landlord.

The court emphasized that in applying the reasoning set out above, it must balance the interests of both the Landlord and the Tenant in the circumstances of the case. As such, the court was of the view that it would be unreasonable to award the rent for the remainder of the lease (14 months) reckoned from the date the Tenant vacated.

It also noted that the Landlord held a security deposit. In the end, the  court directed the Tenant to pay to the Landlord 3 months’ rent of about Kshs.13.8 Million less the security deposit of Kshs.11.3 Million culminating in a net award of Kshs.2.4 Million.

This is certainly a landmark decision by the Supreme Court that will likely impact dealings between landlords and tenants under commercial leases. The following key lessons can be identified from the decision:

It is likely that commercial leases will retain the provisions requiring them to run for a period of more than 5 years without a breakout clause to avoid conversion of the lease to a protected tenancy under the Act. However, should there be a need for an early breakout, an award of rent for the remainder of the lease period, especially where this is a long period of time, will not be made.

The absence of an early breakout clause in a commercial lease does not prevent a tenant from vacating the premises before the expiry of the term of the lease.

The only remedy available to a landlord for an early termination of a commercial lease without a breakout clause is rent up to last date of occupation and special damages for breach of contract.

The doctrine of force majeure is distinguishable from the doctrine of frustration in that force majeure must be expressly provided for in contract while frustration is implied in every contract.

A party seeking to be discharged from their contractual obligations due to frustration must prove that the supervening event was unforeseen and occurred through no fault of their own.