Real Estate 2019 Comparisons

Last Updated April 30, 2019

Contributed By MMC Africa Law

Law and Practice

Author



MMC Africa Law was established in 1995 and is headquartered in Spring Valley, Nairobi, with a full-service office in the coastal city of Mombasa. The firm is made up of 12 Partners and over 30 lawyers with expertise in a wide variety of legal matters. As well as being a member of ALFA International, a global network of independent law firms, it has a close association with the leading global law firm of Orrick, Herrington & Sutcliff LLP. MMC Africa Law’s dedicated real estate team comprises three partners and 12 lawyers who pride themselves on their extensive experience handling sophisticated and complex transactions such as those relating to mixed-use developments, an emerging market in real estate. The team also offers specialised services in urban regeneration projects, construction law, REITs, hospitality and hotels, residential developments, commercial and farmland leases, land use and planning, environmental compliance, contractual agreements, conveyancing and conducting due diligence on property.

As a consequence of having been colonised by Britain, Kenya is a common law jurisdiction.

The main laws governing the real estate sector in Kenya are as follows:

  • the Constitution of Kenya, 2010 (CoK), the fifth chapter of which provides for the categories of land, the principles of land policy, landholding by non-citizens, regulation of land use and establishment of the National Land Commission (NLC);
  • the Land Act, 2012 (LA), which consolidates all the different land laws in Kenya and provides for sustainable administration and management of land and land-based resources;
  • the Land Registration Act, 2012 (LRA), which is meant to revise, consolidate and rationalise the registration of titles to land, giving effect to the principles and objects of devolved government in land registration;
  • the National Land Commission Act, 2012 (NLC), which provides for the functions, powers and internal procedures of the NLC;
  • the Land Control Act (LCA), which establishes the Land Control Board (LCB) to regulate transactions affecting agricultural land;
  • the Stamp Duty Act (SDA), which contains general provisions on the stamping of documents, the penalties, exemptions and the rates applicable;
  • the Law of Contract Act (LCA), which requires contracts relating to a disposition of an interest in land to be in writing;
  • the Landlord and Tenant (Hotels, Shops and Catering Establishments) Act (LTA), which provides for protection of controlled tenants;
  • the Sectional Properties Act (SPA), which provides for the division of buildings into units, ownership of common property of buildings and for the use and management of units and common property;
  • the Distress for Rent Act, which provides for procedures for levying distress for rent in lease transactions;
  • the National Construction Authority Act, 2011 (the 'NCA Act'), which establishes the National Construction Authority (NCA), its powers and functions;
  • the Environment and Land Court Act, 2011 (the 'ELC Act'), which establishes the Environment and Land Court (ELC), its powers and functions;
  • the Environmental Management and Co-ordination Act, 1999 (EMCA), which establishes the National Environment Management Authority (NEMA); and
  • the Physical Planning Act (Cap 286) (PPA,) which provides the procedures for the preparation and implementation of physical development plans.

The main market trends in the real estate sector in Kenya have been as follows:

  • The Government of Kenya is working towards providing affordable housing for its citizens. This has been necessitated by the housing deficit that has been brought about as a result of the mushrooming populations in urban areas due to rural-to-urban migration. In order to achieve this, the Government has proposed the establishment of a housing fund into which employees will be make mandatory monthly contributions. The affordable housing framework requires a developer to build houses priced at a maximum of KES3 million (USD30,000), with the Government guaranteeing offtake in three years.
  • There has been an emergence of master-planned communities in Kenya through the creation of alternative cities – mixed-use developments such as Tatu City, Infinity and Tilisi that have arisen as a result of development in other cities. These alternative cities are built with a focus on the principles 'live, work and play'; they include industrial, commercial, retail and residential development as well as schools, hospitals and recreational facilities.
  • Devolution, which was introduced in 2010, has also changed the real estate sector significantly. This is because unlike under the previous regime in which Kenya only had a centralised government, leading to concentrated real estate development in Nairobi, Mombasa, Kisumu and a few other large towns, real estate developers now have a choice of 47 alternatives (ie, the county government headquarters) in which to venture.
  • In order to reduce operating costs and provide a safe and healthy environment for workers, developers have been employing green building technology. This has proved to increase employee productivity. Green building entails the creation of structures that have low environmental impact throughout their life cycle, encompassing their design, construction, operation, maintenance, renovation and demolition.

The most significant deals in real estate in Kenya have been Tatu City, Tilisi Development and Konza City.

