Real Estate 2023 Comparisons

The main sources of real estate law in Kenya are as follows:

• the Constitution of Kenya, 2010 (Constitution) is the supreme law prescribing land rights and policies in Kenya;
• the Land Act 2012 (LA) is the principal statute on the administration and management of land and land-based resources;
• the Land Registration Act 2012 (LRA) governs the registration of interests in public, private and community land;
• the Community Land Act 2016 governs community land;
• the National Land Commission Act, 2012 prescribes the functions of the National Land Commission (NLC);
• the Land Control Act, 1967 (LCA) governs dealings in agricultural land;
• the Landlord and Tenant (Hotels, Shops and Catering Establishments) Act, 1972 (LTA) governs controlled tenancies related to business premises;
• the Distress for Rent Act relates to distress for rent;
• the Physical and Land Use Planning Act, 2019 (Physical Planning Act) governs the planning, use and development of land;
• the Sectional Properties Act, 2020 (SPA) governs the registration and management of sectional properties;
• the Law of Contract Act, 1961 prescribes the formal requirements for contracts related to dealings in land;
• the National Construction Authority Act, 2011 (NCA Act) establishes the National Construction Authority and prescribes its functions;
• the Environmental and Land Court Act, 2011 establishes the Environment and Land Court (ELC) to hear and determine disputes relating to the environment and land;
• the Environmental Management and Co-ordination Act, 1999 (EMCA) is the framework environmental law; and
• the Special Economic Zones Act, 2015 (SEZ Act) establishes special economic zones.

Implementation of Restrictions on Foreign Ownership of Land

By gazette notice number 4512 of 2023, the NLC ordered the resurvey of tea estates in Kericho and Bomet counties, which are largely owned by foreign multinational companies. This signifies the beginning of a gradual process to convert foreign-owned freehold land and leases of a period above 99 years to leasehold titles of a maximum term of 99 years, as discussed in 2.11 Legal Restrictions on Foreign Investors.

Sustainable Real Estate Finance

There is a growing interest in sustainable real estate finance in Kenya, with notable developments including the following:

• the Kenya Green Bond Programme was established in 2017 to develop a domestic green bond market, with the first green bond to raise capital for a real estate project being issued by Acorn Holdings in 2019; and
• a partnership between KCB Bank Kenya and the International Finance Corporation (IFC) to expand KCB’s Climate Fund, which provides financing to businesses addressing climate change.

Affordable Housing Scheme (AHS)

The government of Kenya aimed to provide 500,000 affordable housing units by 2022 under the AHS but this target was not achieved. The newly elected President of Kenya aims to deliver 200,000 units per year. The latest AHS projects include Starehe Point and the Mavoko Housing Project in Machakos County. An affordable unit should cost no more than KES3 million (approximately USD23,000). The Kenya Mortgage Refinance Company was incorporated in 2018 to provide affordable long-term financing to primary mortgage lenders (eg, banks) for the onward provision of affordable mortgage products to Kenyans.

Private developers are also investing in affordable housing products independent of the AHS, including TSAVO and Acorn Holding Limited.

Large-Scale Infrastructure Projects

The government of Kenya is undertaking large-scale infrastructure projects, particularly in the roads and transport sectors. Ongoing projects include:

• the Barpelo-Tot-Sigor-Marich pass road, a 43 km road linking Baringo, Elgeyo Marakwet and West Pokot counties and connecting Kenya to South Sudan;
• the Nairobi-Malaba standard gauge railway connecting Nairobi to Malaba; and
• the Rironi-Nakuru-Mau summit road, a 175 km road traversing Kiambu and Nakuru counties.

Smart Cities and Green Building

Key projects and deals include:

• a partnership between Africa Logistics Properties and the IFC to promote voluntary green building certification programmes;
• the Nairobi Railway City, a proposed mixed-use sustainable development on 425 acres of land located within the Nairobi Central Business District;
• Konza Technopolis (Konza City), a smart city located in Machakos County;  
• Tatu City, a 5,000 acre mixed-use development located in Kiambu county; and
• the Qwetu Student Residences, modern purpose-built affordable student hostels in Nairobi.

Impact of the COVID-19 Pandemic and Inflation

The pandemic and inflation have affected real estate transactions as follows:

• investors were risk averse, leading to low demand for real estate products and low uptake of loans;
• financial products were increasingly costly, including mortgages, due to rising interest rates and the weakening Kenyan shilling;
• remote working prompted office closures and a low uptake of office space;
• profits in the hospitality industry have not returned to normal;
• the high cost of living prompted rent and loan payment defaults and forfeitures;
• construction materials remain expensive;
• there was a greater appetite for affordable housing solutions; and
• COVID-19 restrictions increased the demand for digital solutions (see 1.3 Impact of Disruptive Technologies).

The following digital solutions have been adopted:

• the digitisation of courts, including the ELC;
• the digitisation of land records and the launch of the Ardhi Sasa platform by the Ministry of Lands and Physical Planning – there have been several technical challenges with the platform, leading to delays in land transactions;
• the digitisation of the collateral registry of security rights over movable assets under the Movable Property Security Rights Act;
• the Business Laws (Amendment) Act, 2020 (Business Laws Act) to enable the digital execution of land-related documents is yet to be fully implemented;
• mobile money payment is available for land transactions;
• proptech solutions like airbnb, xPodd, virtual reality site visits and smart homes are popular in Kenya; and
• 3D printing building technology.

These technologies will have the following impacts:

• the cost of real estate transactions will be reduced;
• land transactions will be easier;
• construction will be more efficient; and
• there will be reduced reliance on middlemen in real estate transactions.

The Climate Change (Amendment) Bill 2023 seeks to amend the Climate Change Act 2016 to provide a legal and regulatory framework on carbon markets in Kenya.

The Natural Resources (Benefit Sharing) Bill 2022 seeks to establish a system of benefit sharing in natural resource exploitation between resource exploiters, the national government, county governments and local communities.

