CHAPTER TWO

CHAPTER TWO: LITERATURE REVIEW2.0 IntroductionThis chapter presents the relevant literature reviewed on management of commercial properties, the various aspects to be considered when analysing a property, commercial lease and its essential provisions. Legal frameworks on relating to rent of commercial properties in Kenya have also been discussed in this chapter.
Management of Commercial Properties
Roddell (2017), defines a commercial property as a property that is not designed or used for residential purposes, or for purpose associated with the primary industries such as agriculture and mining. She further elaborates the three main types of commercial property to be offices (single office buildings and business parks), retail (individual shops, shopping centres, retail warehouses and supermarkets) and industrial (factories, warehouses and distribution centres).

Macey & Baker (1978), defined property management as the application of skill in the caring for a property, its surrounding, and amenities in developing a sound relationship between a landlord and a tenant and between tenants so that the property may give its fullest value to both the landlord and the owner.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Property analysis
This is an important aspect of property management as it familiarizes the property manager with the nature and condition of a specific building and its position relative to similar properties within the neighbourhood. A property manager acquires this information by undertaking a thorough inspection of the subject property and analyze data on similar properties in the neighbourhood to evaluate the subject property in terms of comparables (Kyle et al., 2000).

Lease
In a new property, the manager examines all leases and the terms of each lease discloses the amount and durability of rental income and renewal options of the leases. Loss rates and vacancies provide an insight of the management and performance of the property in the market.

Quantity and quality of space
The property manager determines the total amount of usable space or the number of individual units in the property. The ability of a space to command optimum rents depends on both the desirability of its design and the quality of its fixtures.

Physical condition of the premises
During any given year, there is always a budget for maintenance and operating costs. For a manager to come up with this budget he will be required to undertake a detailed inspection of the building’s exterior, common interior and equipment within the property.

The external inspection of the property will reveal areas with major repairs that have been deferred by the owner, In addition, the improvements might require immediate attention and capital outlay.

Commercial Lease
A commercial lease is a legal document that transfers possession and the use of business or commercial space such as retail store, warehouse or office from one party to another.

Essentially 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.

Essential provisions of a commercial lease
Generally, the valuation and management of leasehold property is made considerably more complicated by the fact that almost every lease of a commercial property contains different clauses with variations in wording. The understanding of these leases often gives rise to disputes which are sometimes only resolved by litigation.

Baum, Sams, Ellis, Hampson, ; Stevens (2007), notes that, “Colam (as long ago as 1981) made a plea for standardisation of the lease terms which are found in commercial leases”. Colam identified 13 pieces of information which need to be included in a lease. These include:
The name of the landlord.

The name of the tenant.

A description of the demised (let) premises.
The term, that is, the length of the lease.

The dates at which the rent is to be reviewed with a provision for the manner in which any dispute is to be settled.

The repairing liability – whether it be wholly upon the landlord, wholly upon the tenant or divided between them.

The decorating liability, which may be split between internal and external decorations.

The insuring liability.

Restrictions upon the user (use) of the building. This may accord with the planning authority’s powers of restriction (for example, where the use is restricted to offices)
The provision regarding alienation, that is sub-letting or assignment of the premises, which normally requires the landlord’s consent with an implied condition that such consent is not to be unreasonably withheld.

The provision for a service charge, which in the case of a multi-occupied office or shopping centre may cover landlord’s services such as cleaning common parts. At the time there was an increasing momentum towards “clear” leases, in which the service charge is designed to cover all possible expenses incurred by the landlord.

The landlord’s covenant promising quiet enjoyment of the premises by the tenant.

Rights (such as access by other users of the property) reserved by the landlord.

It is worth mentioning that despite such efforts to achieve standardization there is still no standard form of lease which is universally adopted in the commercial property sector. Even in an office block where there may be twenty (20) similar units, it is more likely than not that there will be variations in the leases for the units, as each lease will contain variations negotiated by the different solicitors acting for the individual tenants.

Generally, the length of a lease term varies from country to country. The commercial lease period in Kenya is relatively longer than in most other African markets, where leases typically last for a year to a maximum of five years.
For instance, leases in Kenya are typically for five years and three months or beyond with rents paid quarterly in advance with no break option (as this would create a controlled tenancy) and permission to sublet the premises. In Angola, the leases range from one to three years with rents payable monthly to quarterly in advance and a provision of break option exercisable by either party with a notice period of three (3) months. South African leases three to five years with no break option while in Nigeria leases range from two to five years with break options majorly available for only longer leases.

