Key Factors To Leasing A Commercial Property

Based on the previous blog post we did on the basics of commercial property leasing; we now break down the key factors you should consider as you negotiate the terms of your lease. 

You must conduct some due diligence on the property. The benefit of carrying out due diligence checks is that you secure yourself from foreseeable financial and reputational risks. For instance; you’ll be able to see if the landlord has a legal right to grant you a lease. If you find out he has no legal right to do so, you’ll have saved yourself a trespassing suit or forceful eviction. 

Commercial leases in Kenya are required to be in writing and have fixed term durations of at least 5 years and 3 months. They also do not contain termination clauses. They are structured in this manner to eliminate the risk of creating controlled tenancies. A controlled tenancy is one that restricts the landlord’s ability to increase rent or terminate the lease without prior clearance from the Business Premises Rent Tribunal. Incidentally, while this provision protects a Landlord, it is upon a Tenant to insist on an exit clause if they are not keen on being tied to such a long period. We remain at hand to assist our clients regardless of which side of the Lease they stand.

Due Diligence on Premises and Prospective Landlord

Before you sign off on the lease, here are a few things you need to do:  

Conduct a physical inspection. Visit the premises and confirm its physical features such as its size, location, available parking and other amenities being offered, for example, is there a generator to address power outage. It often happens that landlords may overstate the size of the premises while Tenants will read a smaller size. An independent measurement may be called for.

Do a search of the property by obtaining a copy of the title document. A search is an official record from the Ministry of Lands which shows ownership details of the property. A search also reveals if there are any caveats or encumbrances that exist over the property. A caveat is a legal caution to persons dealing with a property that there may be existing registered interests in the property. Such a caveat would affect the possibility of entering into a long term lease; such as requirement of their consent for a lease to be registered. Indeed, there may be a Head Lessor whose consent is required before a Lease is registered or indeed, the interests of a bank in the registration of a lease.

Due diligence on Landlord – where the landlord is a company, carry out a search at the Companies Registry to confirm the ownership details. If the Landlord is an individual, make enquiries from existing tenants or the caretaker of the premises to confirm the identity of the Landlord and the nature of neighboring tenants. Any other issues would likely arise from this kind of enquiry.

Payments

The lease should state the amount, currency and frequency of the rent payment details. It should also provide for rental reviews or escalations over the duration of the lease. In addition, and often forgotten, is the issue of service charge. A Tenant should be clear on this prior to signing the Lease.

It is common for leases to have clauses on payment of deposit. Deposit is often given as security and a show of the Tenant’s commitment to adhere to the lease obligations.

There are no official guidelines on the amount of deposit that is payable. However, it is usually reflective of the period of time it would take for the landlord to find an alternative tenant e.g. 3-12 months.

Deposit is refundable at the end of the lease term subject to some deductions to cater for any restorative actions that the landlord may undertake on the premises (e.g. painting and repairs). To avoid tying up much needed cash-flows in deposit payments, you may negotiate to use alternative forms of security such as bank or personal guarantees.

As with all legal agreements, the devil is in the detail of your lease agreement. We advise that you seek proper legal advice before making any commitments on the lease. Take time to understand the clauses and where possible request your lawyer to provide a summary of its contents which you could refer to over the life of your lease. If you are a landlord, we also have the expertise to guide you in drafting leases. Reach out to us for any queries/assistance at law@ammlaw.co.ke or 0702045995.