Contributed By MMC ASAFO
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 government of Kenya is working towards providing affordable housing for its citizens. This has been necessitated by the housing deficit resulting from 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 make mandatory monthly contributions. The affordable housing framework requires a developer to build houses priced at a maximum of KES3 million (approximately USD30,000), with the government guaranteeing uptake in three years.
Master-planned communities have emerged in Kenya through the creation of alternative cities, such as Tatu City, Infinity and Tilisi. These alternative cities are built with a focus on the principles "live, work and play"; they include industrial, commercial, retail and residential developments as well as schools, hospitals and recreational facilities.
Less Centralised Development
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 (the county government headquarters) in which to progress development.
Green Building Technology
In order to reduce operating costs and provide a safe environment for workers, developers have been employing green building technology, which has increased 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.
Disruptive technology is technology that takes the place of established technology and changes the face of an industry. Where an existing and established technology has been improved upon, this is called a "sustaining technology".
The government of Kenya is committed to embracing modern technology in the delivery of services to its citizens. The e-citizen portal enables citizens to access various government services such as business, land and immigration. The State Department of Information, Communication and Technology (ICT) and Innovation under the Ministry of ICT is tasked with promoting government information technology services.
The Business Reforms and Transformation Department under the Ministry of East African Community and Regional Development is also aimed at promoting the ease of doing business in Kenya by proposing amendments to various laws, including those relating to ICT.
In line with the above initiatives, the Ministry of Lands and Physical Planning (MoLP) has embarked on digitisation of land transactions across the country aimed at improving delivery of services. The adoption of blockchain technology, decentralised finance, proptech and other forms of disruptive technology contributes to a large extent towards implementation of this initiative.
A blockchain is a time-stamped series of immutable records of data that is managed by a cluster of computers owned by various entities. Each of these blocks is secured and bound to the next one using cryptographic principles. Since it is a shared and immutable ledger, the information in it is open for everyone to see. Blockchain is a disruptive technology that can be used in real estate to eliminate the need for third-party intermediaries.
The MoLP has adopted the Land Information Management System (LIMS) which is based on blockchain technology and is aimed at preserving the sanctity of title by preventing fraud and double ownership. LIMS enables people to undertake land transactions, such as conducting searches, paying land rent, undertaking valuations, and lodging documents for registration.
Decentralised finance ("DeFi") describes a financial system that is built on public blockchains which enables anyone with an internet connection and a smartphone to access financial services.
DeFi has been adopted in Kenya in the form of financial technology, which is aimed at delivering essential financial services in a way that better serves the needs of customers and ultimately delivers value to the investor. Payment technologies available in Kenya include mobile money, cards and PayPal.
In Kenya, people are able to pay for various land transactions using mobile money through the e-citizen portal, such as land rent, consents to transfer or charge, and registration fees.
Property technology (proptech) is a collective term that defines start-ups offering technologically innovative products or new business models for real estate markets. Proptech seeks to ensure change in the way property is built, used and managed in order to achieve more operational efficiency. Real estate firms are increasingly putting technology at the forefront of their business operations as the industry adjusts to a brave new world brought about by advancements in proptech.
xPodd Company Limited, a proptech real estate firm, has expanded its reach in Kenya, thus providing a real-time platform for real estate solutions. The online platform enables the public, businesses and real estate developers to connect on one platform, eliminating middlemen who have sometimes duped unsuspecting property dealers. The firm offers solutions for both commercial and residential properties across major towns in Kenya by allowing sellers and buyers, and lessors and lessees, of property to connect.
In order to fully implement these new technologies, Kenya will be required to build new capabilities and capacities. If fully adopted, disruptive technologies will make the real estate marketplace more meaningful, since users will be able to connect more easily and reduce cases of fraud in real estate transactions.
Digitisation of Land Transactions
The MoLP appointed a task force in August 2018 to prepare guidelines for digitisation of land transactions. This is aimed at ensuring efficient and effective service delivery that will lead to enhanced access to information, increased customer confidence, reduced business timelines and enhanced revenue collection.