Table STYLEREF 2 s 2. SEQ Table * ARABIC s 2 1: Comparison of Lease Terms among African Countries
Angola Kenya Nigeria South Africa
LEASE TERMS Rents quoted US$/sq. m/month Kshs/sq. ft./month or US$/sq. ft./month US$/sq. m/annum or Naira/ sq. m/annum Rand/sq. m/month
Typical lease lengths 1-3 years 6 years 2-5 years 3-5 years
Frequency of rent payments Monthly to annually in advance Quarterly in advance Quarterly in advance (now the norm, although historically rents were paid 2-3 years in advance) Monthly in advance
Basis of rent reviews None Fixed rental increases, typically 7.5% per annum if rents are paid in Kshs or 5% if paid in US$ Periodic rent reviews based on open market rents Fixed annual escalation, typically 7-9%
LEASE TERMS Break options Can be exercised by either party. Typical notice period is 3 months Break clauses are not common Break clauses are not common, except in longer leases No break options
Ability to assign lease Subletting permissible, with landlord’s consent Subletting not permitted Subletting permissible, with landlord’s consent Subletting permissible, with landlord’s consent
Source: Knight Frank, 2018
Parties to the lease
According to Delport (2001), “a lease is an agreement between one person (the landlord or lessor) and another person (the tenant or lessee) in terms of which the landlord binds himself to give the tenant the temporary use and enjoyment of property, wholly or in part, in return for a payment called rent”.

The parties to a lease are landlord/lessor and the tenant/lessee. In making of a lease, the landlord transfers the possession and use of the property to the tenant. The tenant under the lease is the party to whom possession and use of the property is being transferred. The financial ability of a tenant is an important aspect that is look into and it is crucial that the tenant have the ability to perform all the lease covenants.

According to (Scarret, 1995), the law will infer the following contracts in the absence of any direct provisions on the part of the lessee:
to pay the rent, in arrears unless otherwise provided: rent continues to be payable even if the property is destroyed unless there is express provision to the contrary;
to pay the usual rates and taxes;
to use the premises in a tenant-like manner;
to deliver up possession at the end of the term in the same condition, fair wear and tear expected.
And on the part of the landlord:
to allow quiet enjoyment;
not to derogate from his grant
to give possession;
to pay landlord’s taxes;
in the case of a furnished house, to ensure that it is fit for human habitation at the commencement of tenancy.”
These are nonetheless usually provided in the lease contract. Also, they are not necessarily similar to the above provisions in every case as they may differ from one country to another. For example, in Kenya rates and taxes for sectional properties is payable by the Corporation (the body corporate incorporated in accordance with section 17 of Sectional Properties Act No. 21 of 1987).
Premises
A lease will always describe the premises (actual space or property) to be rented by the tenant. The situation of the property should also be described.

Use
The lease should clearly state the use the tenant intends to make of the premises. The tenant will usually desire a specific use identified in the lease and permission to use the premises for any lawful purpose while the landlord on the other hand will want to specifically define the use allowable to the tenant on the premises (Fields & Fields, 2017).

Term
This is the period for which the lease will run and it should be set out precisely. The term of a lease is an important factor in the leasing process. Any commercial lease signed, is for a specific number of months, and makes the tenant obligated to pay for the space during the whole period the lease is active.

Typical, commercial leases in Kenya is more than five years as a lease term that is five years or less will lead to controlled tenancies.

Possession and commencement of the lease
Usually, possession of the premises usually begins on the day of the commencement of the lease. However, a lease may provide the tenant with the right to take early possession of the premises without the obligation to paying rent (fit out period). In other circumstances, whereby a property is preleased before the time of completion of construction, the lease providing for future possession should clearly state that the lease becomes effective when signed but possession will be delayed until a certain date in the future (Hinkel, 2015).

Rent
This is the sum of money a tenant pays to the landlord for the use and possession of the premises.
Abbey & Richards (2014), notes that as far as the landlord is concerned, this is the rationale for the very existence of the lease. The tenant is allowed the use and enjoyment of the subject property in consideration of the rentals expressed in the lease. The amount to be paid must be state in clear and definite terms. Is it payable in advance and in instalments at intervals (e.g. annually, semi-annually, quarterly or monthly)?
Rent reviews/ rent escalations
The greatest concern to the lessor is the nature and extent if the rent review provision. Rent review clauses allow the lessor to vary the rent specified in the lease so as to increase the income from the subject property. This comes in handy in times of inflation as the landlord of a long lease at a fixed rental is at a severe disadvantage when inflation is running at high levels (Abbey & Richards, 2014).

According to Mwangi (2013), Wellings (1978), noted that a well drawn rent review clause should; clearly define the rent review period; indicate with clarity the formula for ascertaining the rent in the review; state the scope, limitations an assumptions on factors to be considered during the rent assessment, and finally state the duration of the term and stipulate the persons that will qualify to assess the rent for review either a valuer or an arbitrator.