Digitisation of Land Transactions

Land transactions, from physical planning and survey to land registry transactions, are carried out manually in Kenya. The Ministry of Lands and Physical Planning appointed a taskforce in August 2018 to prepare guidelines for their digitisation. The purpose of this initiative is to ensure efficient and effective service delivery that will lead to enhanced access to information, increased customer confidence, reduced business timelines and enhanced revenue collection.

The author of this chapter (Esther Omulele) is a member of the taskforce on digitisation of land transactions, which has completed its report on the proposed implementation of the digitisation process. The recommendations of the report include amendment of various laws touching on land transactions to allow for digital processes. The success of this programme will require the co-operation of the Ministry of ICT for purposes of creating the necessary digital platform at a national level, as well as the Treasury for purposes of integrating suitable payment solutions relating to capital gains tax, stamp duty, land rent and rates and registration fees.

Land Dispute Resolution Through Alternative Dispute Resolution Mechanisms

The CoK encourages the use of alternative dispute resolution mechanisms. These are advantageous in that they are less costly and take less time. Land disputes are mainly handled by the ELC. Our proposal in this case is for an amendment in the statute establishing that the ELC provide a limit on the matters that are filed in this court. This will reduce backlog, leading to quick resolution of land cases.

The two main property rights that can be acquired in Kenya are freehold and leasehold interests.

A person has a freehold interest when they are the outright owner of land or property for an unlimited period. Leasehold interest, by contrast, is a temporary right to occupy land or property subject to the payment of a fee to the grantor.

The main laws that deal with transfer of property in Kenya are the LA and the LRA. The LA is the substantive law on land transactions, while the LRA contains procedural provisions on transfer of title.

The SPA deals with transfer of sectional title in Kenya.

The process of acquisition of property begins with the purchaser’s advocate conducting a search on the property.

The vendor’s advocate prepares the agreement for sale for execution by the parties upon approval by the purchaser’s advocates.

The vendor then embarks on preparation of the completion documents. In the meantime, the purchaser’s advocate prepares the transfer document for execution by the parties upon approval by the vendor’s advocates.

The transfer is then filed at the Lands Offices for valuation purposes. The purchaser pays stamp duty once valuation is finalised.

Once stamped, the transfer is filed for registration together with the completion documents. Upon registration, the purchaser is issued with a new title.

There are no mandatory requirements for purchasers to buy real estate title insurance. As such, title insurance is not common. However, financiers would require that insurance be obtained in the case of a financed purchase.

A certificate of title issued by a registrar upon registration is taken as prima facie evidence that the person named as proprietor is the absolute and indefeasible owner subject to any registered encumbrances, and the title shall not be subject to challenge except on the grounds of fraud or misrepresentation to which the person is proved to be a party or where a certificate of title has been acquired illegally, unprocedurally or through a corrupt scheme.

The three ways of investing title are searches, pre-contract inquiries and requisitions.

Searches are of two types:

  • official searches made by an official of the relevant lands registry at the behest of a party upon payment of the requisite fees, where the registry guarantees the accuracy of the results; and
  • personal searches made by a member of the public inspecting the relevant register, parcel or deed file availed by the registry.

Pre-contract inquiries are preliminary inquiries relating more to the physical condition and location of the property, as well as to matters not covered by the searches.

Requisitions take the form of forthright questions arising after a perusal and assessment of the title document.

Some of the typical representations and warranties include warranties to the effect that:

  • the vendor is the legal and beneficial owner of the property, with legal capacity to dispose of it;
  • the vendor is not engaged in nor threatened by any litigation or any adverse claim relating to the property;
  • there is no dispute regarding ownership, boundary, easements, rights of way or any other such matters;
  • the vendor has not received any notice from government or any third party which is yet to be complied with; and
  • the property is not subject to any overriding interest in favour of a third party.

Representations and warranties are not statutorily prescribed but are freely negotiable by the parties.

A misrepresentation by the seller will typically entitle the buyer to claim damages and termination of the transaction where the misrepresentation goes to the root of the transaction.

The most important areas of law for an investor to consider when purchasing real estate in Kenya are:

  • land laws as discussed in 1.1 Main Sources of Law, above;
  • planning laws that deal with the procedures to be complied with before developing real estate in Kenya (these include the PPA, the County Government Act and the Urban Areas and Cities Act);
  • environmental laws, above all the Environmental Management and Coordination Act (EMCA) and the legislation subsidiary thereto (the EMCA establishes the National Environmental Management Authority (NEMA), which exercises general supervision and co-ordination of all matters relating to the environment); and
  • construction laws which address the approvals that are required to be obtained before a development can be declared fit for habitation, including the NCA and the Building Code.

A buyer of real property becomes strictly liable for any contamination of the property that pre-dated the sale, even if it was caused by the seller. 