The Landlord and Tenant Bill, 2021 seeks to consolidate the laws relating to the renting of business and residential premises, and to regulate the relationship between landlords and tenants to promote stability in the rental sector.

The Land Control Bill, 2022 seeks to rationalise the law on dealings in agricultural land with the provisions of the Constitution, the Environmental and Land Court Act, the LA and the LRA. The Bill proposes to introduce Land Control Committees, which will regulate dealings in agricultural land in accordance with the law and traditions, customs and the way of life in the community of the controlled area.

There are two main categories of property rights:

• leasehold tenure – a lease interest in immovable property for a specific period, subject to the payment of a lease premium or rent to the owner; and
• freehold tenure – an absolute ownership interest in immovable property, subject only to the provisions of law.

The LA and LRA are the primary statutes that apply to the transfer of real estate title, be it residential, retail, industrial, business or hotels. For community land, the Community Land Act also applies.

The SPA is the primary statute governing the transfer of sectional titles.

Conducting Due Diligence

Transfer of title begins with due diligence being performed by the purchaser; see 2.4 Real Estate Due Diligence.

Preparation of an Agreement for Sale

Agreements for sale must generally meet the requirements under Section 38 of the LA and Section 3 of the Law of Contract Act, and therefore must:

• be in writing;
• be signed by all the parties to the contract; and
• have the signature of each party attested by a witness.

The agreement is prepared by the seller’s advocates.

Obtaining Completion Documents

The seller’s advocate obtains the completion documents, which include the title document, the signed transfer document and land control board consent (where applicable). The transfer is drafted by the purchaser’s advocates.

Transfer of Title

Upon payment of the full purchase price to the seller or the issuance of suitable undertakings to the seller’s advocates for payment of the financed balance of the purchase price (if any), the seller’s advocates release the completion documents to the purchaser’s advocates. Thereafter, the transfer is lodged at the land registry for valuation of the property for purposes of assessing the stamp duty payable. Subsequently, the purchaser pays stamp duty and files the transfer at the land registry for registration.

The law does not require landowners to insure their titles. Title insurance is not common in Kenya.

Limitations Caused by the COVID-19 Pandemic

Pandemic-related restrictions resulted in:

• efforts to fully digitise the land registry and operationalise the Ardhi Sasa platform (see 1.3 Impact of Disruptive Technologies); and
• the enactment of the Business Laws Act to provide for the electronic execution of real estate instruments and electronic stamping of documents.

Purchasers’ advocates conduct due diligence as follows:

• review the title document to confirm the landowner and property details;
• conduct a title search at the land registry to confirm the property details, including existing encumbrances;
• undertake a search at the survey department to confirm the boundaries and permitted use of the property – the purchaser may also appoint a surveyor to identify the property on the ground and confirm the boundaries and size;
• peruse the report by the Commission of Inquiry into the Illegal/Irregular Allocation of Public Land, 2003 to confirm if the property is adversely mentioned;
• peruse all notices published by the NLC to confirm if the title is due for revocation due to any illegalities in acquisition;
• peruse the gazette notices published by the Ministry of Lands and Physical Planning to confirm if the property is listed for conversion;
• physically inspect the property to confirm the existence of squatters, suitability for purpose and compliance with environmental laws; and
• perform searches on the seller to confirm identity and capacity to contract – this may include a company search, where applicable.

Representations and Warranties

On the purchaser’s insistence, the seller may issue representations and warranties to the effect that:

• the seller is the legal owner of the property;
• the seller has full authority to enter into the contract for sale;
• the property is not situated on public land or in a buffer zone or road reserve;
• the seller is not engaged in any litigation relating to the property;
• there are no notices issued by any governmental authority for compulsory acquisition of the property; and
• the seller is not in breach of environmental laws.

Representations warranties and their survival period are not prescribed by law; they are negotiated by the parties. A seller may cap their liability as at the date of the agreement for sale, while a purchaser may negotiate to extend the seller’s liability until the date of transfer or a reasonable period after the date of transfer. A seller may also cap their financial liability to the purchase price amount.

Force Majeure and Diplomacy Clauses

No new representations and warranties were driven by the COVID-19 pandemic. However, there was increased adoption of force majeure clauses including “pandemics” as a force majeure event, thereby warranting termination or other remedies, including the suspension of obligations. For commercial leases, there was a notable increase in diplomacy clauses allowing foreign organisations to terminate leases where they can no longer operate in Kenya due to the pandemic.

Enforcement of Representations and Warranties

The agreement for sale gives the purchaser the option to:

• terminate the agreement in the event of material misrepresentation or breach of a warranty; or
• claim damages if the breach is not material.

Representation and warranty insurance is not common in Kenya.

In addition to those discussed in 1.1 Main Sources of Law, the following laws are also significant:

• the Stamp Duty Act prescribes stamp duty payable on the purchase of immovable property;
• the Urban Areas and Cities Act provides for the classification, governance and management of urban areas and cities;
• county by-laws; and
• the laws governing investors’ real estate investment vehicles, including the Companies Act 2015 governing operations of companies, and the Limited Liability Partnership Act 2011 governing limited liability partnerships.

A buyer is deemed responsible for soil pollution or environmental contamination on their property. Accordingly, it is critical for a buyer to physically inspect the property to confirm its compliance with environmental laws before purchase.

Permitted Use

The Physical Planning Act and county laws govern zoning and planning at the national and county level, respectively. The use or development of land must be in accordance with the National and County Physical and Land Use Development Plans. The permitted use of a parcel of land is usually indicated on the title document. Where this is not the case, the permitted use can be confirmed by a search at the land registry or survey department.

Development Agreements

The law does not prescribe requirements for development agreements, but they may be entered into; see 4.6 Agreements With Local or Governmental Authorities.

