Navigating Contractual Storms: The Supreme Court on Lease Frustration, Force Majeure, and Unilateral Termination in the Wake of COVID-19

Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology (Petition E001 of 2024) KESC 74 (KLR) Supreme Court of Kenya December 6, 2024 MK IBRAHIM, SC WANJALA, N NDUNGU, I LENAOLA & W OUKO, SCJJ

This article analyzes the Supreme Court of Kenya’s judgment in Kwanza Estates Limited v Jomo Kenyatta University of Agriculture and Technology, a significant ruling addressing the interplay between fixed-term lease agreements, the doctrines of frustration and force majeure in the context of the COVID-19 pandemic, the interpretation of contractual clauses, and the remedies available for unilateral termination where no break clause exists.

Summary of Case Facts

The dispute arose from a six-year lease agreement signed on 1st May 2016, between Kwanza Estates Limited (the Petitioner/Landlord) and Jomo Kenyatta University of Agriculture and Technology (JKUAT) (the Respondent/Tenant) for premises known as Nakuru Municipality Block 9/90. The lease was set to expire on 30th April 2022. Under the lease, JKUAT was required to pay increasing annual rent quarterly in advance, along with a service charge, and late payments incurred a 5% penalty.

On 10th July 2020, JKUAT issued a three-month notice expressing its intention to terminate the lease and vacate the premises. JKUAT cited several reasons for this action, including a change in law regarding student placement by the Kenya Universities and Colleges Central Placement Service (KUCCPS), which led to a significant reduction in self-sponsored students (a key revenue source for the Nakuru CBD campus), reduced government support, and the emergence of the COVID-19 pandemic, which forced the closure of learning institutions. These events, JKUAT contended, rendered the lease frustrated or commercially impossible.

Upon the expiry of the notice period on 10th October 2020, as JKUAT began vacating, Kwanza Estates restrained the removal of JKUAT’s property and issued invoices for rent for the period November 2020 to January 2021. Kwanza Estates subsequently instructed auctioneers to levy distress for rent arrears. JKUAT ultimately vacated on 31st January 2021. Despite vacating, Kwanza Estates instructed auctioneers again in February 2021 to recover rent arrears for the period February 2021 to April 2021.

Litigation History and Key Legal Issues

The case originated in the Environment and Land Court (ELC) at Nakuru. JKUAT sought declarations that the lease was frustrated/commercially impossible and terminated by notice, that the distress actions were unlawful, and permanent injunctions. Kwanza Estates, in defence and counterclaim, argued the lease had no termination clause, the notice was void, JKUAT was obligated to pay rent until April 2022, and sought rent for the remainder of the term plus restoration costs.

The ELC identified three issues: frustration, termination by notice, and reliefs. It found the lease was not frustrated because the change in law existed before the second lease was signed, and economic hardship was not a ground for frustration. It further found the lease had no termination clause, making JKUAT’s notice void. The ELC dismissed JKUAT’s suit and awarded Kwanza Estates rent until April 2022 (Kshs. 71,965,138.70), restoration costs (Kshs. 40,000,000 as per consent), costs, and interest.

Dissatisfied, JKUAT appealed to the Court of Appeal. Kwanza Estates filed a cross-appeal seeking VAT on the awarded rent. The Court of Appeal framed the issues as: break clause, frustration, and inclusion of VAT. The Court of Appeal reversed the ELC on the break clause, finding that the phrase “or sooner determination” in clauses like 5.5, 5.26, 5.27, and 7.10 indicated an intention for early termination. It reasoned a holistic reading suggested an “exit window” upon change of circumstances, and forcing payment for unused premises would be unfair. The Court of Appeal also found the lease was frustrated, concluding that the COVID-19 pandemic was a force majeure event causing undue difficulty and making performance unjust [20, 26(4)]. It noted JKUAT’s awareness of policy changes pre-lease but highlighted the impact of the unforeseen government lockdown. Consequently, the Court of Appeal allowed JKUAT’s appeal, setting aside the ELC’s order for future rent and dismissing Kwanza Estates’ cross-appeal (finding it unmerited due to the frustration finding). It only ordered JKUAT to pay the Kshs. 40,000,000 restoration costs as agreed.

The matter reached the Supreme Court based on certification that the effect of the COVID-19 pandemic on contractual obligations and whether frustration allows for partial discharge were matters of general public importance requiring clarification. The key issues before the Supreme Court crystallized as:

1. Whether JKUAT pleaded force majeure or frustration to be discharged from the agreement [46, 51(i)].
2. Whether the COVID-19 pandemic constituted grounds for discharging JKUAT from its obligations under the lease [46, 51(ii)].
3. Whether Kwanza Estates was entitled to the reliefs sought [47, 51(iii)].