To avert this liability, it is important for purchasers of real estate to conduct environmental due diligence before purchasing real estate.

Zoning is a system of land use regulation in various urban areas and cities which designates permitted uses of land based on mapped zones.

The three main zoning classifications are residential, commercial and industrial.

Due diligence will basically involve review of the relevant county zoning bylaw, including communication between the seller and the relevant county regarding the current degree of compliance with zoning laws.

Special conditions of the title would also indicate the permitted use of the property. It will therefore be important to conduct a search on the title to confirm the permitted use.

Development agreements between public authorities and developers are not provided for in the statutes.

Article 40(3) of the CoK allows the state to compulsorily acquire property where the property is required for a public purpose or interest. Such acquisition should be followed by prompt compensation of the person affected.

Section 107 of the LA provides the procedure for compulsory acquisition of land by the government as follows:

  • the respective cabinet secretary submits a request for acquisition of land to the NLC to acquire land on its behalf;
  • the NLC may reject a request of an acquiring authority if it establishes that the request does not meet the prescribed requirements;
  • in the event that the NLC has not undertaken the acquisition within 30 days, it is required to give the acquiring authority the reasons for the delay and the conditions that must be met;
  • upon approval of a request, the NLC publishes a notice to that effect in the Kenya Gazette, delivers a copy of the notice to the registrar of lands and every person who appears to the NLC to be interested in the land;
  • upon service of the notice, the registrar makes an entry in the register;
  • just compensation is paid promptly and in full to all persons whose interests in the land have been determined; and
  • the acquiring body is required to deposit with the NLC the compensation funds, in addition to survey fees, registration fees and any other costs before the acquisition is undertaken.

Real estate sale and purchase transactions are by law subject to taxation. The applicable taxes are stamp duty (payable by the purchaser) and capital gains tax (payable by the seller).

Stamp duty is payable at the rate of 2% of the value of the property for agricultural land and 4% for properties in urban areas.

The following transfers of property are exempt from payment of stamp duty:

  • to a family owned company;
  • between associated companies;
  • between spouses;
  • in favour of any body of persons established for charitable purposes; and
  • by transmission.

Capital gains tax is comprehensively discussed under 7 Tax, below.

Registration costs are not prescribed in statute and vary from one registry to another. They are payable by the purchaser.

Stamp duty is chargeable at the rate of 1% if a property is registered as a company and transfer is by way of shares rather than title.

Gains made on the transfer of shares of private companies within Kenya are subject to capital gains tax and incidental costs are allowable to reduce the tax due.

The CoK restricts ownership of land by non-citizens to leasehold of not more than 99 years. It further provides that if a provision purports to confer on a non-citizen an interest in land greater than 99 years, this will be regarded as conferring a 99-year leasehold interest and no more. A corporate body is only regarded as a citizen if it is wholly owned by Kenyan citizens.

Under the LCA, the LCB is not permitted to approve applications for consent with respect to transactions involving agricultural land where the beneficiary is a foreigner.

Real estate lending requires that the borrower issues collateral for the title to be charged to the lending institutions. Commercial real estate could also be funded through REITs and, in the case of government-owned real estate, through public private partnerships (PPP).

These financing options are also possible for other categories of real estate.

A borrower acquiring or developing real estate will provide a legal charge over immovable property in favour of the lender.

There are no restrictions on granting security over real estate to foreign lenders. Similarly, there are no restrictions on repayments being made to a foreign lender under a security document.

Under the Foreign Investment Risk Review Modernization Act (FIRRMA), real estate transactions are subject to oversight by the Committee on Foreign Investment in the United States (CFIUS) if they relate to the purchase or lease by a foreign person of public or private real estate that is located in the US and is either located within an air or maritime port, or is in close proximity to a government or military installation.

FIRRMA empowers the CFIUS to prescribe regulations that define the term ‘foreign person’ and specify the criteria to limit the application of such clauses to investments made by certain categories of foreign persons, taking into consideration how a foreign person is connected to a foreign government and whether the connection may affect the national security of the US.

Kenyans seeking to invest in the US would have to fulfil the criteria to be developed by the CFIUS.

Stamp duty is payable at the rate of 0.1% of the amount being advanced for registrable securities. For unregistrable securities, the stamp duty payable is nominal.

Legal fees are payable to advocates involved, as prescribed in the advocates’ remuneration order. Registration costs are also payable to the registry.

It is necessary for a company to demonstrate commercial benefit before issuing its real estate asset as security for a loan to a third-party company, even if the third-party company is a related company. Where commercial benefit does not exist, the companies are required to enter into a commercial benefit agreement for payment of an agreed fee to the company providing the asset.