Compulsory Acquisition

Article 40 (3) (b) of the Constitution allows the state to compulsorily acquire land for a public purpose, subject to the fair and prompt compensation of the interested persons. Section 107 of the LA prescribes the process of compulsory acquisition, which takes place in four stages as follows.

The pre-inquiry stage

• The Cabinet Secretary or the County Executive Committee Member of the national or county state agency that wishes to compulsorily acquire the land submits a request for acquisition to the NLC.
• The NLC requests a verification meeting with the state agency, which provides a list of the affected parcels of land and the respective owners, title search details, cadastral maps of the affected areas, a resettlement action plan and a list of persons affected by the acquisition.
• The NLC may reject the request if the constitutional requirements are not met. If the request is approved, the NLC maps out and values the land.
• The NLC then publishes a notice of intent in the Kenya Gazette and the County Gazette, and delivers a copy of the notice to the land registrar and any person interested in the land.
• On receipt of the notice, the land registrar makes an order restricting further dealings on the affected land until it vests in the state agency. The land registrar also makes an entry in the register of the intended acquisition.

The inquiry stage

• At least 30 days after publishing the above notice, the NLC publishes another notice in the Kenya Gazette announcing the date of an inquiry to be conducted by the NLC.
• Before the date of the inquiry, the interested persons submit their written claims for compensation to the NLC.
• On the hearing date, the NLC examines the interested persons to confirm their proprietary interests in the land and hears claims for compensation.

The post-inquiry stage

• After the inquiry, the NLC prepares a written award in favour of the interested persons and serves a notice of the award on each interested person.
• Upon acceptance of the award, the NLC promptly pays compensation to the entitled persons within one year of taking possession of the land. Compensation may be monetary or otherwise, including land swaps.

Possession and vesting

• After an award has been made, the NLC may take possession of the land by serving a notice to each interested person and the land registrar, specifying the day of possession. The title then vests in the national or county government (as the case may be).
• Upon taking possession and payment of just compensation in full, the land vests in the national or county governments, free from encumbrances.
• The landowner is required to deliver the title documents to the land registrar for cancellation if the whole land has been acquired, or for registration of the resultant parcels and issue of their titles if only a portion of the land is acquired.

Taxes in Direct Sale of Real Estate

Capital Gains Tax (CGT) and stamp duty are applicable in real estate transactions. CGT is paid by the seller at the rate of 15% of the net gains received upon sale of the immovable property. This rate was increased from 5% with effect from 1 January 2023. Stamp duty is paid by the purchaser at the rate of 2% of the value of the property if located in a rural area, or 4% of the value of the property if located in an urban area.

The Income Tax Act prescribes transfers exempted from CGT, including the transfer of property to a registered family trust. Similarly, the Stamp Duty Act prescribes transfers that are exempt from stamp duty, including transfers to first-time homeowners under the AHS.

Taxes in Sale of Real Estate by Way of Shares

Where real estate is purchased by way of the acquisition of shares in a land holding company, stamp duty will be paid by the purchaser at the rate of 1% of the value of the acquired shares. This also applies in the event of the subsequent acquisition of the shares of the company. Furthermore, CGT will be charged at the rate of 15% of the net gain on the sale of the shares by the seller.

Transaction Costs

The transaction costs typically borne by the seller are:

• the costs of the subdivision or change of use of the land, if required (unless otherwise agreed);
• the cost of obtaining relevant consents, including the land control board consent in the case of agricultural land;
• CGT; and
• legal fees (unless otherwise agreed).

The transaction costs typically borne by the purchaser are:

• costs for valuation of the property;
• stamp duty;
• registration fees for the transfer; and
• legal fees.

Foreign Ownership of Land

Article 65 of the Constitution prohibits foreigners from owning freehold land. Foreigners may own land based on a leasehold tenure only, and such leases are for a maximum period of 99 years. Any freehold land or lease for a term exceeding 99 years held by a foreigner is deemed to be a lease of a maximum period of 99 years from 27 August 2010.

Under the Constitution, a body corporate is regarded as a Kenyan citizen only if it is wholly owned by Kenyan citizens. Where the property is held in trust, the property is regarded as being held by a Kenyan citizen if all its beneficiaries are Kenyan citizens.

Dealings in Agricultural Land

Sections 6 (1) (a) and (c) as read with Section 9 (1) (c) of the LCA prohibit land control boards from approving:

• the sale, transfer, lease, mortgage, exchange, partition or other disposal of or dealing with any agricultural land situated within a land control area where the beneficiary is not a citizen of Kenya; and
• the issue, sale, transfer, mortgage or any other disposal of or dealing with any share in a private company or co-operative society that, for the time being, owns agricultural land situated within a land control area in favour of a person that is not a citizen of Kenya.

The acquisition of commercial real estate is usually financed as follows:

• by borrowing from financial institutions, including commercial banks and Savings and Credit Co-operatives;
• through REITs; or
• through joint ventures.

Where the government is involved, acquisition may be financed by the government itself or by public-private partnerships.

The developer will typically create a legal charge over the real estate in favour of the lender.

There are no restrictions on granting security over real estate to foreign lenders, nor on making repayments to a foreign lender under a security document or loan agreement.

When granting security, the borrower will be responsible for the following costs:

• stamp duty at the rate of 0.1% of the borrowed amount for registrable securities such as legal charges;
• the legal fees of the borrower’s and lender’s advocates, as prescribed by the Advocates Remuneration Order based on the amount secured; and
• nominal registration fees charged by the relevant registries.

In addition, the borrower is usually responsible for the lender’s enforcement costs, including legal fees.

The following requirements must be met.

• The borrower must have the capacity to give the security under its constitutive documents.
• A corporate guarantor must derive commercial benefit from giving security over its real estate assets, even where the borrower is a related company. Where there is no commercial benefit, the borrower and guarantor must enter into a commercial benefit agreement for the payment of agreed fees to the guarantor as consideration for guaranteeing the facility to the borrower.
• Financial assistance for the acquisition of real estate assets is not prohibited.

