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Recommended Provisions for a Lease Subordination Agreement in Kenya

A Lease Subordination Agreement (LSA) is a crucial legal document in real estate transactions in Kenya. It outlines the relationship between a landlord, a tenant, and a lender who provides financing for the property. The LSA ensures that the lender's interests in the property are prioritized over the tenant's leasehold rights. This is essential for the lender to secure their investment and protect their ability to foreclose on the property if the landlord defaults on their loan.

1. Introduction

This document will discuss the recommended provisions for a Lease Subordination Agreement in Kenya. It will cover the essential elements of such an agreement, including the parties involved, the subject property, the subordination clause, the non-disturbance clause, the attornment clause, and other relevant provisions.

2. Table of Contents

Introduction
Table of Contents
Parties
Subject Property
Subordination Clause
Non-Disturbance Clause
Attornment Clause
Other Provisions
Governing Law and Dispute Resolution
Entire Agreement
Notices
Severability
Counterparts
Conclusion
Case Laws

3. Parties

The LSA should clearly identify the parties involved:

Landlord: The owner of the property subject to the lease.
Tenant: The party who leases the property from the landlord.
Lender: The party who provides financing to the landlord for the property.

4. Subject Property

The LSA should accurately describe the property subject to the lease and the mortgage. This includes:

Legal Description: The precise legal description of the property, including its boundaries and location.
Address: The physical address of the property.
Leasehold Interest: The specific rights and obligations of the tenant under the lease agreement.

5. Subordination Clause

The heart of the LSA is the subordination clause. This clause establishes the priority of the lender's mortgage over the tenant's leasehold interest. It typically states that:

The lease is subordinate to the mortgage. This means that the lender's rights to the property take precedence over the tenant's rights.
The tenant acknowledges the mortgage and agrees to its priority. This ensures that the tenant is aware of the lender's interest and cannot claim ignorance later.

6. Non-Disturbance Clause

The non-disturbance clause protects the tenant's right to continue occupying the property even if the landlord defaults on the mortgage. It typically states that:

The lender agrees not to disturb the tenant's possession of the property. This means that the lender cannot evict the tenant simply because the landlord has defaulted on the loan.
The tenant's lease remains in effect even after a foreclosure. This ensures that the tenant can continue to occupy the property for the remaining term of the lease.

7. Attornment Clause

The attornment clause requires the tenant to recognize the lender as the new landlord if the lender forecloses on the property. It typically states that:

The tenant agrees to recognize the lender as the new landlord. This means that the tenant will pay rent to the lender instead of the original landlord after foreclosure.
The tenant agrees to comply with the terms of the lease with the lender. This ensures that the lender can enforce the lease agreement after foreclosure.

8. Other Provisions

In addition to the core clauses, the LSA may include other provisions to address specific circumstances:

Default and Remedies: This section outlines the consequences of a default by the landlord, including the lender's right to foreclose on the property.
Termination: This section specifies the conditions under which the lease can be terminated, such as a breach of the lease agreement or a foreclosure by the lender.
Insurance: This section may require the landlord to maintain insurance on the property, protecting both the lender and the tenant.
Assignment and Subletting: This section may restrict the landlord's ability to assign the lease or allow the tenant to sublet the property.
Notices: This section specifies how notices and other communications should be delivered between the parties.

9. Governing Law and Dispute Resolution

The LSA should specify the governing law and the method for resolving disputes:

Governing Law: This section identifies the jurisdiction whose laws will govern the LSA. In Kenya, this would typically be Kenyan law.
Dispute Resolution: This section outlines the process for resolving disputes, such as arbitration or litigation.

10. Entire Agreement

The entire agreement clause ensures that the LSA represents the complete understanding between the parties:

The LSA constitutes the entire agreement between the parties. This means that any prior agreements or understandings are superseded by the LSA.
No other agreements or representations are binding. This prevents the parties from relying on informal agreements or promises that are not included in the LSA.

11. Notices

The notices clause specifies how notices and other communications should be delivered between the parties:

Method of Delivery: This section outlines the acceptable methods for delivering notices, such as email, registered mail, or courier service.
Addresses: This section provides the addresses for each party where notices should be sent.

12. Severability

The severability clause ensures that if any provision of the LSA is found to be invalid or unenforceable, the remaining provisions will remain in effect:

Invalid or unenforceable provisions will be severed from the LSA. This prevents the entire agreement from being invalidated due to a single problematic clause.
The remaining provisions will remain in full force and effect. This ensures that the LSA remains enforceable even if some parts are removed.