Financial assistance relating to the acquisition of real estate assets is not prohibited provided that commercial benefit can be demonstrated.

However, financial assistance in relation to the acquisition of shares in a private company is permitted. Public companies, on the other hand, are prohibited from giving financial assistance for the acquisition of their own shares except where the principal purpose of the financial assistance is not to facilitate the acquisition, or the giving of the financial assistance for that purpose is only incidental to achieving some larger purpose of the company and is given in good faith.

In relation to share acquisitions, if a person is acquiring or proposing to acquire shares in a private company, a public company that is a subsidiary of that company shall not give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place. Also, if a person is acquiring or proposing to acquire shares in a public company, neither the company nor any subsidiary of it may give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place.

Where there is a valid security and the borrower defaults in loan repayment, the lender can exercise the statutory power of sale.

Before exercising this power, the lender is required to serve the borrower with a one-month notice stating the nature of the default and what is required to be done by the borrower in order to remedy the default. This is followed by a 40-day notice of sale.

Before exercising the right of sale the lender is required to conduct a valuation of the charged property.

Once appointed, the auctioneer is required to serve the borrower with a 45-day notice within which the borrower may redeem the property by payment of the outstanding amount.

Unless otherwise provided in the charge, charges rank in the order in which they are registered.

The rule on priority of security is that the earliest security to have been registered takes precedence. Where it is necessary that the existing secured debt be subordinated to newly created debt, this may be achieved by the registration of a deed of variation in relation to the existing security coupled with an inter-lender agreement to record that understanding.

A lender holding or enforcing security over real estate has no liability if it did not cause environmental pollution, since the creation of security (such as registration of charge) does not transfer interest in the property from the owner to the lender.

Insolvency does not affect the security interests of a secured creditor. Section 590 of the Insolvency Act provides protection to secured creditors by expressly providing that an administrator should not do anything that affects the right of a secured creditor of the company to enforce the creditor’s security.

The key consequences of the expiry of LIBOR in 2021 will be as follows:

  • International Swaps and Derivatives Association (ISDA) master agreements between counterparties will have to be amended, since LIBOR is applicable to futures and derivatives (the ISDA master agreement is a standard document that is regularly used to govern over-the-counter derivatives transactions);
  • business debts tied to LIBOR such as mortgages and home equity lines of credit will have to be amended unless a back-interest rate is referenced in the original documentation;
  • mortgage-backed securities, loans and floating rate bonds tied to LIBOR will have to be addressed by agreement between the parties; and
  • parties involved will need to come to a consensus that the compensating spread between LIBOR and the new rate is fair.

In order to manage the risk associated with expiration of LIBOR in the US, the Federal Reserve has tasked the Alternative Reference Rate Committee (ARRC) to be responsible for the transition from LIBOR to a new benchmark rate called the Broad Treasury Financing Rate (BTFR). The BTFR rate contains a broad set of US treasury market-based financing transactions.

The BTFR rate will run in parallel with LIBOR for several years in order to help determine a fair compensating credit spread between LIBOR and BTFR for those financial assets that will be affected.

Except for external debt most borrowing in Kenya is however governed by the Central Bank Rate that is published by the Central Bank of Kenya.

Planning in Kenya is undertaken by both the national and the county governments. The national government is responsible for formulation of the laws while the implementation of the laws is undertaken by the counties.

Each county has a legislative framework which is based on the national laws that impose planning and zoning controls. The county planning laws apply to all sub-counties within a county.

Part XI of the County Governments Act requires county planning frameworks to integrate economic, physical, social, environmental, and spatial planning.

The PPA is the main statute dealing with physical development in Kenya, and vests the functions of Physical Planning in the Office of the Director of Physical Planning.

The PPA establishes physical planning liaison committees whose functions are to act as a mechanism for appealing decisions of the Director of Physical Planning.

Under the PPA, a number of regulations have been enacted to deal with various aspects of physical development. These are the Physical Planning:

  • (Building and Development) (Control) Rules, 1998;
  • (Development Plans) Regulations, 1998;
  • (Application for Development Permission) Regulations, 1998;
  • Order of 1998;
  • (Subdivision) Regulations, 1998; and
  • (Appeals to the Physical Planning Liaison Committee) Regulations, 1998.

There is currently a Physical Planning Bill that seeks to amend the PPA. This Bill seeks to provide separation of powers between the national and the county governments. The Bill provides that policy and strategy formulation including the preparation and approval of the National Physical Development Plan are functions of national government while the power to consider and give development approval is vested in the county governments.

The NCA Act establishes the NCA which is mandated with overseeing and co-ordinating the development of the construction industry in Kenya. Every construction project is required to be registered with NCA prior to commencement of a project.