Enforcement of a Legal Charge

Section 90 of the LA prescribes the formalities for the enforcement of a legal charge in the event of default by the borrower. If the borrower is in default for one month, the lender issues a notice of the default to the borrower, requiring the borrower to remedy the default within the notice period (at least three months if the default relates to non-payment). If the borrower fails to do so and the lender opts to exercise statutory power of sale, the lender issues another 40-day notice. Upon lapse of the notice period, the property is valued and sold. The time taken to sell the property would vary according to market demand, and could range from a month to more than a year.

The LA also provides additional remedies available to the lender: appointment of a receiver, suing the chargor, leasing the property and taking possession of the property. Enforcement of these remedies may take longer than exercising the statutory power of sale, especially if the matter is contentious.

Priority of Legal Charges

According to Section 81 of the LA, charges rank according to the order in which they are registered, unless the charge instrument states otherwise.

COVID-19-Related Restrictions on the Enforcement of Security

The government has not implemented any restrictions on a lender’s ability to foreclose or realise its collateral in real estate in response to the COVID-19 pandemic.

According to Section 81 of the LA, charges rank according to the order in which they are registered. However, existing legal charges may be subordinated to newly created legal charges by agreement between the lenders. The holder of the prior registered charge would typically sign a consent form on the subsequent charge, consenting to the creation of the subsequent security and confirming that its security ranks subsequent to the new charge. Lenders can also enter into an intercreditor agreement.

A lender is not liable for non-compliance with environmental laws since a legal charge does not constitute a transfer of the property. However, when enforcing the security by the appointment of a receiver or the leasing or taking possession of the charged property, a lender qualifies as an “owner‟ under the EMCA, and will therefore be liable for non-compliance with environmental laws.

A borrower’s insolvency does not affect a lender’s security interest. Insolvency is usually an event of default in the charge instrument that would trigger enforcement. Under Section 590 of the Insolvency Act, the administrator of an insolvent person’s estate is prohibited from interfering with a secured creditor’s right to enforce its security.

Local borrowings are typically based on the Central Bank of Kenya (CBK) rate or the base rate of each local bank, and are therefore not significantly affected by the expiry of the LIBOR index.

The expiry of LIBOR has largely affected foreign currency borrowings priced on LIBOR. According to the CBK, the proportion of loans priced on LIBOR stood at 450.6 billion as at September 2021. Therefore, the cessation of LIBOR poses a great threat to financial stability and individual financial institutions if not handled properly. Accordingly, the CBK published guidance on LIBOR transition in December 2021, in which it encouraged lenders to stop offering new LIBOR-linked products and instead offer Risk Free Rates (RFRs).

For existing loans priced on LIBOR, the CBK encouraged lenders to develop and implement fallback provisions in loan agreements. For those without LIBOR transition provisions, the CBK recommended that lenders amend the loan agreements to adopt the ISDA IBOR Fallbacks Protocol, wherever possible. Under the Protocol, LIBOR contracts will fall back to RFRs in the same currency:

• SONIA for GBP;
• SOFR for USD;
• SARON for CHF;
• TONAR for JPY; and
• €STR for EUR.

Since RFRs are overnight rates, unlike LIBOR, they will be adjusted accordingly.

Under the Fourth Schedule of the Constitution, the national government is responsible for developing planning policies and co-ordinating planning by the county governments, and the county governments are responsible for county planning and development.

The principal laws for strategic planning and zoning in Kenya are the Constitution, the Physical Planning Act, the Urban Areas and Cities Act and county legislation.

The Physical Planning Act requires development permission to be obtained prior to the improvement of land, which entails the submission of building plans prepared by a qualified planner. The development permit will be issued only if the development complies with zoning laws. The permit may also prescribe conditions for undertaking the development. It is rare for the permit to prescribe requirements on the appearance of the development or method of construction. However, the methods and standards of construction are regulated under the NCA Act.

The following authorities regulate the use and development of real estate in Kenya.

• The NLC manages public land on behalf of the national and county governments, and oversees land use planning and development in accordance with the Constitution and the NLC Act.
• The county governments regulate zoning and planning pursuant to the Physical Planning Act and county legislation. Land use must comply with National and County Physical and Land Use Development Plans. A development permit is also required from the county government prior to development.
• The National Construction Authority (NCA) regulates contractors and construction in Kenya, in accordance with the NCA Act. Construction projects must be registered with the NCA.
• Dealings in agricultural land are regulated by Land Control Boards (LCB) in accordance with the LCA. LCB consent is required for the development of agricultural land.
• The EMCA establishes the National Environment Management Authority (NEMA), which is responsible for the general supervision and co-ordination of all matters relating to the environment, including the development of land.

The Physical Planning Act requires the developer to apply to the relevant county government for development permission. Upon receipt, the county government circulates the application to the relevant state agencies, including the Director of Survey, the NLC and NEMA, for their comments. The state agencies may object to the issuance of the development permit if the development does not comply with the law. The county government also publishes a notice in the Kenya Gazette and newspapers circulated nationwide, inviting public participation in the proposed development. After considering the comments by the state agencies and the general public, the county government may reject the application or issue the development permit.

In addition, the following approvals are required, among others.

• The developer must conduct an environment impact assessment (EIA) of the project and apply to NEMA for an EIA licence. NEMA is required to consult with the relevant state agencies and allow for public participation before the EIA licence is issued.
• The project must be registered with the NCA.
• If the land is agricultural, LCB consent is required. Public participation is not required for this.
• The consent of the Kenya Railway Authority is required if the development is adjacent to a railway line.
• The consent of the Kenya Forest Service is required if the development may affect conservation areas or wildlife.
• The consent of the Kenya Civil Aviation Authority is required if the development may affect the airspace in any manner.

