COVID-19: How To Handle Your Commercial Lease
It’s been almost two years since I penned this guide on commercial leases in Kenya. Since the outbreak of the COVID-19 pandemic, the article has generated a lot of interest from readers. So much so, that it prompted me to provide further insight on how to handle your lease in light of the pandemic.
New Legal Obligations
The first COVID-19 case in Kenya was detected in March 2020. From that moment, the government has issued numerous guidelines aimed at curbing the incidence and spread of the disease. Whilst the pandemic affected most sectors of the economy, sectors such as hospitality and aviation have been hardest hit with full closures. Cognizant of this fact, the government issued sector-specific directives to enable the re-opening of some affected sectors. In addition, the government issued general guidelines applicable to all workplaces in Kenya. The recommended measures include:-
- Teleworking – encourage staff to work from home where feasible and/or work in shifts based systems;
- Increased Physical Space – there should a minimum of at least 1-1.5 meters between workers on any given site;
- Physical Barriers to separate employees; and
- Ventilation and Airflow – occupiers should take steps to improve ventilation and airflow in their buildings.
- Cleaning – building occupiers must increase frequency of cleaning of surfaces and provide handwashing/sanitisation facilities.
Additional guidelines have also been issued under the Occupation Safety and Health Act. In terms of compliance, landlords are responsible for the common areas of the building whilst the tenant takes up the responsibility for all areas under the lease.
Following the outbreak of the pandemic, some tenants took on the extra burden of legal compliance. However, some have been pushed out of business or forced to re-organise their operations. According to a recent Knight Frank report, “a large percentage of offices have closed and their employees are working from home, or have minimal staff on rotation due to the social distancing directive…” Additionally, Knight Frank observed that the second quarter of the year is expected to witness a significant slow down in the absorption of office spaces.
Legal Options for Commercial Leases
If you are reviewing your occupational requirements with a view to rationalize or to meet the government guidelines, then an evaluation of your lease is necessary. Below are some of the legal options available for dealing with your lease during the pandemic.
1. Termination By Notice
Generally, commercial leases in Kenya are in the form of written contracts of fixed terms above 5 years and 3 months. Further, such leases do not contain termination clauses. This rigid structure allows landlords to circumvent the provisions of the Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act which creates controlled tenancies. In other words, if you have an unwritten commercial lease or a lease for a term less than 5 years 3 months you are considered a controlled tenant. This means that unless your Landlord follows procedures stipulated in the Act, he cannot increase rent or evict you from the premises. If he attempts to do so, you can seek redress from the Business Premises Rent Tribunal.
Tenants with a written commercial lease that runs for at least 5 years and 3 months, do not have the option to terminate by serving notice. Attempting to do so gives the Landlord a right to sue for damages (e.g. rent for the unexpired term). The main way out of such an agreement is by mutual agreement with the Landlord. The landlord may demand payment of the remainder of the rent owed on the lease in exchange for his consent. Depending on your existing relationship with the landlord and the circumstances of your business, he may be willing to accept lower compensation.
In some instances, landlords and tenants may to include break clauses in the lease. This often occurs where the lease is long term in nature e.g. for periods of 10 years or more. A break clause provides the tenant the opportunity to terminate the lease early. It also fixes the compensation payable for early termination. Interpretation of your break clause will depend on the language of your lease. If you have met the thresholds for termination, then termination should be fairly straightforward.
2. Termination on Account of Force Majeure
A tenant is entitled to terminate a lease on account of “Force Majeure” where the governing lease contains a Force Majeure Clause. Force Majeure clauses allow parties to either suspend or terminate the performance of their obligations owing to the occurrence of stipulated events that are beyond the control of the parties. Whether or not the COVID-19 pandemic gives rise to “Force Majeure” depends on the language of the lease. For example, if your lease specifically provides that pandemics constitute force majeure events, then you may be able to invoke force majeure. However, if your lease describes force majeure events in broad terms, then applicability depends on the language and interpretation of the lease.
It is worthy to note that an assertion of force majeure does not arise where the lease does not contain a force majeure clause. In other words, your lease must specifically set out force majeure provisions in order for you to rely on it.
Does force majeure entitle a tenant to suspend its rental obligations? Again, this depends on the wording of the clause. In many cases, force majeure clauses carve out the tenant’s obligation to pay rent. In effect, the tenant’s obligation to pay rent persists despite the occurrence of force majeure. Additionally, courts often apply the doctrine of force majeure in strict terms. Financial or economic hardships hardly recognized by courts as events of force majeure.
Undoubtedly, the pandemic creates an unprecedented situation that will be tested afresh by the courts. There may be room to argue that the ensuing financial hardship entitles the tenant to suspend rental obligations. We can only wait to see what outcomes litigious proceedings will yield. In the meantime, if you wish to invoke force majeure, consult your lease and lawyer before pressing forward.
3. Termination on Account of Frustration
In the absence of a force majeure clause, parties may rely on the doctrine of frustration to terminate contractual obligations. The frustration of the contract arises from the common law doctrine of frustration.
Frustration releases a party of its obligations in the contract where the party shows that an unforeseen event has arisen which, through no fault of the parties, renders performance of the contract impracticable or impossible. Generally, frustration of contract is harder to prove than force majeure. You must show that the frustrating event was not only fundamental but also entirely beyond the parties’ contemplation at the conclusion of the contract. Further, frustration does not arise merely because it is more expensive or onerous for a party to perform its obligations.
Unlike force majeure, frustration leads to termination of the contract. The suspension or pause of obligations does not arise. In the context of the COVID-19 pandemic, some parties may not be keen to pursue full termination. For example, restaurants and hotels only faced temporary closures and thus full termination would have been undesirable. However, there are some sectors (e.g. bars and night clubs) that have faced prolonged closures with no end in sight. Hence invoking frustration of contract with the resultant effect of termination may be the most optimal route. I would recommend consulting your lawyer before you relying the frustration of contract as a means of termination.
From the above, it is evident that wiggling out of a commercial lease in Kenya is often murky and complicated. However, the COVID-19 pandemic is an unprecedented situation and calls for creative solutions and parties’ willingness to accommodate each other’s interests. If you, as a tenant, are facing a predicament on your lease, take some of the following issues into consideration:-
- review your existing business requirements, availability of cashflow, space requirements. You may need less space now and in the coming future;
- with the help of your lawyer, review your lease to determine what options you have for exit or suspension of obligations;
- communicate with your landlord; explain the challenges you are facing as a tenant and ask what concessions they may be willing to provide during this period
- if you need to terminate on account of frustration or force majeure, work with your lawyer to determine the merits and demerits of following this route.
As a Landlord, you should be willing to consider your tenant’s predicament and offer concessions where possible. Where you have enjoyed a long-standing relationship with your tenants, show empathy, and remember that the pandemic will soon blow over. Before you re-negotiate your lease, seek guidance from your lawyer so that your interests are protected. The same applies to where the tenant is uncooperative or generally unable to pay rent.
Disclaimer: The information on this blog is available for informational purposes only and is not considered legal advice on any subject matter. By viewing blog posts, the reader understands there is no advocate-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a licensed professional advocate, and readers are urged to consult their own legal counsel on any specific legal questions concerning a specific situation. The information on the blog may be changed without notice and is not guaranteed to be complete, correct or up-to-date. While the blog is revised on a regular basis, it may not reflect the most current legal developments.