Getting a Commercial lease in Kenya?

Getting a Commercial lease in Kenya?

A commercial lease is an agreement between a tenant and a landlord to occupy a business premise. The lease will typically outline the rights and obligations of both parties involved.

Commercial leases in Kenya cover a minimum term of 5 years and three months and do not provide for exit terms other than a breach of contract. This structure avoids a situation known as controlled tenancy that may occur for shops, hotels, and catering establishments.

In relation to these commercial premises, controlled tenancies occur when occupation has not been reduced into writing.

In the event that it has been reduced into writing:

• It is for a period not exceeding five years; or
• Contains a provision for termination, other than for breach of covenant, within five years from the start of the lease.

Controlled tenancies are a headache for the landlord as they introduce a third party; the local rent tribunal – a statutory body tasked with determining rental prices and conditions where the landlord has failed to observe the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act Cap 301. Once a controlled tenancy has been determined, the landlord will not be able to evict, change the rental prices or alter any other aspect of the occupancy without the authority of the rent tribunal. This is because the tenant becomes protected by law. If you feel your shop-space may have become a controlled tenancy, immediately contact your lawyer.

Since it is unlikely that your tenancy will become controlled (well, unlikely in an organized set-up), here’s what to expect in your lease:

1. Leases will typically mention the rent payable over the term of the lease. In the event the landlord wishes to vary the prices in the lease, the escalation shall be clearly documented. Pricing is an important part of your lease. While your legal advisor will review other aspects of your lease, negotiation for pricing is the responsibility of the tenant. Begin by determining an estimate of rent per square foot by checking online listings and discussing with property agents. You may also visit new buildings to determine entry-level rental prices. Newer buildings have lower rental prices and longer rent-free fit-out periods to attract tenants. In an effort to retain tenants during the Covid pandemic, many landlords have also opted to freeze the rental prices for the entirety of the lease.
2. The lease will also mention recurring costs such as service charge applicable over the term of the lease. Service charge in commercial leases is an estimate of the shared costs for running a commercial building. Such shared costs may include those made to meet; security, land rent and rates, water, common area electricity, lift maintenance, shared cleaning services etc. Always require the landlord to share a copy of the building’s audited service charge accounts at the end of the year showing how your funds were used to meet these costs. In many cases, it is likely that the landlord’s service charge estimate on the lease may be higher than actual service charge costs incurred during the year and this will require a refund of excess charges. As a control (as landlords may typically transfer unreasonable costs to tenants) always compare your service charge costs per square foot to those of similar buildings. https://www.standardmedia.co.ke/business/real-estate/article/2000127663/how-landlords-rip-off-tenants-through-service-
3. The landlord may require security deposits to cover the risk of default and tenant-related damages. The deposits are usually equivalent to one billing cycle. Where the lease varies during its term, the landlord may pick the rent and service charge payable in the last billing cycle to be the security deposit. Deposits covering periods longer than one billing cycle should be avoided.
4. Many leases will have fixed charges such as legal fees and stamp duty. A landlord is required by law to register commercial leases with terms greater than 5 years by having the lease assessed and the stamp duty paid at the government’s land office. Registering a lease is the final step in protecting the rights of all parties under the Land Registration Act. Without registration, enforcement of the lease in the event of breach becomes subject to protracted litigation. While this cost is typically passed on to a tenant, what is initially paid by the tenant is an estimate of the stamp duty (usually a higher-than-cost estimate). A rough estimate may be arrived at by computing 2% of annual rent and service charge costs. Ensure that your landlord registers the lease and provides proof of the assessed stamp duty. Require a refund if the actual stamp duty is lower than the estimate paid. Other costs such as legal fees for the landlord’s lawyer should be negotiated. Consider asking your own lawyer what is reasonable or consistent with practice.
5. Some landlords may require a tenant to have their leases co-signed by guarantors. This is usually an effort to transfer the risk of default to an additional party. However, it is difficult to enforce such a guarantee and this should not be a deal-breaker if other conditions of the lease are agreeable. Usually, a director of the business may be chosen as a guarantor for the lease. Ensure to discuss the impact of the lease to guarantors with your lawyer.