A developer may appeal a county government's decision not to grant development permission before the National or County Liaison Committee (as applicable). The developer may lodge a further appeal against the decision of a County Liaison Committee to the National Liaison Committee. Thereafter, an appeal against a decision of the National Liaison Committee may be made to the ELC.

If NEMA declines to grant the EIA licence or revokes it, the developer may appeal such decision at the National Environment Tribunal (NET) within 60 days. A further appeal may be made to the ELC against the decision of the NET.

If the LCB declines to consent to the development of agricultural land, the developer may appeal to the Provincial Land Control Appeals Board within 30 days of the decision being delivered. A further appeal may be made to the Central Land Control Appeals Board. If the developer is not successful, they can consider effecting a change of use of the land to avoid the need to obtain the LCB consent for the development.

If the NCA declines to register a construction project, the developer may appeal to the Appeals Board established under the NCA Act.

Development agreements are not a statutory requirement but may be concluded with county or national government authorities in compliance with the law to facilitate large projects. Development agreements may be aimed at facilitating the issuance of statutory approvals, the development of infrastructure, local content requirements and the provision of social amenities, among others.

Agreements may also be entered into with utility providers, such as Kenya Power and Lighting Company, to facilitate utility provision on the development.

Physical Planning Laws

Section 72 of the Physical Planning Act enables the County Executive Committee Member for Physical and Land Use Planning to issue an enforcement notice to an owner, occupier, agent or developer of land (Recipient) if a developer commences development without a development permit or if any conditions of the development permit are not complied with. The enforcement notice will prescribe the remedial action to be taken by the Recipient, who will face imprisonment and/or be subject to fines if they do not comply with the notice.

Environmental Laws

Section 108 of the EMCA enables NEMA to issue environmental restoration orders prescribing remedial action to be taken by the Recipient to refrain from causing harm to the environment and/or restore the environment to its original state. The order may also impose fines against persons contravening environmental laws, or may award compensation to those affected by environmental degradation or pollution. The ELC may also issue environmental restoration orders.

Section 112 of the EMCA allows courts to grant environmental easements and conservation orders to preserve environmental resources.

Furthermore, part XIII of the EMCA spells out environmental offences. The consequences of committing environmental offences include revocation of the relevant licences, imprisonment and hefty fines.

Construction Laws

Rule 28 of the National Construction Authority Regulations, 2014 empowers the NCA to set up a committee to investigate complaints against contractors and any developments if they are suspected of contravening the law. The committee may recommend the deregistration of a contractor or the revocation or suspension of their licence. Where a contractor is deregistered, all construction contracts being executed by that contractor will be terminated immediately.

Dealings in Agricultural Land

Failure to obtain LCB consent for the development of agricultural land renders all related transactions void.

The main vehicles for investment in real estate are limited liability companies (LLCs), limited liability partnerships (LLPs) and Real Estate Investment Trusts (REITs). LLCs are the most common and preferred investment vehicles, but LLPs are beginning to gain traction.

LLCs

LLCs are the most common and preferred investment vehicles, and are regulated by the Companies Act 2015. LLCs have corporate personality, and the liability of the members is limited. Given this, an LLC may own property, enter into contracts and sue and be sued in the name of the company.

LLCs may be private or public. A private LLC has one to 50 members and a minimum of one director, who must be a natural person. The shares of a private LLC may not be transferred to the public. A public LLC has a minimum of one member and no restriction on the maximum number of members. It is also required to have a minimum of two directors, one of whom must be a natural person. The shares of a public LLC may be transferred to the public.

LLPs

LLPs have gained traction as the real estate investment vehicles of choice, and are regulated by the LLP Act 2011. LLPs have legal personality, and the liability of the partners is limited. LLPs may also own property, enter into contracts and sue and be sued in the name of the LLP.

An LLP has a minimum of two partners and at least one manager, who must be a natural person.

REITs

Following the enactment of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations (2013), REITs have gained traction as the premier vehicle for collective investment in real estate in Kenya. They are licensed and regulated by the Capital Markets Authority (CMA). A REIT is structured as an unincorporated common law trust divided into units and established by way of a trust deed. REITs must have a licensed independent REIT trustee who holds the REIT assets on behalf of the investors and a licensed REIT manager who manages the day-to-day affairs of the REIT.

A REIT scheme may be structured as follows.

• In a development REIT (D-REIT), investors pool resources for the purposes of acquiring eligible real estate for development and construction. Upon the completion of construction, the D-REIT may be converted to an income REIT (I-REIT).

• In an I-REIT, investors pool resources for the purposes of acquiring long-term income-generating real estate. The capital gain and rental income are distributed amongst the unit holders.
• An Islamic REIT is a pool for investment in income-producing Sharia-compliant real estate products.

REITs are beneficial to investors because they are professionally managed and there is minimal capital risk, despite the variety of real estate products available. REITs are also exempt from corporation tax.

There are no minimum capital requirements for LLPs and private LLCs.

A public LLC must have a minimum capital requirement of KES6,750,000 (approximately USD60,000).

REITs must have:

• a REIT trustee, who is required to have a minimum paid up capital of KES100 million (approximately USD874,000); and
• a REIT manager, who is required to have a minimum paid up capital of KES10 million (approximately USD88,000).

Private LLCs

A private LLC is required to:

• convene one annual general meeting;
• file annual returns at the companies registry;
• procure an annual audit of its accounts;
• remit and file tax returns annually with the Kenya Revenue Authority, and pay and file tax returns monthly for taxes due on a monthly basis; and
• maintain registers of its members, directors and charges at its registered place of business.

Public LLCs (Listed and Non-listed)

Listed public LLCs are those listed on the Nairobi Stock Exchange. In addition to the governance requirements listed above in respect of private LLCs, public LLCs are required to obtain a trading certificate for their operations. Furthermore, listed public LLCs must comply with the Capital Markets Act and relevant regulations applicable to listed companies.