The task force has since completed its report on the proposed implementation of the digitisation process. The recommendations of the report include the amendment of various land laws to allow for digital processes. The success of this programme will require the co-operation of the Ministry of ICT for the purpose of creating the necessary digital platform at a national level, and the Treasury for the purpose of integrating suitable payment solutions relating to land transactions.
Land Dispute Resolution through Alternative Dispute Resolution Mechanisms
The CoK encourages the use of alternative dispute resolution mechanisms. These are advantageous since they are less costly and take less time. Land disputes are mainly handled by the ELC. The proposal in this case is for an amendment to the ELC Act to provide a limit on matters that are filed as ELC. This will reduce the backlog, leading to faster resolution of cases.
The two main property rights that can be acquired in Kenya are freehold and leasehold.
A person has freehold interest when they are the outright owners of a property for an unlimited period. Leasehold interest is a temporary right to occupy property subject to payment of a fee to the grantor.
The main laws that deal with transfer of property in Kenya are the LA and LRA. The LA is the substantive law, while the LRA contains procedural provisions on transfer of title.
SPA deals with sectional titles in Kenya.
The process of acquisition of property begins with the purchaser’s advocate conducting due diligence on the property.
The seller’s advocate prepares the agreement, which is executed by the parties upon approval by the purchaser’s advocate.
The seller’s advocate procures completion documents, as the purchaser’s advocate prepares the transfer for execution by the parties.
Once executed, the transfer is filed at the Lands Offices for valuation to enable the purchaser to pay stamp duty.
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 insure their titles. As such, title insurance is not common. However, financing companies would require that insurance be obtained in the case of a financed purchase.
A certificate of title issued upon registration is taken as prima facie evidence that the person named as proprietor is the absolute owner, subject to registered encumbrances, and the title is not 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 was acquired illegally, unprocedurally or through corruption.
Ways of investigating title include searches, pre-contract inquiries and requisitions.
There are two types of searches:
Pre-contract inquiries are preliminary questions relating to the physical condition and location of the property and matters not covered by the searches.
Requisitions take the form of forthright questions arising after a perusal and assessment of the title.
Some of the typical representations and warranties include warranties to the effect that:
These are not statutorily prescribed but are negotiable by the parties.
A misrepresentation by the seller entitles the buyer to terminate the transaction and claim damages, where the misrepresentation goes to the root of the transaction.
The most important areas of law for investors to consider when purchasing real estate in Kenya are:
A buyer is strictly liable for any contamination of the property that pre-dated the sale.
To avert this, it is important for buyers to conduct environmental due diligence before purchasing real estate.
Zoning is a system of land-use regulation in various urban areas which designates permitted uses of land based on mapped zones.
The three main zoning classifications are residential, commercial and industrial.
Due diligence involves review of the relevant county zoning by-law and communication between the seller and the relevant county regarding the degree of compliance with zoning laws.
Special conditions of the title would also indicate the permitted use of the property.
Development agreements between public authorities and developers are not statutorily prescribed.
Article 40(3) of the CoK allows the state to compulsorily acquire property where the property is required for a public benefit, followed by prompt compensation of those affected.
Section 107, LA provides the procedure for compulsory acquisition of land by the government as follows:
The Land (Assessment of Just Compensation) Rules 2017 set out the factors to be considered by NLC in assessing compensation. These include:
Real estate transactions are by law subject to taxation. The applicable taxes are stamp duty and capital gains tax.
Stamp duty is payable at a rate of 2% of the value 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 (CGT) is comprehensively discussed under 8 Tax.
Registration costs are not statutorily prescribed and vary from one registry to another.
Stamp duty is chargeable at a 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 in private companies within Kenya are subject to CGT, and incidental costs are allowable to reduce CGT.
The CoK restricts ownership of land by non-citizens to leasehold of not more than 99 years. A corporate body is only regarded as a citizen if it is wholly owned by Kenyan citizens.
Under LCA, LCB is not permitted to approve applications with respect to transactions involving agricultural land where the beneficiary is a foreigner.
