Controlled Tenancies, Licenses & Commercial Leases: An Introduction

Controlled Tenancies, Licenses & Commercial Leases refer to the different types of commercial arrangements that a property owner (landlord) and the ultimate user of the property (tenant) might have between themselves. The legal arrangements which confer use of property to property users differs to a large extent on the basis of the intent that both parties had at the time they entered into their engagement, the duration or term for which the agreement was intended to subsist, the nature of commercial arrangements the parties desired to engage in besides many other factors.

While on the face of it controlled tenancies, licenses and even registered leases may appear to be one and the same thing, in commercial and legal practice, for example, a controlled tenancy will differ significantly from a registered lease (commercial lease). Both of these will also differ significantly from licenses.

It is important to comprehend their intrinsic differences because they impose different obligations on the parties, confer different rights of use and ultimately possess uniquely different features which, if not sufficiently well understood, may cause one or both of the parties to unwittingly bind themselves into an arrangement that may not adequately represent their intentions. Even worse, the arrangement entered into may not guarantee them the rights and protections they may need to defend their commercial positions in the event of a dispute.

We will seek to explore the differences between these different types of commercial arrangements and how they.

Controlled Tenancies, Licenses, Commercial Leases: 
What is Controlled Tenancy?

A controlled tenancy is defined under section 2 of the Landlord and Tenant Act (Shops, Hotels and Catering Establishments Act), Chapter 301 of the Laws of Kenya as a tenancy for a shop, hotel or catering establishment which has:

1. Been reduced into writing; or
2. Hasn’t been reduced into writing but which is for a period not exceeding five years; or which contains a provision(s) for termination, other than for breach of covenant, within five years from commencement thereof; or which relates to premises specified by the Minister in a Gazette Notice to be a controlled tenancy.

Generally, where tenancy subsists but without a formal written document, that tenancy is defined as a controlled tenancy. The intent to confer tenancy is evident. However, what isn’t outrightly determinable is the nature of the agreement between the two parties.  By failing to reduce the lease agreement into a clear and concise written form, the agreement cannot be easily understood and referenced in the future.

In such cases, it is foreseeable that disputes may arise for various reasons. Landlords can arbitrarily raise rents, for example.

In Kenya, controlled tenancies are regulated by the Business Premises Rent Tribunal which would remedy disputes by, for example in the case indicated where a landlord arbitrarily raises rents, capping or restricting such arbitrary hikes by the landlord.

Controlled tenancies cannot be terminated except as provided for in the Act in Section 7. The rules in this section override anything stated to the contrary, even where there is a written agreement between the parties to the controlled tenancy, as established by S.4(1) of the Act.

In most countries, controlled tenancies typically subsisted where there was a shortage of affordable housing, and the government wanted to ensure that low-income tenants are not priced out of the market.

In Kenya, the Business Premises Rent Tribunal oversights the landlord-tenant relationship to ensure that neither party unduly exploits or leverages their position to take advantage of the other, more so that the rights of tenants are observed by landlords who exercise greater leverage in the relationship.

The Business Premises Rent Tribunal also provides a dispute resolution mechanism via which the tenancy-landlord relationship can be administered within the law. For this reason, it is unlikely that one may encounter controlled tenancies in most commercial premises these days – most landlords would deem the involvement of a state agency in their business operations as disruptive, certainly not nearly worth the trouble it may potentially cause.

Where controlled tenancies subsist, it is the government that typically establishes a system for regulating rents and may even provide other forms of support to landlords, such as subsidies or tax breaks, to encourage them to offer controlled tenancies.

To illustrate this, a hypothetical example where Controlled Tenancy could be inferred would be one where a restaurant operator (in this case the tenant) and their landlord have an oral agreement for the space under tenancy for a period of 3 years and the landlord attempts to evict the tenant on the grounds that the tenant has defaulted in paying rent for a period of a month after such rent has become due.

This is because the Act provides that the landlord would only have grounds to do so if the tenant has defaulted in paying rent for a period of two months after such rent has become due or payable or where the tenant has persistently delayed in paying rent which has become due or payable.

