You and the law/ WITH MUSYOKI KIMANTHI

Q

:I have been looking for rental space to put up a shop within town but I am advised by the landlord’s lawyers that I need to pay ‘goodwill’ of up to Sh3 million and further that I will have to sign a tenancy agreement of at least six years. Is this goodwill a legal requirement and why is it that I cannot get an agreement of about three years?

A

:The premises, or the physical location on which to carry out one’s business no doubt presents a big challenge to entrepreneurs.

This challenge has pushed many business people to ‘move in’ with other ‘bigger’ businesses, which sublet their extra space to smaller businesses.

Most of such sub-tenancies are not permitted by landlords since in the event that the head tenant fails to remit rent to the landlord, the sub-tenant’s goods and property are liable for auction to satisfy the unpaid rents regardless of whether the sub-tenant was paying his dues to the main tenant.

It is true that most landlords, especially in busy downtown streets, are asking for ‘goodwill’ as part of the conditions for signing a tenancy agreement.

Goodwill is more of an accounting terminology than legal and when used with regard to tenancies it means that the proposed rental space has some intrinsic value beyond the mere rental space.

It could be that its location has some good reputation with customers and the tenant agrees to ‘overpay’ because he sees potential synergy with his own proposed business.

Goodwill is purely a matter for the discretion of intending tenant to pay up depending on the potential he sees in the location of the business.

Leases, also referred to as tenancies, are creatures of the law and must, therefore, comply with certain legal requirements depending on the statute under which the title of the property is issued.

The question of duration of a lease for most business premises in Kenya is one of the most controversial issues. Virtually all commercial leases provide for a minimum tenancy of six years and have no termination clause.

This means that if a tenant wishes to vacate the premises prior to the expiry of the specified term, he could only do so upon paying the full rent for the remainder of the term, or otherwise get a replacement tenant who would be willing to pay the rent for the remainder of the term.

The source of the above scenario is traceable to The Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, Cap 301, which came into effect in 1965.

The principal provision of this Act is that any lease for a term not exceeding five years or which contains a provision for termination is a ‘controlled tenancy’ and, therefore, regulated by the Business Premises Rent Tribunal, also set up under the Act.

In a controlled tenancy, the procedure for increasing rent or terminating the lease is cumbersome and it is, therefore, not surprising that owners of commercial properties invariably seek to avoid the application of the Act by eliminating all provisions in the lease, which would give it the character of a controlled tenancy.

The landlords have discovered that the easiest route to achieve this objective is to provide for a lease of more than five years and omit any reference to termination.

The historical basis upon which this law was enacted no longer exists, as most landlords then were of non-Kenyan origin and there was a need to protect tenants from harassment in carrying out their businesses. I am, therefore, not sure whether this law still remains relevant today.