Landlords and Tenants Beware: Consequences of Unilateral Termination of Lease Agreements without a Break Clause by the Supreme Court of Kenya

The Supreme Court in a recent judgement in Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology [2024] KESC 74 (KLR) underscored critical considerations when entering into contractual/lease agreements and attendant consequences of breach.

Brief Facts of the Case

Kwanza Estates Limited (the Petitioner) entered into an unregistered six-year lease agreement with Jomo Kenyatta University of Agriculture and Technology (the Respondent), effective 1^st May 2016 to 30^th April 2022, with an escalating annual rent beginning at Kshs. 45,543,000/-. On 10^th July 2021, the Respondent (tenant) issued a three-month notice to terminate the lease. Following the notice period, the Respondent attempted to vacate the premises on 10^th October 2021, but their efforts were obstructed by the Petitioner (landlord), who deployed security personnel and third parties to prevent the relocation.

Subsequently, the Petitioner issued rent invoices for November 2021 to January 2022 and instructed auctioneers to recover unpaid rent through proclamations of distress. Despite vacating the premises in January 2022, the Respondent faced additional rent recovery actions by the Petitioner, covering January 2022 to April 2022. Consequently, the Respondent filed suit at the Environment and Land Court (ELC) in Nakuru, claiming frustration of the lease agreement and seeking a declaration that the lease had been terminated, as well as an injunction to prevent further harassment or property seizures by the Petitioner.

The ELC ruled in favour of the Petitioner, holding that the lease agreement contained no break clause, thereby making termination before 30^th April 2022 impermissible. The court ordered the Respondent to fulfill its rent obligations until the lease term expired. Dissatisfied, the Respondent appealed to the Court of Appeal, asserting the existence of a break clause and that the lease had been frustrated by unforeseen circumstances.

The Court of Appeal overturned the ELC’s decision, finding that the lease had been frustrated by events beyond the parties' control, including the COVID-19 pandemic, and interpreting that the phrase "or sooner determination" in the lease agreement allowed for early termination. The appellate court ordered the Respondent to pay Kshs. 40,000,000 to restore the premises to a tenantable state.

The Petitioner subsequently appealed to the Supreme Court, contending that the appellate court erred by introducing force majeure considerations, misinterpreting the lease as containing a break clause, and determining that frustration of the contract had occurred. The Petitioner maintained that the parties had not intended a break clause in the lease agreement and argued that the Respondent's reliance on financial constraints caused by COVID-19 pandemic and government policies did not justify avoiding contractual obligations.

The Supreme Court clarified the distinction between force majeure and the doctrine of frustration. It emphasized that force majeure requires explicit inclusion in a contract, while frustration applies narrowly under common law when unforeseen events render contract performance impossible or fundamentally altered. The doctrine of frustration operates to discharge a contract, bringing it to an immediate and definitive end. Once the doctrine is applied, the contract cannot be deemed suspended or temporarily inoperative; it is terminated entirely unless the parties expressly agree to revive it through a subsequent agreement. The apex Court held that the Respondent had invoked frustration and determined that COVID-19 pandemic and subsequent restrictions did not meet the threshold for frustrating the lease, particularly after pandemic restrictions were lifted. The Court further found that the lease lacked a break clause, rendering the Respondent's termination notice invalid and their actions constitutive of breach of contract. Consequently, the Supreme Court awarded damages to the Petitioner for the Respondent’s breach of the lease agreement.

Implication/Lessons

This decision of the Supreme Court highlights essential factors that contracting parties should consider when drafting and entering into contractual agreements, as well as the legal and financial consequences of breach of a contract/lease. The language of a contract should be clear/unambiguous, precise, and include explicit provisions addressing termination. It is imperative to recognize that, in the absence of termination provisions, the contract remains valid and enforceable until its stipulated expiration.

The court further observed the strategic drafting of leases employed by some property owners, designed to exclude their lease agreements from the ambit of the //new.kenyalaw.org/akn/ke/act/1965/13/eng@2022-12-31">Landlord and Tenant (Shops, Hotels and Catering Establishments) Act (Cap 301), which protects tenants (controlled tenancies) inhabiting business premises from being evicted or their leases terminated without an elaborate procedure. Such legal drafting nuances warrant vigilance to protect contractual parties from unfair exposure. Where a termination clause is absent, the sole remedy lies in invoking the narrow doctrine of frustration, which courts apply sparingly and only upon strict proof of its elements. Furthermore, a fixed-term contract devoid of a termination clause cannot be unilaterally terminated, as such action constitutes a breach of contract. Parties aggrieved by breaches arising from such circumstances are advised to seek judicial recourse, including claims for damages resulting from the breach.

Lessons for Landlords

1. Landlords must always strive to seek another tenant for their premises whenever a tenant pre-maturely terminates a lease since they will not able to claim rent for the remainder of the unutilized term. We deem this interpretation as founded on the requirement to mitigate damages for breach of contract under the law of contract.
2. Landlords should ensure the early termination clauses in commercial leases are well negotiated and drafted to cover such eventualities of premature termination.

Lessons for Tenants

1. Tenants will be liable to pay damages for breach of a lease where they terminate a lease pre-maturely and without good cause.
2. Where tenants plead force majeure or frustration/impossibility of performance, they bear the burden of proof (providing evidence) in support and that not all events amount to force majeure and frustration.
3. Tenants must ensure that force majeure clauses are well spelt out in contracts. For force majeure to be considered by Court, it must have been clearly provided in a contract and defined clearly.