County governments are empowered to regulate the use and development of land in the interests of proper and orderly development. The applicable legislation is the PPA and the county bylaws.

Section 30 of the PPA makes it an offence to carry out development within a county without a development permission granted by the county government.

Section 31 of the PPA provides that any person requiring a development permission has to make an application to the relevant county accompanied by such plans and particulars as are necessary to indicate the purposes of the development.

The county when considering a development application submitted to it may consult with various officers including but not limited to the Director of Survey, NLC and the Chief Engineer (Roads).

The county may then either grant the applicant a development permission with or without conditions or refuse to grant the permission stating the grounds of refusal.

Third parties will only have an opportunity to object during public participation that is required before an Environment Impact Assessment licence can be issued.

Any person who is aggrieved by the decision of the county may appeal against the decision to the relevant liaison committee.

Any person aggrieved by a decision of the liaison committee may appeal to the National Liaison Committee.

An appeal against a decision of the National Liaison Committee may be made to the High Court in accordance with the High Court rules of procedure.

Large development projects will require the developer to enter into agreements with government agencies or suppliers for the provision of certain services. These include agreements with the county governments for provision of sewerage services, with the Kenya Power and Lighting Company for provision of electricity and with the road authorities for the construction of access roads to the development.

The approval for development, once granted, will contain certain conditions to be adhered to. When the county discovers that a development has been or is being carried out without the required permission or that any of the conditions of a permission have not been complied with, the county may serve an enforcement notice on the developer.

Unless an appeal has been lodged over the enforcement notice, the enforcement notice shall take effect after the expiration of the notice period.

If a person is aggrieved by the notice then he or she may, within the notice period, appeal to the relevant liaison committee.

Any person who is aggrieved by a decision of the liaison committee may appeal against its decision to the National Liaison Committee.

An appeal against a decision of the National Liaison Committee can be made to the High Court.

The main investment structures for real estate include limited liability companies (LLCs), limited liability partnerships (LLPs) and real estate investment trusts (REITs).

An LLC is a company limited by shares with legal personality to own property distinct from its owners, the shareholders. This could be a private or public LLC organised in accordance with the provisions of the Companies Act.

On being registered, an LLP becomes a body corporate with perpetual succession with legal personality separate from that of its partners.

REITs are real estate companies or corporations which own, develop or manage different types of properties. RElTs are investment instruments that source funds to build or acquire real estate assets which they sell or rent to generate income.

Income REITs (I-REITS) are where investors pool their resources into a trust with the aim of investing in income-generating real estate such as residential, commercial and any other profitable real estate segment. Development REITs (D-REITs) involve pooling assets together procuring qualified land for improvement and development ventures which may incorporate residential and other commercial projects.

There is only one I-REIT that is listed on the Nairobi Securities Exchange. This is because the REIT legislation is recent and is yet to be understood by investors in this market.

For a long time, LLCs have been the preferred investment vehicles. However, with the enactment of the LLP Act, LLPs are gaining popularity for the following reasons:

  • Membership – an LLP must have at least two partners and one manager. The partners may be natural persons or bodies corporate. However, the manager must be a natural person.
  • Body Corporate – an LLP is a separate legal entity from its partners. In this respect, it is similar to a company and different from a typical partnership.
  • Liability – partners of an LLP are not liable for the firm’s debts and obligations, nor are they liable for each other’s debts and obligations. This is not the case with general partnerships.
  • Perpetual Succession – LLPs enjoy perpetual succession in that the death or exit of any one or more partners does not affect the existence of the LLP.
  • Flexibility – LLPs offer participants flexibility in business ownership. Partners have the authority to decide how they will individually contribute to business operations. Managerial duties can be divided equally or separated based on the experience and qualifications of individual partners.

Private LLC

The minimum number of members is one and the maximum 50. A private LLC should have at least one director.

Public LLC

The minimum number of members is one, with no maximum. A public LLC must have at least two directors, of which one must be a natural person.

Memoranda and articles of association are required before a company can be registered.

LLP

Section 26 of the LLP Act provides that a limited liability partnership is required to have at least two partners. Section 27 provides that it must have at least one manager who is resident in Kenya. It is not required for an LLP to create memoranda or articles of association. However, partners are required to execute an LLP Agreement to set out the agreement between the members.

REITs

REITs in Kenya are structured as trusts rather than companies. The properties are held in the name of a corporate trustee who is the custodian of the REIT assets but managed by a corporate REIT manager. The primary sponsor of REITs is usually allowed majority ownership of up to 75%. Other investors’ stake should be a minimum of 25%.