LLPs

LLPs are required to:

• file an annual declaration of solvency; and
• maintain accounting records pertaining to the LLP’s business, such as invoices.

LLPs are not obliged to convene any meetings, nor to procure an audit on their accounts except during the winding-up and dissolution of the partnership. LLPs are also not required to file tax returns.

REITs

A REIT is required to:

• maintain a register of REIT security holders;
• convene an annual meeting of REIT security holders between 14 and 28 days after the circulation of the annual report;
• procure an annual audit of its accounts;
• remit and file tax returns in respect of withholding tax deductions on the payments to investors; and
• submit a copy of the first half financial year reports and accounts, the REIT’s annual report and audited accounts to the CMA.

The REIT trustee and the REIT manager are responsible for maintaining proper records in respect of the fund, the scheme and the REIT.

Nominal fees for annual entity maintenance are payable at the companies registry and the LLP registry for LLCs and LLPs, and at the land registry for trusts licensed as REITs. For REITs, additional compliance costs are incurred towards the renewal of the licences of the REIT trustee and REIT manager, and approval fees for any public offerings. The fees are paid to the CMA.

For accounting compliance, the costs will depend on the terms of engagement negotiated with the retained accounting firm.

Leases

Leases for a term of less than 21 years grant the tenant the right to the exclusive use and quiet enjoyment of the leased premises for the lease term. The same is true for leases that have longer terms but do not confer ownership.

Licences

A licence is a permit granted to the licensee to do some act in relation to the real estate (on a non-exclusive basis) that would otherwise constitute trespass.

Easements

An easement is a non-possessory interest in another’s land that allows the holder to use the land to a particular extent or requires the owner to undertake or refrain from undertaking an act relating to the land.

Public Rights of Way

This could be a wayleave or a communal right of way.

The NLC may authorise a wayleave for the benefit of the national or county government, a public authority or any corporate body to enable them to carry out their functions in relation to the land.

The NLC may also authorise a communal right of way for the benefit of the public upon application by a county government, an association or any group of persons.

The LA provides for the following types of leases.

Short-Term Leases

The LA defines a short-term lease as a lease for a term of two years or less without an option for renewal. A short-term lease is also a periodic lease.

Periodic Leases

The following are periodic leases:

• leases of an unspecified term with no provision for the giving of notice to terminate the tenancy;
• leases whose term is from week to week, month to month or year to year, or is any other periodic basis to which the rent is payable;
• where a tenant remains in possession of land with the consent of the landlord after the term of the lease has expired, unless the parties agree otherwise; or
• where an owner allows exclusive occupation of their land or part thereof for rent but without there being any agreement in writing.

Long-Term Leases

A lease is long term if it is for a period over two years.

Leases of a period of 21 years and above confer an ownership interest to the lessee.

Future Leases

Future leases are leases for a term that is to begin on a future date not being later than 21 years after the date on which the lease is executed. A future lease for a period above five years must be registered.

The terms of a lease, including the rent amount, are negotiated by the parties. However, Sections 65 and 66 of the LA impose some covenants on landlords and tenants, including:

• the tenant's right to peaceful and quiet possession and enjoyment of the leased premises;
• the tenant's obligation to pay rent;
• the landlord's obligation to pay statutory charges; and
• the landlord's responsibility to ensure the leased dwelling premises are fit for human habitation.

The LTA further regulates the revision of rent of the following controlled tenancies:

• commercial leases that are not in writing;
• written commercial leases of a period below five years or which contain termination provisions other than for breach of covenant within five years of commencement of the lease; or
• leases over business premises gazetted as controlled tenancies.

The terms of a lease are contractual, except for the implied covenants under Sections 65 and 66 of the LA (see 6.3 Regulation of Rents or Lease Terms).

Length of Lease Term

The law does not prescribe the term of a lease, which is contractually agreed by the parties.

For commercial leases, the term is typically above five years to avoid creating a controlled tenancy under the LTA.

Furthermore, where the term of the lease is not specified and no provision is made for the giving of notice to terminate a tenancy, the lease is deemed to be a periodic lease pursuant to Section 57 (1) (a) of the LA. In this case, the term of the periodic lease will be the period by reference to which rent is paid.

Finally, where the lease is terminated or the term lapses and the landlord accepts rent and allows the tenant to occupy the premises for at least two subsequent months, a periodic lease from month to month is deemed to have come into force, pursuant to Section 60 (2) of the LA.

Maintenance and Repair Provisions

Sections 65 (1) (c) and (d) of the LA impose an obligation on landlords to keep the exterior parts of leased premises in a proper state of repair, and to ensure dwelling houses are fit for human habitation.

Sections 66 (1) (c) and (e) of the LA impose an obligation on tenants to keep the interior parts of leased premises and boundary marks of land in a reasonable state of repair. Tenants are also required to yield up the leased premises in the same condition they were in when the term of the lease began (subject to fair wear and tear).

The parties can agree to further terms.

Frequency of Rent Payments

The law does not regulate the frequency of rent payments, which is contractually agreed by the parties.

COVID-19 Pandemic Provisions

See 6.21 Forced Eviction.

The law does not regulate rent variation, except in the case of commercial leases governed by the LTA, which sets out elaborate notice requirements and allows the tenant to challenge the proposed variation before the Business Premises Rent Tribunal (BPRT).

If the lease is silent on rent variation, this can only be done by agreement between the parties.

Rent is varied based on a pre-agreed escalation rate indicated in the lease. The frequency of escalation is also indicated in the lease.

VAT is payable on rental income from non-residential premises. Rental income obtained from residential premises is exempted from VAT payment under part II of the First Schedule of the Value Added Tax Act 2013 (VAT Act).

The tenant bears the following costs:

• the cost of fitting out the premises;
• the security deposit on the rent and the service charge;
• the initial service charge;
• the stamp duty payable on the lease, which is charged at 2% of the average annual rent;
• nominal fees for registration of the lease; and
• the tenant's legal fees and the landlord's legal fees (as may be agreed by the parties).

