Terminating a commercial lease

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As a business person, you may have found it quite easy to secure a commercial lease. However, you may face many hurdles if, or when, you need to terminate your lease prior to the end of the term.

There are many business reasons that may necessitate termination of a commercial lease prior to the anticipated period. One very often reason is that your business has not been as successful as you had anticipated. On the flip side, you may perhaps find yourself needing to break a lease purely because your business has turned out so well that you have to expand. Very innocently, you approach your landlord and intimate that you want to terminate the lease. The Landlord not being impressed with the new develops refers you to a rather obscure clause in the lease you had not even noticed prior to execution. The clause is to the effect that the lease is for a fixed number of years, usually more than five. The landlord then goes ahead to caution that in view of the fixed term period, any premature termination of the lease would amount to a breach of the lease with the usual consequence – that is, that you pay rent for the remainder of the lease period.

What next for you?

Obviously, the questions that would pop in your head are;

  • Why the long duration in commercial leases?
  • Is there anything you may legally do in order to get out of the existing long lease?

Why the long duration in commercial leases?

 

As highlighted in the previous article- virtually all commercial leases in Kenya have a minimum fixed term of five years and three months or beyond and will usually not have a termination clause. This state of affairs can make things extremely thorny for a tenant who wishes to walk out of the lease before the end of the fixed term period.

Whereas there is really nothing magical about five years and three months, this rather exaggerated period will normally be inserted into the lease by the landlord, most likely at the advice of his lawyers, all in a bid to exempt the lease from qualifying as a controlled tenancy. A controlled tenancy can simply be defined as that lease whose term does not exceed five years or one that has a clause which allows for termination within five years. Controlled tenancies are governed by the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act. This Act was essentially enacted to protect businessmen from unnecessary harassment from Landlords perhaps to encourage smooth flow of business. The Act provides among others that a Landlord may not increase rent or terminate a lease without the authority of the Business Premise Rent Control Tribunal, established under the Act. Generally, this Act deprives the Landlord of certain rights over his property in order to protect the tenant. It is therefore not surprising that owners of commercial properties invariably seek to avoid the application of the Act by eliminating any provisions in the lease which would give it the character of a controlled tenancy.

Consequences of Premature Termination of a Lease

What makes it a risky affair to walk out of a fixed term lease prior to the end of the lease period is usually the likely legal consequences. When a commercial lease is terminated before the end of the lease term, the non breaching party may seek damages for the breach. These damages may be as high as the total sum of the rent for the remainder of the lease period. Some leases even contain an acceleration clause which would be a term stating that upon breach, all other obligations under the entire term of the lease become due upon the other parties breach. What then are the options available for a tenant who wishes to terminate a fixed period lease before the end of the lease period?

Tips for legally getting out of lease prior to the end of term

 

  • Direct Negotiations with the Landlord– The best option is usually to approach the landlord with a request to have the lease terminated by mutual consent. Chances are that the landlord may actually cooperate especially if the rental market is good and demand is high. The odds however appear to be that the landlord may prove difficult.

 

  • Find a replacement tenant– A landlord’s interest is usually to obtain returns on his investments. So long as the landlord is assured of a continued income on his premises, he may have no reasons to offer objection to an intended termination of a lease mid term. Therefore, the other option for abandoning a lease midterm is to approach the landlord with a replacement tenant either upon similar terms as those in the existing lease or even more favourable ones from the landlord’s standpoint.

However, so as to assure yourself of this option, it may be advisable to have a clause inserted into the lease stating that the landlord is not to unreasonably refuse to consent to a new tenant.

  • Buy-out-Another possibility is to approach your landlord about a buy-out. While it’s true that if your lease still has a long time to run, a buy-out may be difficult to negotiate, if your landlord believes he’ll be able to re-let your space without too much trouble, he may agree to let you out of the lease if you pay some consideration. Or you could offer to let him keep part or all of your security deposit in exchange for letting you out of your lease.
  • Review of Termination Provisions – Under general law of contract, a fundamental breach by one party may avail the other party the option to treat a contract as rescinded. This will normally have the effect of relieving the innocent party from his obligations under the contract.As a last resort, you may scrutinize the clauses in the contract vis-à-vis the landlords conduct with a view to establishing fundamental breach on the part of the landlord such as to avail you the option of treating the lease as rescinded and thereby to walk out of the same. A visit to a commercial lawyer’s offices may come in handy here!

Parting Shot

 

When it comes to leasing commercial space, the smartest thing you can do is to make sure you’ve got your bases covered before you sign on the dotted line. That way, you’ve got contingency plans in place.

First, you can ask to add provisions to the lease that would allow you to modify the agreement or terminate early, if needed. Doing so allows for clear direction in the event you need lease modification because both parties have already agreed upon the terms for modification. Discussing modification and termination procedures with the lessor before signing a lease is highly recommended.

Secondly, you can negotiate a break clause. A break clause gives a tenant or a landlord an option to terminate a lease at least once during the term of the lease. The break may be used by the landlord or the tenant only when the conditions of the break clause have been met. The right to break may only occur as indicated in the lease, either on a certain fixed date(s) or at any time during the lease. There is no universal type of break clause and issues related to the drafting, timing, beneficiaries, penalties, and frequency of use all vary depending on the terms of the break clause agreed upon in the lease.

Thirdly, you can sign a lease for a shorter amount of time, allowing you to see if the business is profitable on the property. Signing a shorter lease gives you the option of vacating the premises if needed. It is better to sign a lease for a short amount such as two years of time than to sign a lease for a longer period, such as more than five years. Always bear in mind at all times that if you agree to a fixed term lease, you must meet all of the obligations under the lease until the lease ends, even if the business fails or the premises is vacated.

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