There are no minimum capital requirements for private limited liability companies or limited liability partnerships.

Public limited companies are required to have an authorised minimum capital of KES6,750,000.

The minimum value of starting assets of an I-REIT should not be less than KES300 million. For D-REITs, it is KES100 million.

Limited Liability Company

A public LLC is required to have a company secretary; a private LLC will be required to have a company secretary if it has a share capital over of over KES5 million.

An LLC is required to hold an annual general meeting within six months of the day following its accounting reference date each year, and thereafter within three months of the end of its financial period.

A public LLC is required to have a minimum of four board meetings annually.

LLCs listed on the Nairobi Securities Exchange are required to comply with the code of corporate governance for listed companies.

Private LLCs are expected as a matter of best practice to comply with the code of conduct for private organisations.

If the company has share capital, it must file an annual return like any other limited liability company. If it has no share capital, it must file an annual return stating the address of the registered office.

If the register of members is not kept at the registered office, the address of the place where it is kept must be stated.

The particulars of the directors and the secretary are required to be kept in the register of directors and secretaries. Particulars of the total amount of the company’s indebtedness in respect of all charges are required to be registered.

Limited Liability Partnership

An LLP must:

  • have a manager;
  • file a solvency report annually;
  • keep proper accounting records;
  • have a registered office in Kenya; and
  • all documents issued by the LLP must bear the name and registration number of the partnership and a statement that it is an LLP.

REITs

Under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 a REIT must have:

  • a trustee who is licensed by the CMA (this trustee must be a financial institution);
  • a REIT manager appointed by the trustee with the approval of the CMA;
  • a structural engineer appointed by the trustee in consultation with the manager.

A REIT is required to keep proper books, records and accounts in respect of the fund and scheme in accordance with the law.

The manager is required to prepare, present to the trustee semi-annual and annual reports for the REIT and thereafter submit the reports to the CMA.

The trustee is required:

  • to appoint an auditor to audit the accounts of the REIT at least annually;
  • to notify the CMA within seven days of any changes in its structure;
  • to appoint a valuer for purpose of valuation of the assets of the REIT.

Whereas the cost of filing the secretarial and tax returns is nominal, the professional fees payable by the entity will depend on the accountancy/audit or legal firm chosen by the entity.

The two ways by which real estate can be occupied for a short term are by way of a lease and a licence. A lease entitles the lessee to exclusive use and quiet enjoyment of the property, while a licence is permission to use the premises. A licence does not grant exclusive use of premises.

The various types of leases under the LA are:

  • Commercial leases in respect of any commercial premises including offices, shops and hotel establishments. It is recommended that commercial leases be put into writing and that the tenure be not less than five years. Commercial leases that do not meet this threshold are considered to be controlled tenancies, the effect of which is that any variation of the terms of the lease would require the consent of the tenant and if consent is not granted, the landlord would have to obtain a court order to effect such variation.
  • Periodic leases, the term of which is not specified and regarding which there is no provision for giving notice to terminate. The term of such leases is deemed to be the interval at which rent is paid. Periodic leases could arise where the lessee remains in possession of premises with the consent of the lessor after the term of a written lease has expired.
  • Short-term leases are made for a term of two years or less, without an option for renewal. Often, these are residential leases.
  • Farm leases are entered into in respect of agricultural land. Such leases require the consent of the relevant Land Control Board.
  • Leases terminating on the occurrence of a future event.
  • Future leases which are to commence at a later date.

Rents and terms of leases are freely negotiable. There are, however, terms that are implied in the lease as provided in the LA. These include:

  • quiet enjoyment of the lease by the lessee subject to compliance with the lease terms;
  • non-derogation from the grant by the lessor;
  • repair of the roof, all external and main walls and main drains, and the common parts and installations by the lessor;
  • the lessor’s duty to ensure that the premises are fit for human habitation;
  • the lessor’s duty to suspend payment of rent if the premises are destroyed by force majeure events;
  • payment of rates and taxes by the lessor;
  • the lessee’s obligation to pay rent; and
  • the lessee’s obligation to keep the property in a reasonable state of repair.

The length of a lease term is not regulated and parties are free to negotiate it. Typically, landlords would want commercial leases to be for not less than five years to avoid controlled tenancies.

Section 66 (1e) of the LA requires the tenant to keep all buildings comprised in the lease in a reasonable state of repair.

Frequency of rent payments is not statutorily regulated. Typically, rent is payable either monthly or quarterly.

Some leases have rent escalation clauses, hence there may be variation in the rent payable.

It is common for rent to escalate every two years.