In Kenya, annual escalations on Kenya Shilling denominated leases range from 5% to 7.5% and biennial escalation are between 10% and 12% while for Dollar denominated leases escalations range from 3.5% to 5% annually and from 7.5% to 10% biennially.
Security deposit
This is the sum of money paid by a tenant to the landlord to secure the tenant’s performance of the lease terms. It is intended to protect the landlord from damage to the property by the tenant or to compensate the landlord for lost rent if the tenant vacates before the lease or fails to pay the amount owed under the lease.
For commercial properties in Kenya, the security deposit equivalent to three (3) months rent, service charge and car parking licence fees is paid to the landlord with the payment of the first quarter’s rent before possession of the premises is granted to the tenant.
Alternatively to the security deposit, a landlord may require a third party guarantees the tenant’s perfomance of the lease.
Maintenance/repair and alterations of the premises
The maintenance provision should address the responsibilities of each party for maintaining and/or repairing the premises. In Kenya, the common practice is that the lessor provides maintenance of all structural components and common areas while the lessee is responsible for maintenance of the interior of the premises.

Commercial lessees usually want to make alterations, additions, decorations, or improvements to the leased space over and above the installation of trade fixtures. However, the landlord will always want to ensure that unauthorized alterations do not take place and that authorized alterations and/or improvements that do take place are such that the integrity of the structure is not adversely affected.
Restoration
On termination of a lease agreed upon between the landlord and the tenant, the tenant will be required to redecorate the premises to the same state that they were at the time of taking possession and according to the terms and conditions contained in the lease.

During the term of the lease the lease, the tenant is required to keep the premises and fixtures and fittings thereon and therein in good repair, order and condition.

Subletting and assignment
Subletting is the process whereby a tenant transfers a portion of the lease instead of the entire interest in the lease while an assignment arises when the tenant transfers all of his/her unexpired lease to a third party.

Transferring, assignment, subletting or parting with the possession of the premises or any part being permitted without the consent of the landlord will lead to violation of the covenant thus enabling the lessor to void the sublease/assignment and/or recover damages.

With a sublease, two leases exist. The landlord has rights only against the tenant since the landlord contracts only the tenant and not the subtenant. The tenant remains liable to the landlord under the term of its lease and the subtenant is not liable to the landlord (Fields & Fields, 2017).

Hinkel (2015), states that due to lack of a legal binding relationship between the landlord and the subtenant, the rights of the subtenant are fully dependant upon the performance of the prime lease by the tenant of the prime lease. If the tenant defaults on the prime lease, causing it to terminate, the sublease will also teminate.

Service Charge
Service charge refers to the collective running costs of a shared property or estate that each individual occupier or tenant is obliged to contribute towards. The scope service that are to be undertaken by the landlord and recovered from the tenants are agreed before the lease commences and form part of the lease contractual terms.

Regularly, the tenant’s percentages contribution toward the total service charges are also defined by reference to a fair proportion, a set percentage or formulae for contributions and/or a maximum sum of the property’s service charge total for example in Kenya, it is based on the lettable area and payable quarterly in advance.

Upon receipt of the auditor’s report, the tenant pays any excess in expenditure, and should there be a saving, a credit note is issued on the tenant’s service charge account.

Causes of Controlled Tenancies
Accordfing to the the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, Chapter 301 of Laws of Kenya, a controlled tenancies refers to tenancy of a premises whereby;
the tenancy has not been reduced to writing,
the tenancy has been reduced to writing but the tenancy is for is for a period not exceeding five years,
the tenancy contains provision for termination, otherwise than for breach of covenant, within five years from the commencement thereof.

The Minister responsible for commerce may also by notice in the Gazette, specify, by reference to rent paid or to rateable value entered in a valuation roll under the Valuation for Rating Act, classes of shops, hotels or catering establishments tenancies of which shall be controlled tenancies regardless of the form or period of such tenancies.

The Act further elaborates that any tenancy to which the government, the community or a local authority is a party, whether as landlord or as tenant, is considered a controlled tenancy according to the statute.

Dispute Resolution on Controlled Tenancies
Dispute refers to an argument or disagreement between two or more parties whereas dispute resolution refers to the process of resolving the differences between two or more parties.

In Kenya, disputes between a landlord and a tenant under controlled tenancies are handled by the Business Premises Rent Tribunal. The head office of the Business Premises Rent Tribunal (BPRT) is located in Nairobi with seven (7) regional offices in Mombasa, Embu, Nakuru, Eldoret, Kakamega, Kisumu and Kisii towns.