The maintenance and repair costs for common areas are paid by the landlord or the management company from the service charge paid by the tenants. These costs are apportioned amongst the tenants.

Each tenant bears the cost of installing individual utility meters (water, electricity, etc) for the leased premises, and pays utility costs directly to the utility providers.

For shared utilities, the landlord or management company will apportion the costs to the tenants, who will pay the landlord or management company in the form of service charges for onward payment to the utility providers.

The landlord insures the building while the tenant insures the contents in the leased premises, including the assets of the tenant within the premises. The lease indicates the insured risks, which may include fire, burglary and natural disasters. In recent times, insurers have offered cover for losses suffered due to the COVID-19 pandemic. There is no data on the uptake of these types of cover or recovery rates for pandemic-related losses.

The landlord may contractually restrict the use of the leased premises by a tenant if such restrictions are permitted by law.

Furthermore, the law imposes user restrictions on tenants, with the Physical Planning Act and county legislation regulating the use and development of land in Kenya. These restrictions may be indicated on the title document. The LA also implies covenants on the use of leased premises by tenants.

Section 67 (2) (e) of the LA restricts tenants from developing the leased premises beyond what is permitted in the lease. The landlord’s consent would be required for restricted developments, and is granted on the following conditions:

• the tenant complies with the applicable laws, including obtaining all development approvals;
• the tenant engages the relevant qualified professionals, such as architects; and
• the tenant restores the leased premises to its original state (subject to reasonable wear and tear) at the expiry of the lease (unless otherwise agreed).

The LA applies to all leases, whether residential, industrial or commercial. The following categories of leases are governed by specific laws.

Controlled Tenancies Under the LTA

The LTA regulates controlled tenancies (see 6.3 Regulation of Rents or Lease Terms) over business premises to protect tenants from exploitation, including arbitrary rent revisions and illegal evictions.

Leases of Dwelling Houses Under the Rent Restriction Act (Rent Act)

The Rent Act regulates tenancies relating to dwelling houses of a standard rent of below KES2,500, to protect tenants from exploitation by landlords.

Leases Over Agricultural Land

The LCA regulates dealings in agricultural land, with the aim of advancing agricultural activities and restricting ownership by foreigners.

There has been no legislation regulating leases during the COVID-19 pandemic period.

Under Section 73 (1) of the LA, the landlord has the right to terminate the lease if the tenant is declared bankrupt or goes into liquidation.

A landlord can ensure performance of the tenant's obligations through holding a security deposit throughout the term of the lease, which will be forfeited in the event of default. Some landlords may also accept bank guarantees as security.

The tenant has no right to occupy the leased premises upon the expiry of the commercial lease. The landlord should call for the yielding up of the premises by the tenant, and should issue eviction notices if necessary. Thereafter, the landlord may evict the tenant; see 6.21 Forced Eviction.

The lease would typically prohibit the assignment of the lease or permit assignment subject to the landlord’s consent. If permitted, a tenant may assign its rights over all or part of the leased premises on the following conditions:

• the parties execute and stamp the deed of assignment;
• the assignee is restricted from further assigning their rights under the lease; and
• the tenant settles all obligations due to the landlord as at the date of assignment.

Section 73 of the LA allows the landlord to terminate a lease if the tenant:

• commits a breach of its express or implied obligations under the lease; or
• declared bankrupt or goes into liquidation.

The lease may also allow for early termination by the parties giving reasonable notice. Termination may also be permitted in the event of the occurrence of a force majeure event.

Controlled tenancies (see 6.3 Regulation of Rents or Lease Terms) may only be terminated in accordance with the LTA, which requires the other party’s consent to be obtained. The aggrieved party can challenge termination at the BPRT. In this case, termination of the lease will be subject to BPRT’s orders.

The termination of commercial leases can also be challenging, since these leases do not contain termination provisions so as to avoid creating controlled tenancies under the LTA. In these instances, termination is by agreement between the parties or by the issuance of reasonable notice, which depends on the circumstances of the case.

Short-term leases for two years or less without the option of renewal are not registrable.

Long-term leases for more than two years are required to be registered under the LRA.

Leases are required to comply with the formalities of a valid contract. The lease will also be subject to stamp duty, charged at the rate of 2% of the average annual rent. The stamped lease is lodged at the relevant land registry for registration. An entry of the registered lease will be made on the title document and on the deed file of the property maintained by the land registry. The tenant meets the registration costs and the legal fees of their advocates and the landlord’s advocates.

Long-term leases conferring ownership (ie, leases for a period of 21 years and above) are deemed to be transfers of title. Accordingly, stamp duty is payable at 2% of the value of the leased premises if located in a rural area, or at 4% of the value of the leased premises if located in an urban area. Upon registration, a title is issued to the lessee, who bears the registration costs and the legal fees of their advocates and the landlord’s advocates.

Where a lease is lawfully terminated by a landlord as discussed in 6.19 Right to Terminate a Lease, the tenant may be evicted by the issuance of an eviction notice of at least three months. Eviction must comply with the law, particularly Section 152G of the LA.

A tenant may apply to the ELC to challenge the eviction notice.

For controlled tenancies, the tenant may challenge the eviction notice at the BPRT. In this case, eviction will be subject to the BPRT’s orders.

For commercial leases, the tenant may challenge the eviction notice in courts of law. In this case, eviction will be subject to the court’s orders.

For leases in respect of dwelling houses of a standard rent below KES2,500, the tenant may challenge an eviction notice at the Rent Tribunal. In this case, eviction will be subject to the Tribunal’s orders.

COVID-19 Eviction Moratoriums

There are no statutory COVID-19 eviction moratoriums in Kenya. The parties may contractually agree to reliefs, including rent moratoriums, rent reductions or freezes in rent escalation. Eviction moratoriums are uncommon. The tenant may also invoke the force majeure clause if the COVID-19 pandemic is recognised as a force majeure event in the lease. Alternatively, the parties can enter into a termination agreement setting out the terms for early termination of the lease.

