Beginner’s Guide to Commercial Leases in Kenya
The global digital economy has made it very easy to start and run businesses. All you need is a computer, internet connection and a great idea. Most start-up entrepreneurs opt to set-up online businesses due to the easy set-up procedures and low operating and maintenance costs. However, as the business expands it may become necessary to set-up a physical office for effective coordination of operations. If your business needs a physical location, you may have to consider purchasing or renting some space. For rented premises, landlords often require tenants to execute commercial leases.
Below are some of the key factors you should consider as you negotiate the terms of your lease.
Before you sign a lease, you should do some basic due diligence on the premises and your prospective Landlord. Due diligence involves a number of things:
- Physical Inspection: visit the premises and confirm its physical features such as its size, location, number of parking spaces etc.
- Search on Title – obtaining a copy of the land title for purposes of carrying out a search. A search is an official record from the Ministry of Lands which shows ownership details of the property. A search also reveals if there are any caveats or encumbrances that exist over the property. A caveat is a legal caution to persons dealing with a property that there may be existing registered interests in the property. Such a caveat would affect the possibility of entering into a long term lease.
- Due diligence on Landlord – where the landlord is a company, carry out a search at the Companies Registry to confirm the ownership details. If the Landlord is an individual, make oral enquiries from existing tenants or the caretaker of the premises to confirm the identity of the Landlord.
Failing to carry out due diligence checks may result in financial and reputation risks. For instance, if the landlord has no legal right to grant you a lease, you may be sued for trespass by a rightful owner or forcefully evicted.
Payment of Deposit and Rent
The lease should state the rent payment details including:- the amount and frequency of payment e.g. quarterly or annually. The payment clause may also provide for rental reviews or escalations over the duration of the lease.
It is common for leases to have clauses on payment of deposit. Deposit is often given as security and a show of the Tenant’s commitment to adhere to the lease obligations.
There are no official guidelines on the amount of deposit that is payable. However, it is usually reflective of the period of time it would take for the landlord to find an alternative tenant e.g. 3-12 months.
Deposit is refundable at the end of the lease term subject to some deductions to cater for any improvements or restorative actions that the landlord may undertake on the premises (e.g. painting and repairs).
To avoid tying up much needed cash-flows in deposit payments, you may negotiate to use alternative forms of security such as bank or personal guarantees.
Lease Duration and Termination
Commercial leases in Kenya are required to be writing and have fixed term duration of at least 5 years and 3 months. They also do not contain termination clauses. They are structured in this manner to eliminate the risk of creating controlled tenancies. A controlled tenancy is one that restricts the landlord’s ability to increase rent or terminate the lease without prior clearance from the Business Premises Rent Tribunal.
It is often difficult for tenants to terminate the lease before expiry of the agreed term of the lease. Premature terminations give the landlord the right to seek compensation from the tenant for breach of the lease. The amount of compensation may vary depending on the circumstances leading to exit but it can be as high as the rent that would be payable for the unexpired term of the lease.
If you are constrained to terminate your lease before its end-date, it is advisable to negotiate exit terms for such exit with the landlord. Where there is an obvious demand for the premises, the landlord may be willing to accept an early termination without any penalty or at a minimal fee. If demand is scarce, the landlord may push a hard bargain and negotiate for high compensation.
The tenant can mitigate against the landlord’s potential loss in a number of ways. First, he can find a suitable replacement tenant to take over the premises on similar terms. The Tenant can also negotiate for a break period in the agreement. A lease break clause gives the tenant power to terminate the lease after a fixed duration of time, provided that the tenant has met all his rental obligations and complied with all his obligations in the lease.
As with all legal agreements, the devil is in the detail of your lease agreement. It is advisable that you seek proper legal advice before making any commitments on the lease. Take time to understand the clauses and where possible request your lawyer to provide a summary of its contents which you could refer to over the life of your lease.