Rent escalation is based on either a percentage increase provided for in the lease, or the market rent payable at the time of the increase. Where rent increase is to be calculated based on market rent, then the mechanism of determination of such rent, including the method of appointing a valuer, should be provided for in the lease.

VAT is payable on rent at a rate of 16%.

At the start of the lease, the tenant pays the following:

  • security deposit on rent (in most instances, the security deposit payable is equivalent to three months’ rent);
  • service charge deposit to cater for maintenance and services relating to the common areas, where applicable;
  • stamp duty on the lease at a rate of 2% of the average annual rent, as well as nominal registration fees;
  • where the underlying title is leasehold, the proprietor of the property let is required to pay land rent to the relevant authority and to obtain a land rent clearance certificate; and
  • legal fees are also payable to the advocate who prepares the lease.

Maintenance and repair of areas used by several tenants are catered for by the tenants through apportioned service charge contributions.

Meters are assigned to the tenants for the leased premises and the tenants are responsible for paying the bills.

There will also be a meter for the common areas, the bills relating to which are paid for by all the tenants though service charge contributions.

Furniture and fittings owned by the tenant are insured by the tenant. The landlord insures the real estate structure.

Restrictions can be imposed by landlords on how tenants use real estate, since a lease sets out the tenant’s covenants. Some covenants require a tenant to obtain the landlord’s consent before carrying out certain activities. An example would be alterations to the premises and assignment or subletting.

The LA also contains activities for which the tenant will require consent of the landlord. These include transferring or assigning the lease, subletting, parting with possession of the leased premises, change of use, improvement of the premises and charging.

Section 67 (2e) of the LA disallows the tenant from altering or improving any building, beyond what is permitted in the lease, without the consent of the landlord.

A lease would ordinarily provide for the requirements and procedure for obtaining the landlord’s consent including the submission of drawings.

The LA applies to all leases whether residential, industrial, office, retail or hotels.

Leases for commercial premises are deemed to be controlled tenancies under the LTA.

A controlled tenancy is a tenancy of a shop, hotel or catering establishment which has not been established in writing, or has been established in writing but is for a period not exceeding five years or contains provision for termination otherwise than for breach within five years of commencement.

A controlled tenancy cannot be terminated or its terms varied without the consent of the tenant. The landlord can only vary the terms of the tenancy by an order of the tribunal established under the LTA where the tenant contests the variation.

The Rent Restriction Act contains provisions for restricting the increase of rent, the right to possession and the exaction of premiums and fixing standard rents in relation to dwelling-houses. It applies to all dwelling-houses except those which have a standard rent exceeding KES2,500 per month.

The Public Health Act prohibits letting premises in which any person who has been suffering from an infectious disease was occupant without having the same efficiently disinfected to the satisfaction of a medical officer of health, as testified by a certificate signed by the officer.

Section 73 of the LA gives the lessor the right to forfeit the lease if the lessee is adjudicated bankrupt or, if it is a company, goes into liquidation.

The security provided by the tenant is a rent deposit which is forfeited in the case of default. If the tenant is a company, its directors would be required to issue directors' guarantees to the landlord securing performance of the tenant’s obligations.

The tenant does not have a right to continue to occupy the premises after the expiry of the lease. However, if the landlord allows the tenant to remain in possession of the premises after expiry of the tenancy, this will constitute a periodic tenancy.

For a landlord to ensure that the tenant vacates the premises on the date initially agreed, he or she will need to serve the tenant with a notice equivalent to the period after which rent is payable.

Section 73 of the LA empowers the landlord to forfeit the lease if the lessee commits any breach of its obligations as earlier discussed, is adjudicated bankrupt or, in the case of a company, if it goes into liquidation. However, controlled tenancies can only be terminated in accordance with the provisions of LTA, as discussed in 6.14 Specific Regulations, above.

Forceful eviction is not allowed in Kenya. However, when a tenant is in breach of the terms of a lease, the landlord is required to serve the tenant with notice to rectify the breach as stipulated in the lease.

In the case of a controlled tenancy, the tenant has the power to refer the matter to the Business Premises Rent Tribunal, whereupon the notice shall be of no effect until the determination of the reference by the tribunal.

If the tenant does not refer the matter to the tribunal, or when nothing is done to rectify the shortcoming, a landlord can terminate the lease agreement and demand that the tenant vacates the premises.

Where a tenant declines to vacate premises, a landlord would have to obtain an eviction order from the tribunal established under the LTA (where the tenancy is controlled) or a court order (where the tenancy is not controlled).

It would take between six months and two years to conclude eviction proceedings.

Long-term leases conferring title can be terminated by the government if the lessee does not comply with the conditions contained therein.

