To pay or not to pay goodwill: The tough choice for tenants

By EVELYNE MUSAMBI

When starting a new business, an entrepreneur needs to have enough capital for the initial stock.

But this is not the only dilemma that start-up businesses face, especially in major urban centres.

Besides the start-up capital, those who have to rent business premises are in almost all instances required to pay a "goodwill" amount.

In Nairobi, landlords are asking for up to Sh2 million as goodwill from potential tenants for an empty stall.

The new tenants have then to furnish the room to make it ready for business.

The term "goodwill" is used in business to refer to the assumed value of a business and its assets.

Business premises located in strategic places — such as on a busy street or on the ground floor of a building — attract huge goodwill amounts.

Though goodwill is not enshrined in the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act, most landlords will require that it be paid before a tenant is given the keys to the premises.

Most tenants would, however, prefer not to pay the goodwill money.

This is because, contrary to its original meaning and purpose, most landlords ask for goodwill for empty buildings or stalls.

However, in most cases, tenants do not have much choice, because of stiff competition for business space.

James Kimani, a businessman in Nairobi’s central business district (CBD), says he has had to part with money in the form of goodwill to several landlords.

This money, he says, is never refunded once a tenant moves out of the rented premises.

As such, Mr Kimani is among many tenants who have lost their goodwill money to landlords.

“My understanding of goodwill is an amount you pay for an existing business that you can run as your own. We are, however, always being asked by landlords to pay them goodwill for a new stall that has nothing,” said Mr Kimani.

He added that the practice of paying the non-refundable goodwill has existed for a long time.

“Most businesspeople have now devised a way of recovering the goodwill amount when they leave their rented premises. They look for another tenant to whom they rent out the stall and who in turn refunds to them the goodwill they had paid to the landlord. The new tenant then continues paying the monthly rent,” said Mr Kimani.

According to Gichaura Wachira, an advocate who represents tenants and landlords in cases filed at the Business Premises Rent Tribunal (BPRT), goodwill is purely an agreement between the tenant and landlord that the tenant can choose to pay or not pay and opt for a premise that does not require goodwill.

“It is purely a choice and depending on how badly the businessperson needs the premises, one can choose not to pay and opt for (other) premises,” said Mr Wachira.

According to Mr Wachira, the only way to avoid extortion on the issue is to ensure the goodwill agreement stipulates key issues, such as the lease period for which the amount is valid.

“Since the law does not provide for goodwill arbitration, the agreement needs to mention that the amount is for a period stipulated in the lease to ensure the landlord does not kick out the tenant in favour of another one who pays a higher goodwill,” he added.

According to Mary Simiyu, who owns a business near the old OTC bus terminus in Nairobi, the trend has discouraged many young entrepreneurs who are unable to raise the required goodwill amount.

“It has become too expensive to rent a stall and this has contributed to the increase in the number of hawkers who would rather sell their wares along the streets,” said Ms Simiyu.

She added that a body ought to be constituted to regulate the lease terms given by different landlords to those intending to rent commercial spaces.

Traders have now formed associations to rent bigger spaces as groups so as to be able to raise the required goodwill amount.

Several buildings, mainly along Tom Mboya Street and Moi Avenue in Nairobi, have an open space that is subdivided to house different businesses.

Goodwill rates in the CBD range from as low as Sh100,000 to Sh2 million, depending on the location of the business premises and the distance of a particular stall from the entrance.

Along Race Course Road, the goodwill amount can be as low as Sh50,000 or as high as Sh600,000, depending on the landlord.

“Some landlords even increase the monthly rents without notice before the end of an agreed leasing period, especially if they notice an increase in the number of customers visiting your business,” added Ms Simiyu.

The tribunal that arbitrates disputes between tenants and landlords with lease agreements not exceeding five years has been of great help to tenants who face arbitrary rent increases or unlawful evictions.

Mbichi Mboroki, the chairman of the tribunal, said a landlord can only change the terms of an agreement if he or she gets a notice from the tribunal after having demonstrated convincing reasons for wanting to change the terms. The landlord must also comply with the requirements that allow for such changes.

“A landlord can apply to evict tenants if he wants to renovate the premises, but this can only be granted after satisfying certain requirements and having taken into account the agreement made with the tenants,” he added.

Mr Mboroki, who was gazetted as the tribunal chairman in February 2014, said goodwill is not illegal as long as a lease agreement is designed correctly and the tenant is willing to pay.

“The market has distorted the payment of goodwill from its original meaning of (the) amount paid for an existing business when transferring ownership to paying for a new premise.

“It is, however, one’s choice whether to pay goodwill or not, depending on the location (the tenant) is looking for,” said Mr Mboroki.