There is something about Kenyan leases for commercial properties
that foreign investors and local 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 Sh2,500 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.
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