Real estate lending requires the borrower to issue 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 projects, through public-private partnerships (PPP).
A borrower acquiring or developing real estate will create 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.
Stamp duty is payable at a rate of 0.1% of the loan amount 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 (ARO). Registration costs are 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 lender, even if the lender 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.
Where there is a valid security and the borrower defaults in loan repayments, the lender can exercise the statutory power of sale.
Before exercising this power, the lender is required to serve the borrower with one month's notice stating the default and the remedy required of the borrower. 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 property.
Once appointed, the auctioneer is required to serve the borrower with 45 days' notice within which the borrower may redeem the property by paying 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 based on date of registration, with the earliest-registered security taking precedence. Where it is necessary for existing secured debt to 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 security over real estate has no liability if it did not cause environmental pollution, since the creation of a security does not transfer interest in the property 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 providing that an administrator should not do anything that affects a secured creditor’s right to enforce its security.
The key consequences of the expiry of LIBOR in 2021 are as follows:
In order to manage the risk associated with the expiry of LIBOR, the Federal Reserve tasked the Alternative Reference Rate Committee (ARRC) with being responsible for the transition from LIBOR to a new benchmark rate called the Broad Treasury Financing Rate (BTFR). BTFR contains a broad set of US treasury market-based financing transactions.
BTFR will run in parallel with LIBOR for a while in order to help determine a fair compensatory credit spread between LIBOR and BTFR for those financial assets that will be affected.
However, except for external debt, most borrowing in Kenya is governed by the Central Bank Rate published by the Central Bank of Kenya.
Planning in Kenya is undertaken by both national and 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 based on the national laws that impose planning and zoning controls which apply to all sub-counties within a county.
Part XI of CGA requires county planning frameworks to integrate economic, physical, social, environmental and spatial planning.
PLUPA is responsible for the following:
The NCA Act established the NCA, which is mandated with overseeing the construction industry in Kenya. Every construction project is required to be registered with the NCA prior to commencement.
County governments are empowered to regulate the use and development of land in the interests of proper and orderly development. The applicable legislation is PLUPA and county by-laws.
Section 57 of PLUPA makes it an offence to carry out development within a county without obtaining development permission.
Under Section 58 of PLUPA, any person requiring development permission should make an application to the relevant county accompanied by such plans and particulars indicating the purposes of the development.
When considering a development application, the county may consult with various officers including the Director of Survey, NLC and the Chief Engineer (Roads).
The county may either grant the applicant development permission, with or without conditions, or refuse to grant permission stating the grounds for refusal.
Third parties will only have an opportunity to object during public participation, which is required before an environmental impact assessment licence can be issued.
Any person aggrieved by the decision of the county may appeal to the County Physical and Land Use Planning Liaison Committee.
Any person aggrieved by a decision of the County Physical and Land Use Planning Liaison Committee may appeal to the ELC.
Large development projects require the developer to enter into agreements with government agencies for provision of certain services. These include agreements with county governments for provision of sewerage services; with Kenya Power and Lighting Company for provision of electricity; and with the road authorities for construction of access roads to the development.
If the county discovers that a development has been or is being carried out without development permission or that any of the conditions of permission have not been complied with, the county may serve an enforcement notice on the developer. Unless an appeal is lodged over the enforcement notice, the enforcement notice takes effect once the notice period expires.
If a person is aggrieved by the notice they may, within the notice period, appeal 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 can be made to the High Court.
Main Investment Structures
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. This could be a private or public LLC.
Once 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.
Income REITs (I-REITS) are where investors pool their resources into a trust with the aim of investing in income-generating real estate segments. Development REITs (D-REITs) involve pooling assets together to procure qualified land for improvement and development ventures which may incorporate residential and commercial projects.
Preferred Investment Vehicles
For a long time, LLCs have been the preferred investment vehicles. However, with the enactment of the LLP Act, LLPs are gaining popularity because:
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 seven, with no maximum. A public LLC must have at least two directors and one must be a natural person.
