Commercial Tenancy in Nairobi: The Clauses That Decide Your Exit

A tenant's attention at heads of terms goes to rent, term and rent-free period. The clauses that determine the true cost of occupancy sit further back in the document and are rarely negotiated.

This article covers the terms that actually matter in a Nairobi commercial lease, the statutory protection some tenancies attract, and what to establish before signing.

Is your tenancy "controlled"?

The first question, and it changes everything.

Kenya's Landlord and Tenant (Shops, Hotels and Catering Establishments) Act creates a regime of controlled tenancies. Broadly, a tenancy of premises used as a shop, hotel or catering establishment is controlled where it is for a term of less than five years, or contains a provision for termination within five years of commencement.

Where a tenancy is controlled, the landlord cannot simply terminate at the end of the term. A statutory notice must be given, the tenant may object, and the Business Premises Rent Tribunal determines whether termination or a rent increase is justified. In practice this gives the tenant considerable security of tenure.

The consequence for both sides is significant. Landlords structure leases for terms of five years or more precisely to fall outside the regime. Tenants sometimes prefer a shorter term for exactly the opposite reason.

Establish which side of the line your tenancy falls before negotiating anything else.

Reinstatement: the clause that costs the most

A reinstatement or "yield up" clause requires the tenant to return the premises to a specified condition at the end of the term — frequently the condition at commencement, which means stripping out every alteration and fit-out.

For a tenant who has fitted out an office or a restaurant, that cost can run to a substantial fraction of the original fit-out. It arrives at the moment the tenant is also paying to fit out new premises.

What to negotiate: a schedule of condition photographed and agreed at commencement, so what "original condition" means is documented; landlord's consent to alterations expressed to include consent that they may remain; and a cap on the reinstatement obligation, or its exclusion for specified works.

This is negotiable at heads of terms and effectively not negotiable four years later.

Rent review

Most Nairobi commercial leases provide for review at intervals — commonly every one to two years — either at a fixed percentage, by reference to an index, or to open market rent.

Fixed uplifts are predictable and can exceed market movement in a soft market. Open market reviews require a valuation mechanism and, ideally, a dispute resolution route where the parties cannot agree.

Watch for upward-only reviews, which prevent the rent falling even where the market has. They are common and they are negotiable, particularly on a longer term.

Service charge

In multi-let buildings the service charge frequently exceeds what tenants budget for.

Establish what it covers, how it is apportioned between tenants, whether there is a cap, and whether the landlord must provide an annual reconciliation against actual expenditure. Ask for the last three years' service charge accounts before signing — a building with escalating charges and no reconciliation is a building where the landlord's maintenance is being funded by tenants without scrutiny.

Resist provisions allowing recovery of capital improvements through the service charge. Replacing a lift at the end of its life is arguably maintenance; upgrading the building's specification is the landlord's investment.

Repair obligations

Who repairs what determines whether occupancy costs are predictable.

A tenant taking an internal repairing obligation is responsible for the interior only. A full repairing and insuring lease puts the whole building's condition on the tenant, which for an older building can be a substantial and open-ended liability.

Where the lease is full repairing, a schedule of condition agreed at commencement limits the obligation to the condition recorded rather than to an absolute standard. Without it, the tenant can be required to hand back a building in better condition than they received.

Break clauses

A break clause gives one or both parties the right to terminate early on notice.

Break clauses are frequently drafted with conditions — that the rent is fully paid, that the tenant has complied with all covenants, that vacant possession is given. Conditional breaks fail regularly, because a tenant with a trivial breach discovers the break is ineffective and remains bound for the full term.

Negotiate breaks conditional only on payment of principal rent to the break date, and on vacant possession. "Compliance with all covenants" is a condition almost no tenant satisfies perfectly.

Serve break notices exactly as the lease requires — right method, right address, right period. Break notices fail on service more often than on substance.

