In commercial settings, the terms ‘lease’, ‘license’, and ‘tenancy’ have been interpreted and used interchangeably to mean the same thing. However, each of these terms is different, possess unique features and imposes different rights and obligations on the parties involved. It is important to distinguish the terms to be aware of which agreement to or not to bind yourself into in order to guarantee you full rights and protection in cases of disputes.
Definitions under the law
A lease is defined under Section 2 of the Land Act, 2012 as “a grant, with or without consideration by the proprietor of the land, of the right to exclusive possession of his or her land, and includes the right so granted and the instrument granting it and also includes a sublease but does not include an agreement to lease.” In simple terms, this means that a lessor (owner of the property/landlord) grants permission to a lessee (tenant) to exclusively use a particular property (whether for residential, commercial, agricultural or industrial use) for a specific period at a certain fee (rent). During this period, the tenant has the right to use the property as if it was their own.
A license refers to a relationship where a licensor permits a licensee to use a premise for a period of time and at a certain fee but without being granted exclusive possession over the property. This means that the licensee can use the property to the exclusion of everyone else apart from the licensor else but he/she does not own the property for the particular period.
A tenancy is defined in section 2(1) of the Landlord and Tenant (Shops, Hotels and Catering Establishments) commonly referred to as Cap 301 as “a tenancy agreement created by a lease or underlease, by an agreement for lease or underlease by a tenancy agreement or by operation of law, and includes a sub-tenancy but does not include any relationship between a mortgagor and mortgagee as such.”
A controlled tenancy is defined in section 2(1) of Cap 301 as a shop, hotel or catering establishment that is either not reduced in writing, or if it is in writing, is for a period not exceeding five years, contains a provision for termination, otherwise than for breach of covenant within the five years, or is specified by the Minister (now Cabinet Secretary) to be a controlled tenancy.
The Differences between a Lease, License and Controlled Tenancy Agreement
- A lease vs a license
The main feature that distinguishes a lease from a license is the right to exclusive possession over the property. While a lease grants a tenant exclusive possession, a license grants a tenant mere permission to use the landlord’s property for a period of time. Exclusive possession confers a tenant the right to transfer, assign and even charge the property to third parties so long as it is registered. It follows then, a tenant under a lease enjoys more rights as compared to a tenant under a license agreement.
The preferred instrument of choice for commercial landlords is a license agreement as it gives a landlord the option to terminate the agreement before the expiry of the term and it can be for a period of less than 5 years without it falling under the purview of a controlled tenancy.
- A lease vs a controlled tenancy
A commercial lease in Kenya is required to be in writing, have a fixed term duration exceeding 5 years and should not contain a termination clause. By drafting it in this manner, the agreement falls outside the scope of a controlled tenancy (as defined above). Commercial leases need not be registered to be enforceable between the parties, however, it should be noted that an unregistered lease offers no protection against the rights of third parties (See Mega Garment Limited vs. Mistry Jadva Parbat & Co. (EPZ) Limited (2016) eKLR).
In commercial settings, a lease agreement is said to be pro-landlord while a controlled tenancy is pro-tenant. A controlled tenancy restricts the landlord’s ability to increase rent and terminate the tenancy without the leave (permission) of the Business Premises Rent Tribunal. Termination under a controlled tenancy has been termed as bureaucratic and cumbersome as the process must be in strict compliance with Cap 301.
On the other hand, it is difficult for tenants to terminate a lease before the expiry of the agreed term. Premature terminations give the landlord the right to seek compensation from the tenant on account of a breach of the terms of the lease.
What have Courts held in regards to interpretation?
Whether an agreement constitutes a lease, license, or a tenancy, Courts have ruled that the intention of the parties, the nature and terms of the agreement, the nature of the relationship between the parties and surrounding factors play critical roles in establishing which agreement exists between the parties.
In Hecht vs. Morgan 1957 E.A.741 the court ruled that there must be a clear-cut intention to create a lease on the part of both parties. It further noted that the intention can be inferred from the surrounding circumstances of the agreement. However, in circumstances when it is difficult to ascertain the intention of the parties and where the surrounding circumstances do not point towards the creation of a lease, then courts should be inclined to hold that the agreement between the parties is a license rather than a lease.
In National Social Security Fund v Sokomania Limited & 3 others (2018) eKLR, Judge S. Okong’o held that “…. whether or not an agreement is a lease or a license does not depend on the name the parties give it. However, having regard to the nature and the terms of the contract between the parties…”
In Spannerright Auto Limited v Shell & BP (Malindi) Kenya Limited (2008) eKLR, Judge R.N. Sitati while echoing the words of Lord Denning M.R held that:
“The nature of the relationship between the parties is to be determined on a full examination of the dealings between them in their entirety. It does not depend solely on the interpretation of any agreement between them, nor does it depend on the payment or otherwise of any rent or other consideration. It does not, it would appear, also depend merely on having or not having exclusive possession or as it is sometimes exclusive occupation by the user. It is no longer possible to say that because a person has exclusive possession of the premises for which he pays rent or other consideration he is “ipso facto” a tenant and conversely that if he does not have such exclusive possession or occupation, he is by that reason alone to be regarded as a licensee. That Lord Justice Denning M.R calls “old law” which is now gone in the case of Shell – Mex and B.P. Ltd. –vs- Manchester Garages Limited [1971]1 ALL ER 841”.
Conclusion
In commercial agreements, as a rule of thumb, the devil is in the details of the agreement. Before appending your signature on that commercial agreement, it is advisable to seek proper legal advice for interpretation of the provisions of the agreement and ensure that your interests as a landlord or a tenant are fully protected under the law.
Written by Cynthia Kitolo
Legal Officer & Advocate of the High Court of Kenya