Judgment Analysis by the Supreme Court

The Supreme Court meticulously analyzed the issues, starting with the distinction between force majeure and frustration. The Court noted that these terms, along with “act of God,” are often used interchangeably but are distinct legal concepts. Drawing upon definitions from Black’s Law Dictionary and cases like Pankaj Transport PVT Limited v SDV Transami Kenya Limited, the Court defined:

• Act of God: An overwhelming, unpreventable event exclusively caused by forces of nature, exceptional and irresistible, whose effects could not be prevented.
• Force Majeure: An event or effect that can be neither anticipated nor controlled, including both acts of nature and human actions (riots, strikes, wars). A force majeure clause is a contractual provision allocating risks if performance becomes impossible or impracticable due to such events. It must be explicitly written into the contract.
• Frustration: A common law doctrine implied into contracts where an unforeseen event radically changes the circumstances, making performance impossible or fundamentally different from what was agreed, discharging parties from further performance. It operates by law, not by contractual provision.

Upon examining JKUAT’s pleadings, the Supreme Court found that JKUAT explicitly pleaded frustration, outlining the KUCCPS policy changes, reduced funding, lack of self-sponsored students, and the COVID-19 pandemic as particulars of frustration. The Court noted that force majeure was not pleaded by JKUAT nor contained in the lease agreement. It held that the Court of Appeal erred by introducing the concept of force majeure and concluding that COVID-19 was a force majeure event when it was not pleaded and the contract lacked such a clause.

Turning to whether COVID-19 constituted a ground for frustration in this case, the Supreme Court reiterated the principles of frustration applied in Kenyan courts, citing Kenya Airways Limited v Satwant Singh Flora, Charles Mwirigi Miriti v Thananga Tea Growers Sacco Ltd, and Five Fourty Aviation Limited v Richard Oloka. It affirmed that frustration requires an unforeseen event that fundamentally alters the contract’s nature, rendering performance impossible or radically different, without fault of either party. The Court cited Lord Radcliffe in Davis Contractors Ltd v. Fareham U.D.C. on the “radically different” test.

The Supreme Court took judicial notice of the unprecedented global impact of COVID-19 and government-mandated lockdowns, including the temporary closure of learning institutions in Kenya. However, the Court distinguished between hardship/difficulty and legal impossibility. It observed that JKUAT’s core business purpose (teaching self-sponsored students) was not permanently barred; the lockdown was temporary, and institutions resumed normal learning. Furthermore, JKUAT demonstrated its ability to continue operations by moving to another location in Nakuru City. The Court found that while COVID-19 caused financial hardship, this did not amount to an absolute impossibility of performance in the legal sense required for frustration. Referencing comparative cases from the US, Canada, South Africa, and Ireland, the Court noted that financial hardship alone due to the pandemic has generally not been found to meet the high threshold for frustration or impossibility. The Court concluded that COVID-19 did not constitute a frustrating event in the circumstances of this appeal. This overturns the Court of Appeal’s finding on frustration [16, 20, 26(4)].

Regarding the issue of the break clause and JKUAT’s notice of termination, the Supreme Court disagreed with the Court of Appeal’s interpretation of “or sooner determination”. While the phrase hinted at a possibility of early termination, the Court found that in the absence of a specific termination clause detailing notice requirements, this intention failed to crystallize into a legally operative break clause.

The Court then addressed the consequences of JKUAT’s unilateral termination and vacation of the premises on 31st January 2021. Since the lease was for a fixed term without a break clause and was outside the ambit of the Landlord and Tenant (Shops, Hotel and Catering Establishments) Act (Cap 301), JKUAT’s action constituted a breach of contract. The Court rejected the application of Section 57(4) of the Land Act, Cap 280, which allows for termination of periodic tenancies by notice equivalent to the payment period, finding JKUAT’s reliance on this provision to be an afterthought not used in their termination notice.

Considering the available remedies for breach, the Supreme Court synthesized the position from previous case law. While Kenya Commercial Bank Limited vs. Popatlal Madhavji & Another suggested a tenant without a break clause is obligated to pay rent for the full term, the Court found persuasive value in Chimanlal Meghji Shah & Another vs. Oxford University Press (EA) Limited and Indar Singh Limited vs Star Times Media Company Limited. These cases held that it is unconscionable to force a tenant to occupy premises against their will or demand full rent for the remaining term after they have vacated.

