Contributed By MMC Africa Law
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 main market trends in the real estate sector in Kenya have been as follows:
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:
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:
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:
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:
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:
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:
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:
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:
The minimum number of members is one and the maximum 50. A private LLC should have at least one director.
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.
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 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:
Under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 a REIT must have:
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:
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:
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:
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:
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:
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:
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:
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.