Memoranda and articles of association are required before a company can be registered.
Under Section 26 of the LLP Act, an LLP is required to have at least two partners. Section 27 provides that it must have at least one manager who is resident in Kenya.
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's assets but they are managed by a corporate manager. The primary sponsor of a REIT 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 LLCs or LLPs.
Public LLCs are required to have an authorised minimum capital of KES6.75 million.
The minimum value of starting assets of an I-REIT should be not less than KES300 million. For D-REITs, it is KES100 million.
A public LLC is required to have a company secretary; a private LLC is only required to have one if it has share capital of over KES5 million.
A public LLC is required to have a minimum of four board meetings per year.
A private LLC is required to hold an AGM within six months of the day following its accounting reference date, and thereafter, within three months of the end of its financial period.
LLCs listed on the Nairobi Securities Exchange are required to comply with the code of corporate governance for listed companies.
If the company has share capital, it must file annual returns like any other LLC. 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 where it is kept must be stated.
Particulars of the directors and the secretary are required to be kept in the register of directors and secretaries. Particulars of the company’s indebtedness are required to be registered.
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.
The manager is required to prepare and present semi-annual and annual reports for the REIT to the trustee and CMA.
The trustee is required to:
The annual cost of filing returns for an entity is nominal, but the professional fees payable by the entity will depend on the accountancy or legal firm chosen.
The two ways by which real estate can be occupied for a short term are by way of leases and licences. A lease entitles the lessee to exclusive use and quiet enjoyment of the property, while a licence is merely permission to use the premises.
The various types of leases under the LA are:
Rents and terms of leases are freely negotiable. However, some terms implied in leases as provided in the LA are:
Although no regulatory enactments affecting lease terms had been made at the time of writing, the Tax Laws (Amendment) Act, 2020 was enacted in April 2020 amending various tax laws such as the Income Tax Act (ITA), the Value-Added Tax Act, the Excise Duty Act and the Miscellaneous Fees and Levies Act. Amendments to these statutes reduced taxes, thereby cushioning Kenyans from the economic impact of inflation.
Tax rates were, however, revised again through the Tax Laws (Amendment) No 2 Act, 2020 published in December 2020 and Kenyans reverted to pre-COVID-19 tax rates effective January 2021.
As at the date hereof, the Senate is debating the Pandemic Response and Management Bill, 2020 (PMB) which, if passed, will provide a framework for a co-ordinated approach in the management of activities during a pandemic. Section 29 of the PMB provides that where a pandemic has affected the financial capacity of a tenant to meet their obligations, the tenant shall give notice of this in writing to the landlord and the contracting parties shall agree on how the tenant shall meet their obligation after the pandemic.
A lease term is not regulated and the parties are free to negotiate it. Landlords would want commercial leases to be for not less than five years to avoid controlled tenancies.
Section 66(1e) of the LA requires tenants to keep all buildings covered by the lease in a reasonable state of repair save for the roof, all external and main walls and main drains, and the common parts and installations.
Frequency of rent payments is not statutorily regulated. Rent is payable either monthly or quarterly.
Rent abatements and force majeure are not statutorily prescribed. Leases do, however, contain force majeure clauses. Force majeure events are defined as conditions beyond the reasonable control of a party that prevent the party from fulfilling its obligations under an agreement. Parties can agree to suspend their obligations during the force majeure event. Parties can, however, exclude payment obligations from applicability of the force majeure clause.
Some leases have rent escalation clauses, hence there may be variation in the rent payable for each year.
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 the increase in the rent is to be calculated based on market rates, then the mechanism of determination of such rent, should be provided for in the lease.
VAT is payable on rent at a rate of 16%.
At the start of a lease, the tenant pays:
Maintenance and repair of common areas are paid for by the tenants through apportioned service charges.
Meters are assigned to tenants for leased premises and tenants are responsible for paying the bills.
There will also be a meter for utilities in the common areas, with the bills being paid by all the tenants.
Furniture and fittings owned by the tenant are insured by the tenant. The landlord insures the structure as a whole.
