A recent Supreme Court decision has clarified a long-standing issue in Kenyan courts regarding a landlord’s remedies in the event of early termination of a commercial lease without a break clause. In Supreme Court Petition No. E001 of 2024, Kwanza Estates Limited (the Petitioner) v. Jomo Kenyatta University of Agriculture and Technology (the Respondent), the Court was tasked with determining, among other issues, whether a commercial tenant was obligated to pay rent for the remainder of the lease term following early termination.
Commercial leases in Kenya are often drafted without termination clauses to circumvent the application of the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, Cap 301, which provides extensive protections for tenants. This practice, though common, creates challenges when a tenant wishes to vacate early, either due to financial constraints or because the premises no longer meet their needs.
Case Background
The Petitioner and Respondent entered into a 6-year commercial lease as landlord and tenant, respectively, with rent payable quarterly in advance and subject to periodic increments. Before the lease expired, the Respondent issued a 3-month termination notice, stating its intention to vacate the premises. Disputes arose between the parties, including attempts by the Petitioner to recover rent arrears through auctioneers, prompting the Petitioner to file a claim at the Environment and Land Court.
The ELC ruled in favor of the Petitioner, ordering the Respondent to pay both restoration costs and the outstanding rent for the remainder of the lease term. However, the Court of Appeal reversed this decision, holding that the Respondent was only liable for restoration costs. The Petitioner then escalated the matter to the Supreme Court.
Key Issues and Supreme Court Findings
1. Frustration of Contract
The Respondent argued that financial hardship frustrated the lease agreement, releasing it from further obligations. However, the doctrine of frustration only applies when an unforeseen event makes contractual performance impossible, rather than merely burdensome. The Court emphasized that financial difficulty alone does not amount to frustration. Since the Respondent failed to prove that performance had become impossible, the Court found that terminating the lease constituted a breach of contract.
2. Reliance on Section 57(4) of the Land Act
The Respondent also sought to rely on Section 57(4), read together with Section 57(1) of the Land Act, Cap 280, which provides that if a lease does not specify a term or termination notice requirements, it is deemed a periodic tenancy and may be terminated with notice equivalent to one rental period. However, the Supreme Court noted that the Respondent had not cited this provision in its termination notice but only invoked it as an afterthought. Despite this, the Court appeared to consider the lease a periodic tenancy, given that rent was payable quarterly, and used this reasoning in assessing damages.
3. Duty to Mitigate Losses
In assessing damages, the Court rejected the Petitioner’s claim to unpaid rent for the remainder of the lease term, which in this case was 14 months. The Court underscored the principle that an injured party must take reasonable steps to mitigate losses. While mitigation efforts depend on case-specific facts, landlords should actively seek replacement tenants, and tenants should begin searching for alternative premises upon issuing or receiving a termination notice. The burden of proving failure to mitigate rests with the party alleging it.
Key Takeaways for Landlords and Tenants
This ruling offers several important lessons for commercial lease agreements:
a) Absence of Break Clauses – Commercial leases in Kenya are commonly structured without break clauses to avoid falling under Cap 301. Parties could consider negotiating a side agreement to clarify early termination terms. Otherwise, unilateral termination by either party constitutes a breach of contract, entitling the aggrieved party to damages.
b) Proving Frustration – A party seeking to rely on the common law doctrine of frustration must prove that performance has become impossible, not merely inconvenient or financially burdensome.
c) Citing Section 57(4) of the Land Act – If a tenant or landlord intends to invoke this provision to justify termination, the termination notice must explicitly reference it. This may encourage landlords and tenants to structure new leases or amend existing ones with longer tenancy periods to accommodate notice requirements. However, this does not preclude a court from finding that unilateral termination under this provision still constitutes a breach of contract if there is no break clause.
d) Mitigating Losses – Upon receiving a termination notice, landlords should immediately begin advertising the property, while tenants should proactively seek 3
alternative premises. Although the Supreme Court did not provide detailed guidelines on mitigation efforts, both parties should take reasonable steps to minimize losses.
Conclusion
The Supreme Court’s decision clarifies critical aspects of commercial lease termination, particularly the application of frustration, reliance on statutory provisions, and the duty to mitigate losses. Going forward, landlords and tenants must be more deliberate in structuring lease agreements and planning for contingencies to avoid disputes of this nature.
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