This tribunal is established under the provisions of section 11 of the Landlord and Tenants (Shops, Hotels and Catering Establishments) Act Chapter 301 of the Laws of Kenya. The Business Premises Rent Tribunal has jurisdiction to hear and determine disputes, in controlled commercial premises, related to the following matters, as per the provisions of section 12 (1) of Chapter 301 of the Laws of Kenya:
determination of a controlled tenancy;
to determine or variation of the rent payable under a controlled tenancy;
apportioning the amount of rent & service charge payable among tenants sharing the occupation of the premises comprised in the controlled tenancy;
making necessary orders to recover rental arrears and mesne profits and also for the recovery of possession of a premises;
making orders to have a building repaired and maintained satisfactorily;
to permit the levy of distress for rent;
to vary or rescind any order made by the Tribunal under the provisions of this Act;
summon any landlord or tenant to disclose any information or evidence which the Tribunal considers relevant regarding rents and terms or conditions of tenancies, and to issue summons for the attendance of witnesses to give evidence or produce documents, or both, before the Tribunal;
award compensation for any loss incurred by a tenant on termination of a controlled tenancy;
to enter and inspect premises comprised in a controlled tenancy in respect of which a reference has been made to the Tribunal;
The process of resolution of disputes under controlled tenancies by the Business Premises Rent Tribunal consist of the existence of a controlled tenancy, arising of dispute, filing of a case, notice of hearing and summon of witnesses, representation, adducing of evidence, ruling and appeal (Ayiecho, 2002). The following is a flow chart summary of the process of resolution of disputes under controlled tenancies by the Business Premises Rent Tribunal by Ayiecho (2002);

Table STYLEREF 2 s 2. SEQ Table * ARABIC s 2 1: Disputes Resolution Process under Controlled Tenancies, by the Business Premises Rent Tribunal
Existence of controlled tenancies
Tenancy has not been reduced to writing,
Tenancy has been reduced to writing but the tenancy is for is for a period not exceeding five years

Notice of hearing by the tribunal
Arising of a dispute
Rent arrears
Rent review
Termination of tenancy
Distress of rent

Hearing of public nature
Opening of the case
Summoning of witnesses
Adducing of evidence
Closing of the case

Filing of a case in a prescribed format

Decision

Non-performance

Performance

Appeal to the High Court

Source: Ayiecho, 2002
Legal Framework Relating To Rent of Commercial Properties in Kenya
The Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, Chapter 301 of Laws of Kenya
This Act came into effect on 1st November, 1965 and its purpose was to apply to certain premises and protect tenants of such premises from eviction and exploitation. It applies to shops, hotels and catering establishments.

The Act applies to premises where tenancy has not been reduced to writing, or where has been reduced to writing but the tenancy is for is for a period not exceeding five years, or the tenancy contains provision for termination, otherwise than for breach of covenant, within five years from the commencement thereof.

The Minister responsible for commerce may also by notice in the Gazette, specify, by reference to rent paid or to rateable value entered in a valuation roll under the Valuation for Rating Act, classes of shops, hotels or catering establishments tenancies of which shall be controlled tenancies regardless of the form or period of such tenancies.

The Act further elaborates that any tenancy to which the government, the community or a local authority is a party, whether as landlord or as tenant, is considered a controlled tenancy according to the statute.

The Landlord and Tenant Bill, 2007
The landlord and tenant bill was drafted in 2007 with the intention of
Simplifying, modernizing and consolidating the laws relating to renting of business and residential premises.

Establishing a framework for the regulation of landlords and tenants so as to promote stability in the rental sector;
Protecting tenants from unlawful rent increases and unlawful evictions;
Balancing the responsibilities of landlords and tenants and
Provide for the adjudication of disputes and other purposes incidental thereto.

Application of this bill was mainly focussed on:
All furnished or unfurnished residential premises other than those excepted, those let on service tenancies, and those that have a fair rent exceeding Kenya Shillings Fifteen Thousand (equivalent to approximately One Hundred and Fifty US dollars at current exchange rate) per month.

Tenancy of a business premise which has not been reduced into writing, or which has been reduced into writing and relates to business premises which have been indicated by the Minister by notice in the Gazette that the statute shall apply. The Minister shall make reference to such premises by either rent paid or rateable value entered in a valuation roll under the Valuation for Rating Act.

Chapter Summary
This chapter has reviewed the existing literature on controlled tenancies that is relevant to the topic of study and within the scope of the research objectives. It has examined the various aspects of management of commercial properties, relevant laws relating to rent of commercial properties in Kenya.

x

Hi!
I'm Dianna!

Would you like to get a custom essay? How about receiving a customized one?

Check it out