The Court took the position that the remedy for unilateral termination of a fixed-term lease without a break clause is rent due up to the date of vacating plus damages for breach of contract. Applying the principle of restitutio in integrum (restoring the injured party to the position they would have been in) and the duty to mitigate loss (African Highland Produce Limited v John Kisorio), the Court found Kwanza Estates’ claim for rent for the entire remaining term (14 months) excessive. It was Kwanza Estates’ obligation to actively market and find an alternative tenant.

Exercising its powers under Section 21 of the Supreme Court Act, the Court assessed damages. It found three months to be a reasonable timeframe for Kwanza Estates to conduct renovations and re-lease the premises. Therefore, the Court awarded Kwanza Estates rent for three months following JKUAT’s vacation (February to April 2021), calculated based on the annual rent [103, 104, 106(d)]. From this amount, the security deposit of Kshs. 11,385,750, which the Court noted had “fallen through the cracks” in the lower courts, was deducted [101, 102, 103, 106(d)]. The final awarded amount for damages was Kshs. 2,453,699.75 (Kshs. 13,839,449.75 – Kshs. 11,385,750) [103, 104, 106(d)].

Finally, the Court briefly addressed the VAT issue, noting it was not pleaded by Kwanza Estates in the ELC. As the final award was for damages and not rent arrears, the issue of VAT was deemed to fall away.

The Supreme Court partially allowed the appeal, setting aside the Court of Appeal’s decision but declining to reinstate the ELC’s judgment fully [105, 106(a,b)]. It upheld the Kshs. 40,000,000 award for restoration costs and substituted the rest of the monetary award with the calculated damages for three months’ rent minus the security deposit [105, 106(c, d)]. The Court ordered each party to bear its own costs [104, 105, 106(iii)].

Implications of the Decision

The Supreme Court’s judgment carries significant implications for landlords, tenants, and legal practitioners in Kenya:

• Frustration Doctrine Clarified: The ruling reinforces the high bar for successfully invoking the doctrine of frustration in Kenyan law. Economic hardship alone, even if severe and caused by unforeseen events like a pandemic, is generally insufficient to frustrate a contract. The event must render performance legally impossible or radically different, not merely more difficult or expensive.
• COVID-19 and Contracts: The judgment provides a clear stance that the financial consequences of the COVID-19 pandemic, such as reduced income or inability to use premises for the intended purpose (like in-person learning), may not automatically discharge contractual obligations like paying rent. This aligns with many international common law jurisdictions cited by the Court.
• Force Majeure: The Court emphasizes that force majeure is a contractual concept. It must be explicitly included and defined in the agreement for a party to rely on it. Courts will not imply it or apply it if it wasn’t pleaded.
• Interpretation of “Sooner Determination”: The ruling suggests that merely including phrases like “or sooner determination” in a fixed-term lease may not create a valid break clause. A clear and specific termination clause outlining notice periods and conditions is necessary if parties intend to allow for early termination. This highlights the importance of precise drafting in lease agreements.
• Remedies for Unilateral Termination of Fixed-Term Leases: The judgment settles conflicting High Court decisions and provides a definitive position on remedies when a tenant prematurely vacates a fixed-term lease without a break clause. Landlords cannot claim rent for the entire remaining term; the remedy is limited to rent until vacation plus damages for breach.
• Duty to Mitigate: The ruling strongly emphasizes the landlord’s duty to mitigate losses by actively seeking a new tenant after a premature vacation. Damages for the lost rent period will be assessed based on a reasonable time frame required to re-let, not the entire remaining term.
• Security Deposits: The Court underscored the importance of accounting for the security deposit in assessing the final amount owed upon lease termination due to breach, viewing it as a refundable asset offsetting the landlord’s claim [101, 102, 103, 106(d)].
• Pleading Specificity: The case highlights the critical importance of pleading the correct legal basis (frustration vs. force majeure) and all relevant facts and claims (like VAT) at the trial court level. Issues not pleaded at trial may not be entertained on appeal.

For landlords, the decision confirms that fixed-term leases without break clauses are binding, and tenants cannot easily escape obligations due to financial difficulty or general unforeseen events like the pandemic unless the high threshold for frustration is met. However, they must be proactive in mitigating losses if a tenant breaches by vacating. For tenants, the ruling means that prematurely vacating a fixed-term lease without a break clause constitutes a breach. While they cannot be compelled to stay or pay rent for the full term, they will be liable for rent until vacation and damages assessed considering the landlord’s mitigation duty. The decision encourages careful consideration of lease terms, potentially favouring leases with explicit force majeure or break clauses to manage risks associated with unforeseen future events. The ruling also serves as a reminder for both parties to clearly define and address potential disruptive events in their contracts.