Faulty leases hold tenants, landlords in toxic embrace

The outcome of a court case between Africa’s biggest supermarket and its former landlord, The Waterfront Karen Mall, has drawn interest in Kenya’s retail circles.

The mall sued Shoprite, which was an anchor tenant, seeking Sh520 million in lost rent after the retailer terminated a 10-year lease agreement.

The case has exposed the prevalent lack of exit clauses in lease agreements between retailers and mall landlords, which ends up hutring both of them especially when unforeseen events such as the Covid-19 pandemic and businesses falling on bad times happen.

Most lease agreements in Kenya stretch between five and 10 years and have been a source of much debate in the retail industry.  

Retail Trade Association of Kenya Chief Executive Wambui Mbarire said the agreements are drafted by landlords’ lawyers hence are a means to protect their investments.

“The argument is that they have a bank facility that they require to pay and to be able to do that they lock tenants in to ensure they can pay that loan for the next five years,” she told Home & Away.

Exit clauses

Mbarire said this does not make sense because the property owners sometimes lock in retailers who are no longer making money.

“We must create exit clauses that allow for end of leases within the shortest time possible,” she said.

In April, Shoprite announced the closure of its Karen branch owing to reduced footfall from shoppers, a move that saw 104 staff laid off.

According to court documents, the mall said the Sh527 million – presented in dollars – is for lost rent for the remainder of the tenancy, among other expenses.

“The plaintiffs pray for general damages for breach of contract, general damages for loss of expectation of rental income for the remainder of the tenancy, being $4,888,168.57 interest thereon and costs of the suit,” said the court documents.

Naivas Supermarkets Chief Executive Willy Kimani says there was a “cheering squad” for the court case whose ruling was set to be a landmark for the industry.

“I’ll be honest; half the retailers are waiting for the court case between Shoprite and The Waterfront Mall. There’s a cheering squad all backing up because it’s supposed to be one of the defining moments,” he said.

He called for dynamic lease agreements, noting there were cases where tenants had not paid rent for long, but landlords could not kick them out.

“I know of a particular landlord who has a retailer who hasn’t paid him for the last two years, just trading two or four items, a bakery here and there,” he said.

“The landlord wants this retailer out but there is a lease with no exit registered.” 

Kimani was speaking at a recent virtual East Africa Property Investment Summit where he was part of a panel examining the current and future impact of Covid-19 on East Africa’s retail market.

In the court filings, The Waterfront further argued that Shoprite’s conduct caused panic among other tenants who feared suffering loss and damage.

Further the landlord would incur costs in sourcing for another tenant.

In defence, Shoprite Kenya General Manager Andrew Mweemba denied that the retailer was an anchor tenant, saying that Game Stores held “superior space”.

He said the mall still had a strong mix of tenants including banks, telcos, fashion stores and ATMS.

He added that Shoprite had acted reasonably and notified the landlords of its intended action.

The retail sector has emerged as one of the hardest hit in the property market this year owing largely to the Covid-19 pandemic.

Prime rental rates in the first half of this year fell to Sh450 per square foot monthly compared to Sh492 in the same period last year, with occupancy levels averaging 80 per cent, according to Knight Frank.

Shoprite seems to have been unable to crack the Kenyan market. It is set to lay off 115 workers as it shuts its Nyali Branch, Mombasa this month.

The South African retailer has also struggled in other African markets and is considering pulling out of Nigeria - Africa’s most populous country - amid declining sales worsened by the coronavirus pandemic.

Retailers in Kenya are having a hard time paying rent in malls, forcing landlords to kick them out or use crude methods to recover their money.

Foreign retailers are also complaining that dollar-based rents are pushing them out of business.

South African fashion retailer TFG, which has four stores, is set to exit Kenya due to the new demand.

TFG Group Chief Executive Anthony Thunström said over the last six months, the government had increased import duties, in some cases doubling them.

“It’s totally, utterly unenviable to be in Kenya. We’ve given notice, and we’re going to exit Kenya,” he said.

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