Termination of a Fixed-Term Lease Without a Termination Clause: The Case of Kwanza Estates Limited v. Jomo Kenyatta University of Agriculture and Technology (Petition E001 of 2024)
Termination of a Fixed-Term Lease Without a Termination Clause: The Case of Kwanza Estates Limited v. Jomo Kenyatta University of Agriculture and Technology (Petition E001 of 2024)
Background
Parties had entered into a fixed-term lease of 6 years that was supposed to end on 30/04/2022. However, the Respondent (JKUAT) issued 3 months’ notice in July 2020 of its intention to terminate the lease and vacate the premises and paid rent for the 3 months ahead. Upon expiry of the notice, the Respondent started vacating and was stopped by the Petitioner (Kwanza Estates Ltd). In the notice, the Respondent cited financial constraints caused by the COVID-19 pandemic, government-mandated lockdowns, and reduced income due to changes in the placement of self-sponsored students.
The Respondent ultimately vacated in January 2022 and the Petitioner claimed rent for the remainder of the lease term.
Proceeding at Environment and Land Court
The Petitioner disputed the validity of the termination notice, arguing that the lease lacked a termination clause and sought compensation for rent for the remainder of the lease term and restoration costs. They opined that the Respondent was obligated to continue occupying the premises and pay rent until April 2022.
The Respondent pleaded frustration of the contract due to a change in law (new placement policy by KUCCPS) that led to the reduction of self-sponsored students’ enrolment hence, financial hardship. The Respondent also argued that the Covid-19 pandemic also led to closure of schools and learning institutions which circumstances made it financially impossible to sustain the lease.
Consent was recorded by the parties and the Respondents agreed to pay the Petitioners a sum of Kshs. 40,000,000 being the cost for restoring the premises to its original state.
The Court stated that by the time the parties entered into the agreement, both the 2014 new university placement policy and the statutory provisions in the Universities Act were in place therefore, the Respondent failed to demonstrate a change in law or operation that would discharge it from liability.
The ELC ruled in favor of Kwanza Estates Limited, finding that the lease was not frustrated since the financial hardships faced by JKUAT did not render performance impossible. The court further held that the lease contained no valid termination clause, and the notice to terminate issued by JKUAT in July 2020 was void. JKUAT was ordered to pay Kshs. 71,965,138.70 in rent arrears and Kshs. 40 million for restoration costs.
Proceedings at the Court of Appeal
The Respondents appealed the ELC decision, arguing the trial judge erred in finding no break clause in the lease, that the agreement had not been frustrated by law, and in awarding the Petitioners Kshs. 71,956,138.70 for breach. The Respondent contended that the phrase “or sooner determination” implied a break clause and that COVID-19 frustrated the lease. The Petitioner’s cross-appeal sought VAT inclusion under clause 3(3).
The Court of Appeal found clauses 5.5, 5.26, and 5.27 implied early termination and ruled the Petitioner was only entitled to rent up to termination, beyond which payment would be unjust enrichment. It also held that COVID-19 frustrated the lease, preventing the Respondent from benefiting from the premises. The court reduced the award, ordering the Respondent to pay Kshs. 40,000,000 for restoration costs.
Proceedings at the Supreme Court
Kwanza Estates Limited appealed the decision to the Supreme Court, seeking reinstatement of the ELC judgment. The Petitioner argued that the Court of Appeal had erred in interpreting the lease as containing a break clause and in concluding that the COVID-19 pandemic frustrated the lease. The petitioner also contended that the Respondent could not rely on force majeure, as the lease did not contain such a clause, and that financial hardship did not meet the threshold for frustration of a contract.
The issues for determination were whether the Respondent pleaded force majeure or frustration in order to be discharged from the agreement and depending on the answer, the court to decide whether the Covid-19 constituted grounds for discharging the Respondent from its contractual obligations under the lease agreement. Lastly, the court to determine whether the appellant is entitled to the reliefs sought.
The Supreme Court clarified the distinctions between force majeure, frustration, and acts of God in addressing the ancillary legal issues. It noted that while force majeure relies on specific contractual provisions to excuse performance due to certain events, frustration arises from common law principles and applies when an unforeseen event fundamentally disrupts the contract’s purpose. Unlike force majeure, which must be explicitly stated in the agreement, frustration operates to discharge contractual obligations without the need for prior agreement between the parties.