Restrictions can be imposed by landlords on how tenants use real estate. Some covenants in the lease require a tenant to obtain the landlord’s consent before carrying out certain activities.
The LA lists activities for which the tenant will require the landlord's consent. These include transferring or assigning the lease, subletting, improvement of the premises and charging the property to secure advances for the tenant.
Section 67(2e) of the LA disallows the tenant from altering or improving any building, beyond what is permitted in the lease, without consent of the landlord.
A lease would ordinarily provide the requirements and procedure for obtaining the landlord’s consent.
The LA applies to all leases whether residential, industrial or commercial.
Some 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 is not in writing, or which is in writing but is for a period not exceeding five years, or which contains provision for termination other than for breach within five years of commencement.
A controlled tenancy cannot be terminated or varied without consent of the tenant. The landlord can only vary terms of the tenancy by an order of the BBRT and the tenant can contest the variation.
Rent Restriction Act
The Rent Restriction Act contains provisions restricting the increase of rent, the right to possession and 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.
Public Health Act
The Public Health Act prohibits letting premises previously occupied by a person suffering from an infectious disease without having the same efficiently disinfected to the satisfaction of a medical officer of health.
At the time of writing, there is no specific legislation dealing with leases during the COVID-19 pandemic. However, as discussed under 6.3 Regulation of Rents or Lease Terms, the PMB, once promulgated, will apply to tenancies during pandemics.
Section 73 of the LA gives the lessor the right to forfeit the lease if the lessee is adjudicated bankrupt or, in the case of a company, if it is insolvent.
The security provided by the tenant is rent deposit which is forfeited in case of default. If the tenant is a company, its directors may be required to issue guarantees to the landlord securing performance of the tenant’s obligations.
The tenant does not have the 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 upon expiry of the term, they will need to serve the tenant with notice to vacate .
A tenant in possession by virtue of a lease is permitted to assign their leasehold interest for a specific period of time in compliance with the terms of the lease.
Section 63, LA allows tenants to sublet their interest for a term that is the same as or shorter than the remainder of the term of the head lease. The LA further provides that for an assignment to be effective, it has to be explicitly stated as such in the sublease.
Section 67, LA provides that a lessor will not unreasonably withhold consent to assign the lease or sublet. The lessor is required to inform the lessee in writing, within reasonable time, of their acceptance or refusal to grant consent.
Some of the typical conditions that may be imposed by the lessor before granting consent to the lessee include:
Section 73, LA empowers the landlord to forfeit the lease if the lessee:
However, controlled tenancies can only be terminated in accordance with the provisions of the LTA, as discussed in 6.14 Specific Regulations.
The two categories of leases in Kenya are short-term leases, for a term of less than two years, and long-term leases, for a term of over two years. Short-term leases are not registrable. Long-term leases for a term of less than 21 years are mainly commercial in nature and registration is not mandatory. Long-term leases of over 21 years are deemed to be titles and are therefore required to be registered at the lands registry.
Section 3(3) of the LoCA requires contracts for disposition of interests in land to be in writing, signed by the parties thereto with the signature of each party attested to by a witness present when the contract was signed by such party.
All registered documents relating to disposition of interest in land in Kenya must be recorded in the relevant lands registry. Before registration can be undertaken, the following fees and taxes are payable.
Forced 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.
In the case of a controlled tenancy, the tenant has the power to refer the matter to the BPRT, whereupon the notice shall be of no effect until a determination has been reached by the BPRT.
If the tenant does not refer the matter to the BPRT and nothing is done to rectify the shortcoming, the landlord can terminate the lease and demand that the tenant vacates the premises.
Where a tenant declines to vacate the premises, the landlord would have to obtain an eviction order from the BPRT (for controlled tenancies) or a court order (for non-controlled tenancies).
It would take between six months and two years to conclude eviction proceedings.
Despite the harsh economic times occasioned by the COVID-19 pandemic, no measures have been put in place by the state (as at the date hereof) to cushion vulnerable citizens from eviction from their premises for non-payment of rent.