Alienation: assignment and subletting

Whether a tenant may assign the lease or sublet determines exit flexibility.

Most leases prohibit assignment without the landlord's consent, frequently expressed as consent not to be unreasonably withheld. Some prohibit it absolutely, which leaves a tenant who no longer needs the premises paying rent to the end of the term with no way out.

Where assignment is permitted, check whether the outgoing tenant remains liable after assignment. A tenant who assigned and remains guarantor for the assignee's performance has not actually exited.

The deposit

Commercial deposits are commonly three to six months' rent. Establish whether it is held in a separate account, whether interest accrues to the tenant, the conditions for its return, and the period within which it must be returned.

Deposits are a recurring source of dispute at lease end, usually where the landlord asserts reinstatement or dilapidations claims against them. A documented schedule of condition at commencement is the tenant's principal protection.

Landlord's title and consents

Tenants rarely check who they are contracting with. They should.

Confirm the landlord is the registered proprietor or holds a superior lease permitting subletting. Where the landlord's own interest is leasehold, the head lease may require the superior landlord's consent to a sublease, and a sublease granted without it is vulnerable.

Where the property is charged to a bank, the charge may prohibit letting without the lender's consent. A lease granted in breach can be disregarded by a lender enforcing its security, leaving the tenant without occupation rights against the buyer at a chargee sale.

Ask for an official search and evidence of any required consents. Our property and leasing team runs these checks for tenants taking significant space, and they take days rather than weeks.

Insurance and outgoings

Who insures, and against what, is worth establishing rather than assuming.

In most Nairobi commercial leases the landlord insures the building and recovers the premium from tenants through the service charge or as a separate insurance rent. Confirm the cover, the sum insured, and whether the tenant's interest is noted on the policy — a tenant with no noted interest has no claim on the proceeds.

Establish what happens if the building is damaged or destroyed. A well-drafted lease suspends rent while the premises are unusable and permits termination if reinstatement is not completed within a defined period. Without those provisions a tenant can be paying rent for premises they cannot occupy.

Tenants insure their own contents, fit-out and business interruption, and should carry public liability cover. Where the lease requires specific cover levels, check them against what your broker has actually placed.

Stamp duty and registration

Leases attract stamp duty, calculated by reference to rent and term, and the lease should state who bears it — commonly the tenant.

Leases for terms exceeding a prescribed period must be registered against the title to be effective against third parties. An unregistered long lease may not bind a purchaser of the reversion, which matters if the landlord sells.

Fit-out, alterations and landlord consent

Most commercial tenants alter the premises, and the consent regime determines what that costs at both ends of the lease.

Leases typically prohibit alterations without the landlord's written consent, sometimes with structural alterations prohibited absolutely. Consent is often expressed as not to be unreasonably withheld, but the landlord may impose conditions — including that the works be removed at lease end.

Negotiate two things when seeking consent. First, that specified works may remain at the end of the term rather than being stripped out. Second, that the landlord's costs of considering the application are capped, because open-ended reimbursement of the landlord's professional fees is a common and unbudgeted cost.

Where a rent-free period is given for fit-out, establish whether it is genuinely rent-free or merely deferred, and whether service charge and insurance remain payable during it. "Six months rent free" frequently means six months free of principal rent only.

Keep the consent documentation. At lease end, a tenant who can produce written consent permitting works to remain avoids the reinstatement argument entirely.

What to establish before signing

Whether the tenancy is controlled. What the reinstatement obligation actually requires, and what the premises look like today. What the service charge has been for the last three years. Whether repair is internal or full. Whether any break is conditional, and on what. Whether you can assign or sublet, and whether you stay liable afterwards. Who the landlord is and whether they need anyone's consent to grant the lease.

Seven questions, answerable in a week, that determine the real cost of a five-year commitment. Our commercial law practice reviews leases on a fixed fee for exactly this reason — the cost of the review is trivial against the reinstatement clause alone.