The Court applied these principles to emphasize that the doctrine of frustration should only be invoked or applied in exceptional circumstances, as it disrupts the certainty of contracts. Frustration is interpreted narrowly and only discharges obligations when a supervening event completely nullifies the purpose of the contract. The Court highlighted that financial hardship, even under extraordinary circumstances like the COVID-19 pandemic, does not automatically constitute frustration. Increased costs or challenges in performance are insufficient to release parties from their contractual commitments.
In this case, the Court rejected the tenant’s reliance on frustration, noting that the government’s COVID-19 restrictions did not entirely prevent the university’s operations. Virtual learning remained a viable option, and the tenant’s relocation to alternative premises further demonstrated its ability to continue functioning.
Additionally, the Court clarified that the phrase “or sooner determination” in a lease does not, on its own, establish a right to terminate unless expressly supported by a termination clause.
The Supreme Court found that the lease lacked a termination clause, making the Respondent’s unilateral termination invalid and the termination notice void. By vacating the premises in January 2021, the respondent breached the lease agreement. The Court then was to consider the appropriate remedies available to the Petitioner as a result of this breach.
The court was then set to address the dispute regarding the termination of a fixed-term commercial lease that lacked a termination clause. The Court began by analysing commercial leases within the Kenyan legal framework, highlighting that such agreements are typically governed by the Landlord and Tenant (Shops, Hotels, and Catering Establishments) Act, which protects tenants in controlled tenancies. However, the lease in question fell outside the ambit of the Act, as it was a long-term agreement without a termination clause, a common feature landlords use to bypass statutory controls.
The Court referenced William Maema’s article titled Kenya’s archaic commercial leases law now ripe for repeal published in the Business Daily on 12 th June, 2018, which critiques the outdated nature of the Act, noting that modern lease agreements are often crafted to exclude its application, forcing tenants into inflexible long-term arrangements. These leases lack termination clauses, thereby limiting tenants’ ability to terminate contracts even in cases of financial difficulty. The impugned lease reflected this trend, leaving JKUAT unable to lawfully terminate the agreement mid-term.
In its ruling, the Supreme Court invalidated the Respondent’s three-month termination notice, deeming it a unilateral action that breached the lease. While JKUAT argued that financial hardship caused by the COVID-19 pandemic justified the termination, the Court rejected this claim, emphasizing that commercial contracts are governed by principles of certainty. It held that financial challenges or increased difficulty in performance do not amount to frustration of a contract unless an event renders the agreement entirely impossible to perform.
In determining appropriate remedies, the Court emphasized the landlord’s duty to mitigate losses. Citing cases such as Chimanlal Meghji Shah & Another v. Oxford University Press (EA) Limited [2007] eKLR and Indar Singh Limited v. Star Times Media Company Limited [2021] eKLR, the Court held that it would be unconscionable to compel a tenant to continue occupying premises they no longer wish to occupy or to allow a landlord to claim full rent for the unexpired lease term without seeking alternative tenants. The court found persuasive value in the Court of Appeal’s finding in Kasturi Ltd v Nyeri Wholesalers Limited where it held that a tenant cannot force himself on a landlord and the converse is true. The principle of mitigation required the Petitioner to make reasonable efforts to re-let the premises. The court concurred with the above rulings that it is unreasonable to claim rent for the unexpired lease term after the tenant has vacated.
The Court limited Kwanza Estates’ claim for rent to three months, considering this a reasonable period for renovations and finding a new tenant. This award totalled Kshs. 13,839,449.75, less the security deposit of Kshs. 11,385,750, resulting in a net award of Kshs. 2,453,699.75. The Appellant was also awarded Kshs. 40 million for restoration costs as previously agreed.
The Supreme Court declined to reinstate the Environment and Land Court’s ruling, which had awarded rent for the entire unexpired lease term, deeming it excessive. It also set aside the Court of Appeal’s decision, which had absolved JKUAT of liability. Each party was directed to bear its own costs.
Conclusion
The court ruled that while tenants cannot unilaterally terminate fixed-term lease agreements without a termination clause, it is unconscionable for landlords to claim rent for the entire unexpired lease term after the tenant has vacated the premises without making reasonable efforts to mitigate losses, such as seeking new tenants.