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 is required for public purposes, as discussed in 2 Sale and Purchase.
Market prices mainly determine the construction cost of a project based on a bill of quantities prepared by a quantity surveyor (QS) from the detailed architectural and engineering designs of a development.
The tendering process for a suitable contractor is usually competitive and begins by the project proponent sending out a request for proposals to various contractors.
Upon lapse of the timeline for submission of proposals, the project proponent evaluates the proposals submitted and awards the tender to the most competitive contractor based on technical and financial capability, as well as pricing.
There are two main options available for the design and construction of a project in Kenya.
Management of construction-related risks is governed by the parties’ contract.
The contractor will be required to issue a performance bond to the developer to guarantee against the contractor’s failure to meet its obligations. The performance bond is issued by a reputable insurance company or bank.
Construction contracts also provide for limitation of liability in certain instances, including force majeure events.
Provisions relating to indemnification, warranties and limitation of liability are not provided for in the statute and the parties can agree as appropriate.
Management of schedule-related risk on construction projects depends on the structure of the project and the agreed timelines.
Delay damages can be imposed on the contractor if certain timelines/milestones are not met.
Causation is however taken into account in determining such fines, as some delaying factors could be outside the contractor’s control, such as force majeure events and delays on the part of the developer in providing the required information/payments.
It is common for developers to request additional forms of security from the contractor. In this regard, letters of credit, parent guarantees, performance bonds, escrow accounts, or third-party sureties can be availed on request. Failure to provide the security could be deemed to be an event of default and may lead to termination of the contract.
In the event of non-payment, the contractor will exercise its right of lien over the property. This gives the contractor legal recourse to get paid for its work.
The contractor’s lien can cause substantial delays in implementation of the project. To avert this, developers would require delivery of an undertaking before commencement of the works to the effect that the contractor will not exercise its right of lien.
Upon completion of construction, the architect issues a certificate of practical completion confirming that all the works have been finalised. A certificate of practical occupation is then issued by the relevant county government (planning authority) confirming the structure to be suitable for human habitation.
As discussed in 6.7 Payment of VAT, 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, leasing, hiring or 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 should also be exempt from VAT. The matter is pending determination at the Court of Appeal.
Large real estate projects tend to mitigate tax liability in three ways.
Firstly, application for declaration of their developments as SEZs under the SEZ Act. The following tax advantages are accorded to operators within a special economic zone:
Secondly, since agricultural land attracts stamp duty at a rate of 2% of the consideration, real estate developers will acquire land as agricultural land and thereafter undertake change-of-use to allow for real estate development.
Thirdly, since VAT is payable on the purchase price of commercial premises, real estate developers would opt to acquire the premises prior to conducting a change-of-use to commercial use.
Rates are paid in Kenya pursuant to the Rating Act. Rates are levied by county governments in relation to properties in urban areas in order to meet all liabilities that need to be discharged out of the general rate fund.
The following properties are exempt from rates under the Valuation for Rating Act:
Withholding tax is payable by foreign investors and is dependent on the category of income. For instance, the withholding tax rate on management and professional fees is 20%. Dividends earned from a REIT are subject to withholding tax of 5% for East African residents and 10% for non-residents.
Under the ITA, tax at 10% of the gross rental income is payable in respect of annual rent from residential property which is in excess of KES144,000 but less than KES10 million.
CGT is charged at 5% of the net gain and 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 ITA, REITs are exempt from corporation tax but are subject to withholding tax on interest, income and dividends.
Exemption is not automatic; the REIT must apply for exemption under the ITA Registered Unit Trust/Collective Investment Scheme (Rules 2003) and must show that:
Stamp duty is not applicable to transfers of real estate to a REIT. This is in accordance with Legal Notice No 73 of 2008, which provides that any instrument executed in respect of the transfer of property on setting up a listed property investment vehicle is exempt from the provisions of the SDA.
The Finance Act, 2017, amending the First Schedule of the VAT Act, 2013, provides for exemption from VAT for transfers of assets into REITs.