Nairobi is shadow-governed by some of the most powerful real estate conglomerates in the country like Knight Frank, HassConsult, Kenya Homes, Pam Goldings, among others.
The existence of these “mega-landlords,” as well as high expenses across the board, often means the odds are stacked against commercial tenants. For one, many lenders prefer to rent to larger chains with extensive credit histories rather than small business owners.
There’s also the matter of renovation costs: In Nairobi, some commercial spaces can cost between kes 20,000,000 and kes 40,000,000 to upgrade a commercial space to be move-in ready. And then there’s average retail lease length in Nairobi City: about 10 years, compared to half that nationwide, according to statistics. That’s a big commitment for an entrepreneur in a frequently topsy-turvy market.
In Nairobi, there is very little statutory protection [or laws ensuring certain rights] for commercial tenants.
What’s a small business owner in the Big City to do? Fortunately, there are resources available to help you come out ahead on your next lease contract.
There’s a way commercial tenants can negotiate with their landlord when their lease expires and the landlord must act in good faith.
Fear not: No matter which neighbourhood you’ve set up shop in, there are ways you can avoid mistakes:
Watch out for: A lapse in your commercial real estate lease
Keep in mind landlord-tenant issues often arise after a lease has expired and the landlord continues to accept the rent without providing new lease terms. Therefore, the lease is the most important instrument in terms of protecting you for future potential issues that you’ll have with your landlord. Since it spells out how each party will respond.
Watch out for: The tax escalation provision
Most commercial leases have a potentially sneaky section called the tax escalation provision, which stipulates the tenant will pay a percentage of additional rent according to changes in the building’s tax rate. It’s largely determined by a “base year” laid out in the contract.
Let’s say you rent a space for kes 15,000 a square foot, and the contract’s tax escalation provision has the base year of 2019. You might think kes 15,000 a square foot is a great deal and sign right away, but eight years into your lease, you could be paying much more per square foot because of increases in the building’s taxes — a percentage of which you’re already locked into paying.
The solution? Try to have the base year moved forward if possible say, 2020 instead of 2019. And ensure the percentage of the tax increase you’ve agreed to pay is proportionate to the amount of space you’re renting in the building. For example, if it’s a four-story building and you’re renting the entire ground floor, the tax escalation provision should stipulate no more than 25 per cent.
Watch out for: A strict personal guarantee
If you’re the owner of a limited liability company (LLC), renting a commercial space often requires a personal guarantee. That means that even though your LLC is the named renter, you are essentially a “guarantor” for your own company.
In other words, you’re promising to personally take on financial responsibilities for space if the LLC ends up falling short. If you do agree to a personal guarantee, make sure the contract includes a “good guy clause.” It’s an agreement stating that if you’re having trouble paying rent and need to vacate the premises. You can hand over the keys to the landlord with a certain amount of notice to be released from the lease.
Most landlords will give that kind of a ‘good guy clause’. If they don’t, then tenants shouldn’t sign the lease. Most entrepreneurs don’t see themselves failing in six months.
Something else to look out for: Make sure the amount of notice stipulated in the clause is no more than two months (or 60 days). There have been leases under which the tenant has exercised the right to vacate but isn’t released from their personal guarantee until six months later.
Watch out for: Unclear terms for what happens if your building changes ownership
Received information that your building is changing ownership? It’s time to take a close look at your contract. Depending on the terms, it’s possible that the new owner could void your lease once their purchase goes through. There’s a potential for the new owner to take that “escape clause,” void all the leases and then offer to re-issue them with new terms (and higher monthly rents).
You can protect yourself as an entrepreneur by ensuring that if ownership changes, the lease terms do not change. Before you sign a lease, carefully read any provisions about ownership changes for the building. If there aren’t any protections for your current lease terms, alert the landlord of your concerns. After consulting a lawyer, you could even propose your own addendum.
Watch out for: Commercial tenant harassment
Maybe the WIFI stopped working. The air conditioner is broken. Water service is constantly interrupted during normal business hours. Whatever the issue, standard commercial contracts usually attribute responsibility for regular repairs to the landlord. And dictate that they are completed in a timely manner.
If your landlord is making it difficult for your business to operate, there’s a chance they could be attempting to push you out of the space. That likely falls under commercial tenant harassment — it’s similar to breach of contract but with financial penalties attached.
Always Check The Contract
Take a look at your contract and make sure that clauses on timely repairs are included. Alert your landlord that you’re aware of the contract’s requirements, and if you still don’t hear back, it may be time to consult a commercial tenant attorney.
They can reach out to the landlord to let them know they’re in danger of breach of contract. And potentially negotiate new terms for the next lease. You can have your lawyer prepare a “cease and desist” letter for your landlord.
Then if you end up vacating the space because of unworkable conditions, that counts as a “constructive eviction– meaning that since you’ve essentially been denied the use of the space, you are entitled to leave with no obligation to continue paying rent.
One more thing to note: A lawyer will likely never advise you to withhold rent because doing so could strip you of your power in the situation.
Failing to pay rent automatically puts you in violation of your lease, and the idea here is to prove the opposite — that the landlord is the one who’s violating terms. It’s a good idea to speak with an attorney first. They can send an official notice to the landlord, including a deadline by which they must remedy the situation. Plus the actions you’ll take if they fail to deliver.
See Also: Guide To Investing In Commercial Real Estate