Landlords tend to have a deep aversion for controlled tenancies because, under the Act, disputes between landlords and tenancies for these types of arrangements are referred to the Rent Tribunal – a statutory body whose mandate it is to determine rental prices and conditions where a landlord fails to adhere to the Act.

A landlord cannot, therefore, evict a tenant under a controlled tenancy, arbitrarily change the rent price, or even vary any other material aspects of the tenancy without the authority of the Rent Tribunal. While the terms of a controlled tenancy may vary depending on the jurisdiction, they typically include restrictions on the amount of rent that can be charged, as well as other provisions that are designed to protect the rights of tenants. For example, controlled tenancies may have strict rules about how and when landlords can increase the rent, or they may require landlords to provide certain services or amenities to tenants.

Controlled Tenancies, Licenses, Commercial Leases:
What is a License?

A license is a commercial arrangement that grants the person to whom it is granted (licensee) permission from the owner of the land (licensor) to use the land for an agreed purpose and for a particular amount of time but without being granted exclusive possession of the property.

Unlike a lease which grants the lessee possession of the property, a licensee has no interest in the property. A licensee can exclude everyone else from the property except the licensor.

An example of a license may include an event at a stadium or other privately-owned venue which allows the licensee to allow entry and exit of the event’s patrons including making gate collections and even selling food and beverages. Cinema-goers, for the time that they are in the cinema hall, are licensees of the property owner. Another example includes marketing billboards which are placed with a client(s) who are not the proprietor(s) of the land

A contractual license provides express or implied permission to enter or use the property in exchange for some consideration. In Kenya, the vast majority of Radio Frequency Base Stations (cellphone tower masts) are operated on commercial licenses. In our practice, we see an increasing number of owners of property who have sunk boreholes on their property granting limited operator licenses to licensees who then pay a licensing fee to operate a water point on the land and whose water delivery bowsers are granted licenses to draw and dispense water from the licensors land.

Controlled Tenancies, Licenses, Commercial Leases:
What is a Commercial Lease?

A commercial lease in Kenya is a lease agreement that is used to rent out a commercial property, such as an office building or a retail space. Like other lease agreements, a commercial lease in Kenya typically includes terms and conditions that specify the rights and responsibilities of the landlord and the tenant, as well as the rental amount and other important details.

What Terms are Indicated in Commercial Leases?

The terms of a commercial lease in Kenya may vary depending on the specific property and the needs of the landlord and tenant, but some common provisions may include:

• The length of the lease: This is the amount of time that the tenant is agreeing to rent the property for.
• The rental amount: This is the amount of money that the tenant agrees to pay the landlord each month in exchange for using the property.
• The security deposit: This is an amount that the tenant typically pays the landlord at the beginning of the lease. The landlord holds this money in case the tenant causes any damage to the property or fails to pay the rent.
• The terms for renewing the lease: This specifies whether the tenant has the option to renew the lease at the end of the initial lease period and, if so, under what conditions.
• The terms for terminating the lease: This specifies the conditions under which the tenant or landlord can terminate the lease early, such as if the tenant fails to pay the rent or violates some other lease agreement provision.
• The terms for making alterations to the property: This specifies whether the tenant is allowed to make any changes to the property (such as painting or installing new fixtures) and, if so, what conditions must be met.

In Kenya, commercial leases are typically governed by the Law of Contract Act and the Rent Restriction Act, which establish the rights and responsibilities of landlords and tenants and provide a framework for resolving disputes.

Conclusion

While the fundamental purpose of these arrangements is to facilitate commercial relationships between landowners and other parties who may be interested in utilizing them to extract their commercial value, these arrangements differ significantly in their administration and in their derived rights and in the different obligations they create to the parties in the arrangement.

If you intend to secure or offer a controlled tenancy, a lease or even a license over property, then it behoves you to understand the different obligations and rights of each arrangement and to find the arrangement that best suits the economic activity you intend to undertake.

Researching your different options and consulting with a legal expert are both good places to start. Here’s to safe, pragmatic and sound investing!