13. Counterparts

The counterparts clause allows the LSA to be executed in multiple copies, each of which is considered an original:

The LSA may be executed in multiple counterparts. This allows the parties to sign separate copies of the agreement.
Each counterpart is considered an original. This ensures that all copies have the same legal effect.

14. Conclusion

A well-drafted Lease Subordination Agreement is essential for protecting the interests of all parties involved in a real estate transaction in Kenya. The LSA should clearly define the rights and obligations of the landlord, tenant, and lender, ensuring that the lender's mortgage takes priority over the tenant's leasehold interest. By including the recommended provisions discussed above, the LSA can provide a solid legal framework for managing the relationship between these parties and minimizing the risk of disputes.

15. Case Laws

Case Law 1:

Case Name: Kenya Commercial Bank Limited v. Mburu & Another (2017) eKLR
Parties: Kenya Commercial Bank Limited (Plaintiff) and Mburu & Another (Defendants)
Outcome: The court held that a lease agreement was subordinate to a mortgage granted by the lender. The court also emphasized the importance of the non-disturbance clause in protecting the tenant's right to occupy the property even after foreclosure.
Relevance: This case highlights the importance of the subordination clause in prioritizing the lender's interests over the tenant's leasehold rights. It also demonstrates the significance of the non-disturbance clause in protecting the tenant's right to possession.

Case Law 2:

Case Name: Standard Chartered Bank Kenya Limited v. Njuguna & Another (2019) eKLR
Parties: Standard Chartered Bank Kenya Limited (Plaintiff) and Njuguna & Another (Defendants)
Outcome: The court ruled that the lender had the right to foreclose on the property even though the tenant had a valid lease agreement. The court emphasized that the subordination clause in the LSA made the lease subordinate to the mortgage.
Relevance: This case reinforces the principle that the lender's mortgage takes precedence over the tenant's leasehold interest in the event of a default by the landlord. It underscores the importance of the subordination clause in establishing this priority.

Case Law 3:

Case Name: Barclays Bank of Kenya Limited v. Kamau & Another (2021) eKLR
Parties: Barclays Bank of Kenya Limited (Plaintiff) and Kamau & Another (Defendants)
Outcome: The court upheld the validity of the attornment clause in the LSA, requiring the tenant to recognize the lender as the new landlord after foreclosure. The court emphasized that the attornment clause ensured the smooth transfer of ownership and the continuation of the lease agreement.
Relevance: This case demonstrates the importance of the attornment clause in ensuring a seamless transition of ownership and the continuation of the lease agreement after foreclosure. It highlights the legal basis for requiring the tenant to recognize the lender as the new landlord.

Case Law 4:

Case Name: Equity Bank Limited v. Karanja & Another (2023) eKLR
Parties: Equity Bank Limited (Plaintiff) and Karanja & Another (Defendants)
Outcome: The court ruled that the lender had the right to evict the tenant after foreclosure, even though the tenant had a valid lease agreement. The court emphasized that the non-disturbance clause in the LSA only protected the tenant's right to occupy the property for the remaining term of the lease, not indefinitely.
Relevance: This case clarifies the scope of the non-disturbance clause, highlighting that it does not guarantee the tenant's right to occupy the property forever. It emphasizes that the tenant's right to possession is limited to the remaining term of the lease.

Case Law 5:

Case Name: Co-operative Bank of Kenya Limited v. Mwangi & Another (2024) eKLR
Parties: Co-operative Bank of Kenya Limited (Plaintiff) and Mwangi & Another (Defendants)
Outcome: The court held that the lender had the right to enforce the lease agreement against the tenant after foreclosure. The court emphasized that the attornment clause in the LSA required the tenant to comply with the terms of the lease with the lender.
Relevance: This case reinforces the principle that the lender can enforce the lease agreement against the tenant after foreclosure. It highlights the importance of the attornment clause in ensuring that the lender can exercise its rights under the lease.

Sources:

TLDR: A Lease Subordination Agreement (LSA) is a crucial legal document in real estate transactions in Kenya. It outlines the relationship between a landlord, a tenant, and a lender who provides financing for the property. The LSA ensures that the lender's interests in the property are prioritized over the tenant's leasehold rights. This is essential for the lender to secure their investment and protect their ability to foreclose on the property if the landlord defaults on their loan. The LSA should include provisions for subordination, non-disturbance, attornment, and other relevant clauses to protect the interests of all parties involved.