The government can also cause a lease to be terminated if the property on which the leased premises are leased is required for public purposes, as discussed in 2 Sale and Purchase, above.

As discussed in 6.7 Payment of VAT, above, VAT is payable by the purchaser on the purchase price at a rate of 16%.

The first schedule of the VAT Act exempts sale, renting, and leasing, hiring, letting of land or residential premises from payment of VAT.

There is an ongoing court case in respect of payment of VAT on the sale of commercial premises. The case (David Mwangi Ndegwa v Kenya revenue Authority) seeks to challenge the requirement to pay VAT on the sale of commercial premises based on the common law definition of land. Land is defined as the soil and the developments thereon. The argument is therefore that since sale of land is exempt from payment of VAT, commercial premises which are comprised in the definition of land, are also exempt from such tax. The matter is pending determination at the Court of Appeal.

Rates are paid in Kenya pursuant to the Rating Act. Rates are levied by county governments in relation to properties in urban areas and cities in order to meet all liabilities that are to be discharged out of the general rate fund.

The following properties are exempt from payment of rates under the Valuation for Rating Act:

  • properties used for purposes of public religious worship;
  • cemeteries, crematoria and burial or burning grounds;
  • hospitals or other institutions for the treatment of the sick;
  • educational institutions;
  • charitable institutions, museums and libraries;
  • outdoor sports facilities; and
  • national parks and national reserves.

Withholding tax is payable by foreign investors. This is dependent upon on the category of income. For instance, the withholding tax rate applicable to management and professional fees is 20%. Dividends earned from a REIT will be subject to withholding tax of 5% for East African residents and 10% for non-residents.

Under the Income Tax Act, tax at a rate of 10% of the gross rental income is payable in respect of rent from residential property which is in excess of KES144,000 but less than KES10 million.

CGT is charged at the rate of 5% of the net gain. It is paid by the transferor.

The following are exempt from CGT:

  • income that is taxed elsewhere as in the case of property dealers;
  • issuance by a company of its own shares and debentures;
  • transfer of machinery, including motor vehicles;
  • disposal of property through transmission;
  • vesting of property in the hands of a liquidator or receiver; and
  • transfer of individual residence occupied by the transferor for at least three years before the transfer;
  • transfer of assets between spouses, including as part of a divorce settlement; and
  • sale of land by an individual where the proceeds are less than KES3 million.

Depreciation deductions do not apply to buildings. Such deductions do, however, apply to furniture and fittings in a building.

Under Section 20(1) of the Income Tax Act, REITs are exempt for corporation tax purposes but are subject to payment of withholding tax on interest income and dividends.

Exemption is not automatic; the REIT must apply for an exemption under the Income Tax Act Registered Unit Trust/Collective Investment Scheme (Rules 2003) and must show that:

  • the REIT will undertake portfolio investments in accordance with CMA policies and guidelines;
  • the sole purpose of the REIT is to carry on investments on behalf of the REIT's securities holders;
  • six months after registration/exemption, no REIT securities holder shall hold more than 12.5% of REIT securities in the REIT; and
  • the REIT shall, within six months of its commencement, maintain at least 25 REIT securities holders at any particular time.

If the above cannot be proven, REITs will be subject to corporation tax and required to pay tax on all income they receive before distributing dividends.

Stamp duty is not applicable to transfers of real estate into a REIT. This is pursuant to Legal Notice No 73 of 2008, which provides that any instrument that is executed in respect of the transfer of property on setting up a listed property investment vehicle shall be exempt from the provisions of the Stamp Duty Act.

The Finance Act, 2017, amending the First Schedule of the VAT Act, 2013, provides for exemption from VAT for transfers of assets into REITs.

MMC Afica Law

MMC Arches,
Spring Valley Crescent,
Off Peponi Rd.
Westlands

+254 020 2329898

+254 720 585 785

eomulele@wakili.com www.wakili.com
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MMC Africa Law was established in 1995 and is headquartered in Spring Valley, Nairobi, with a full-service office in the coastal city of Mombasa. The firm is made up of 12 Partners and over 30 lawyers with expertise in a wide variety of legal matters. As well as being a member of ALFA International, a global network of independent law firms, it has a close association with the leading global law firm of Orrick, Herrington & Sutcliff LLP. MMC Africa Law’s dedicated real estate team comprises three partners and 12 lawyers who pride themselves on their extensive experience handling sophisticated and complex transactions such as those relating to mixed-use developments, an emerging market in real estate. The team also offers specialised services in urban regeneration projects, construction law, REITs, hospitality and hotels, residential developments, commercial and farmland leases, land use and planning, environmental compliance, contractual agreements, conveyancing and conducting due diligence on property.

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