EARLIER TERMINATION OF COMMERCIAL LEASES – THE SUPREME COURT OF KENYA IN PET. NO. E001 OF 2024 – KONZA ESTATES LTD VERSUS JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

Most landlords have always made the argument that a tenant who opts to terminate a commercial lease before the expiry of its term ought to pay rent equal to the rent payable for the remainder of the term of the Lease. However, the Supreme Court of Kenya recently delivered judgement in Petition No. E001 of 2024 where it held that if a tenant unilaterally decides to terminate the lease, the landlord cannot insist that the tenant remains on the premises or that it pays rent equal to the rent payable for the remainder of the term of the lease.

Brief Background

The parties to the case entered into a lease agreement for a term of 6 years which term was to expire at the end of April 2022. Sometimes in July 2020, before the expiry of the term of the lease, the tenant issued a 3 months’ notice of intention to terminate the lease citing inter alia the effects of COVID -19 on its business. The landlord argued that the tenant could not terminate the lease as it did not have a termination clause and that the tenant had to pay rent for the remainder of the term of the lease.

At first, the landlord sued the tenant before the Environment and Land Court (ELC) which agreed with the landlord by holding that the lease had no termination clause and that the tenant was bound by the terms of the lease until the expiry of the term of the lease. However, the tenant appealed the decision of the ELC to the Court of Appeal which allowed the tenant’s appeal.  

The decision of the Supreme Court

Being dissatisfied with the decision of the Court of Appeal, the landlord appealed to the Supreme Court. The Supreme Court agreed with the landlord that the lease did not contain a termination clause and that the unilateral termination by the tenant amounted to breach of contract. However, the Supreme Court noted that the remedy for such breach by the tenant is neither:

a. The landlord insisting on the tenant to remain on the premises for the remainder of the term

of the lease; nor

b. The landlord insisting on the tenant paying rent equal to the rent payable for the remainder

of the term of the lease.

The remedy, the Supreme Court held, is in damages to be assessed by the court and paid by the tenant. In this case, the Court found that 3 months’ rent was adequate remedy in the circumstances of the case as rent was payable quarterly.

Implications

The decision of the Supreme Court will certainly have critical ramifications to various business sectors such as retail, hospitality and entertainment. Most tenants who are largely retailers operating in rather volatile business environments will welcome the flexibility that this decision infuses in their leasing decisions. However, most landlords will only need to actively seek out new tenants to mitigate likely financial loss but they will also have to pay more attention to various details when negotiating their leases such as inclusion of termination clauses and rental terms.