A lease can be terminated by the government in cases of compulsory acquisition; see 2.9 Condemnation, Expropriation or Compulsory Purchase.

The price of construction projects is determined by the procurement method. For government-related contracts, competitive bidding is generally required, so it is preferable for the price of the project to be fixed or capped. The price would typically include the construction costs and professional fees for the project team.

For negotiated contracts, there is more flexibility on pricing. The cost may be estimated but free of any cap. The parties may also enter a cost-reimbursable agreement, which would cushion a contractor if the construction costs exceeded the estimates.

The design and construction of a project may be allocated as follows.

• The project proponent may undertake the planning aspect of the project in-house in consultation with relevant professionals, including architects and engineers. In the case of government projects, public participation will be required in the design process. Once the design is approved, the project proponent invites bids for construction in accordance with the approved plan. In this case, the contractor’s scope of work is limited and, therefore, the cost of construction is reduced.
• The project proponent may invite bids for both the planning (design) and construction of the project. The competitive bidder is selected to undertake both functions. Once the final plan is approved, the contractor proceeds with construction in accordance with the approved plan.

Construction risk is largely managed as per the terms of the construction contract, which may provide for:

• proper risk allocation to the party best suited to manage the risk – usually the contractor;
• limitation of the contractor’s liability to the price of the contract;
• indemnity and warranty provisions to cushion the project proponent from constructions risks;
• the requirement for the contractor to take up insurance against construction risks;
• force majeure provisions to cushion the parties from unforeseen circumstances that may delay or render the project impossible to implement; and
• performance guarantees and bonds, particularly in government projects.

The parties may agree to a milestone-based construction schedule. The contract may provide for liquidated damages to be paid by the contractor in the event of inexcusable delays in attaining the milestones. In cases of inordinate inexcusable delays, the contract may also provide for termination at the discretion of the aggrieved parties.

Project owners may call for additional security to guarantee a contractor’s performance, including:

• guarantees from the contractor’s parent company and third-party sureties;
• performance bonds from reputable insurers;
• letters of credit from reputable financiers; or
• holding the contract sums in an escrow account, with payments being released to the contractor upon the attainment of relevant milestones.

Unless restricted in the construction contract, an unpaid contractor has a builder’s lien over the constructed property so long as they maintain possession of the property. Financiers may require a contractor to sign a waiver of a builder’s lien.

Notably, the Government Proceedings Act prohibits the exercising of liens over government property.

For a project to be inhabited, a certificate of practical completion must be issued by a qualified architect, and a certificate of occupation must be issued by the relevant county government.

The sale of non-residential premises is subject to VAT under the VAT Act.

However, in David Mwangi Ndegwa v Kenya Revenue Authority (KRA) [2018] eKLR, the High Court held that VAT is not payable on the sale or purchase of both residential and non-residential premises. KRA obtained a stay of this judgment pending determination of an appeal of the High Court’s decision. In 2020, the Tax Appeals Tribunal in National Bank of Kenya Limited v Commissioner of Domestic Taxes (Tax Appeals No. 14 of 2017) ruled that KRA will continue to charge VAT on the sale and improvement of non-residential premises until the appeal in the David Mwangi Ndegwa case is determined. The appeal is still pending.

Large real estate investors mitigate tax liability by:

• applying for the development to be declared a special economic zone (SEZ) under the SEZ Act, which has many tax benefits, including reduced corporate taxes and exemption from the payment of stamp duty and excise duty;
• where possible, acquiring the shares of the landowner instead of purchasing land directly (see 2.10 Taxes Applicable to a Transaction);
• investing in special programmes like the AHS, which benefits from various tax incentives; or
• taking advantage of any existing statutory tax exemptions.

The landlord or owner is obliged to pay land rates to the relevant county government if the business premises are within an urban area. However, the tenants contribute towards land rates by way of the payment of service charges.

The Valuation for Rating Act exempts some properties in urban areas from the requirement to pay land rates, including churches, burial grounds and charitable institutions.

Withholding Tax (WHT)

Foreigners are subject to WHT, which is levied at different rates depending on the category of income earned. The rate also depends on whether the foreigner is a resident or a non-resident. WHT is 30% on rental income earned by a non-resident, 15% on dividend income earned by a non-resident, and 20% on professional fees earned by a non-resident.

WHT is deducted by the payer at source and remitted to KRA.

CGT

Gains from the disposal of real estate are subject to CGT; see 2.10 Taxes Applicable to a Transaction.

Rental Income Tax

Rental income tax is paid by residents earning annual rental income of between KES288,000 and KES15 million. The tax can be paid monthly, quarterly, semi-annually or annually at the rate of 10% of gross rent received per month.

This tax is not applicable to non-residents.

There are no specific tax benefits from owning land. However, the following expenditures are allowable deductions when determining a person’s taxable income:

• capital expenditure incurred on legal costs and stamp duty in connection with the acquisition of a lease for a period not exceeding 99 years of premises to be used for business purposes;
• capital expenditure by the owner or occupier of farmland for the prevention of soil erosion;
• sums expended during a year of income for structural alterations to the premises where the expenditure is necessary to maintain the existing rent (this does not include the extension or replacement of the premises) and
• capital expenditure incurred by the owner or tenant of agricultural land in clearing that land or in planting permanent or semi-permanent crops thereon.

REITs also enjoy the following tax exemptions:

• they are exempted from income tax, pursuant to Section 20 (1) of the Income Tax Act;
• they are exempted from stamp duty on transfers relating to REITs, pursuant to Section 96A of the Stamp Duty Act; and
• the transfer of assets into REITs and related transactions are exempted from VAT, pursuant to paragraph 33 of Section II of the VAT Act.