The Supreme Court recently issued a judgement in the case of Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology (Petition No. E001 of 2024) addressing early termination of fixed term commercial leases by tenants.

20 January 25

Background
This dispute between Kwanza Estates Limited (the Landlord), and Jomo Kenyatta University of Agriculture and Technology (the Tenant) involved a lease for commercial premises. The lease commenced in 2010 for six years and was renewed for a further term of six years from 1 May 2016 to 30 April 2022 (the Lease). On 31 October 2020, the Tenant citing financial hardship due to the COVID-19 pandemic, issued a three-month notice to terminate the Lease. The Tenant vacated the premises upon lapse of the notice period on 31 January 2021. A legal battle ensued over unpaid rent up to 30 April 2022 and the validity of the termination of the Lease.

The dispute was first determined at the Environment and Land Court (ELC), which dismissed the Tenant’s claims of frustration on the grounds that the Lease did not contain a termination clause. The ELC held that the Lease was in force until its expiration date.

Appeal to the Court of Appeal
On appeal by the Tenant, the Court of Appeal overturned the ELC’s decision and held that the phrase “…or sooner determination…” used in the Lease had the effect of providing an early exit from the Lease. The Court of Appeal also found that the COVID-19 Pandemic constituted a force majeure event which affected the Tenant’s ability to perform its obligations under the Lease.

Appeal to the Supreme Court
On appeal by the Landlord, the Supreme Court made the following key determinations:

  1. Frustration and Force Majeure
    The Supreme Court clarified that the doctrine of frustration of a contract is a common law doctrine that applies when unforeseen events fundamentally alter a party’s contractual obligations through factors beyond a party’s control, and can be relied on by a party if it is implied by a court. A force majeure event, it was held, must be explicitly written into a contract for it to be enforced by the courts.
  2. The COVID-19 pandemic is not a frustrating event
    While the Supreme Court recognised that the COVID-19 pandemic was an extraordinary event, it was held that it did not meet the threshold for the frustration of a contract. Financial hardship alone could not discharge a tenant from the contractual obligation to pay rent.
  3. Termination of fixed-term leases with no termination clause
    The Supreme Court ruled that the Lease did not have a termination clause. In Kenya, most commercial leases do not include early termination provisions so as not to create controlled tenancies, which landlords generally seek to avoid. While the Tenant did not have the right to unilaterally terminate the fixed-term Lease, the Court held that it would be unconscionable to compel a tenant to continue occupying premises it no longer intended to use or require a tenant to pay rent after vacating premises.
  4. Remedies for breach of a fixed-term Lease
    The Supreme Court held that the Tenant’s early vacating of the premises before the Lease expiry constituted a breach of contract. As a remedy for the breach of contract, the Tenant would be required to pay rent up to the date of vacating the premises, as well as a reasonable amount in damages to compensate the Landlord for the losses caused by the early termination of the Lease. The Court held that the quantum of the loss would be calculated based on the time a landlord would take to find a replacement tenant.
  5. Mitigation of losses
    The Supreme Court held that the Landlord had a duty to mitigate its losses. The Court rejected the Landlord’s claim for payment of rent for the remainder of the Lease period of 14 months. The Court held that the Landlord had a duty to mitigate its losses, market the premises and find an alternative tenant.
  6. Calculation of Damages
    While the Supreme Court held that it would be difficult to predict when the Landlord would be able to get a new tenant, in the circumstances of the case, the court held that a period of 3 months was sufficient for the Landlord to carry out necessary renovations and actively market the premises in a competitive market.

Implications for Landlords

  • A landlord cannot physically restrain a tenant from vacating the leased premises if the tenant no longer intends to use the premises.
  • Landlords must take all reasonable steps to actively mitigate losses when tenants vacate a premises early including marketing the premises to other prospective tenants.
  • Claims for damages should reflect reasonable compensation for losses.

Implications for Tenants

  • Tenants who vacate prematurely without the contractual right to do so are in breach of the lease.
  • Tenants will be liable to pay rent until the date the premises are vacated and reasonable damages for landlord losses, determined by how quickly the premises can be re-let at a similar rent.
  • It may also be helpful for tenants to mitigate the damages they may have to pay to a landlord by proactively seeking a replacement tenant to occupy the premises.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Aisha Abdallah, Abbas Esmail, Mona Doshi, Adnan Khan or Nicole Gichuhi.

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Contributor

Caleb Weisiko – Associate

 

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