Real Estate 2023 Comparisons

The main sources of real estate law in Nigeria are:

• the Constitution of the Federal Republic of Nigeria 1999 (as amended), Chapter C23, LFN 2004 – the Constitution guarantees the right of every Nigerian to own immovable property anywhere in Nigeria; and
• the Land Use Act 1978, Chapter L5, LFN 2004.

These sources govern the acquisition and disposition of title in Nigeria. However, real estate is largely regulated by the laws enacted by each state of the federation. A few of the real estate laws applicable in Lagos State are:

• the Lagos State Mortgage and Property (Amendment) Law, 2015;
• the Lagos State Tenancy Law, 2011 – this law regulates leases and tenancies in most parts of the state, with few exceptions;
• the Land Registration Law, Chapter L41, Laws of Lagos State of Nigeria, 2015 – this law prescribes and regulates the registration of all land instruments in Lagos State; and
• the Lagos State Real Estate Regulatory Authority Law, signed into law in February 2022 – this law is newly enacted and introduces new modalities into real estate practice in Lagos State. For example, all real estate practitioners within the state are required to be registered with, and licensed by, the Lagos State Real Estate Regulatory Authority.

The Lagos State Real Estate Regulatory Authority’s functions further include:

• receiving and investigating petitions and complaints against registered real estate professionals;
• collating data on real estate transactions within Lagos;
• serving as mediator in real estate disputes;
• ensuring the protection of citizens from illegal real estate transactions; and
• providing consultancy services on housing data and related matters to all stakeholders in the real estate sector.

Though the real estate market grew significantly in 2022 and contributed over NGN7 trillion to the country’s GDP, home ownership has been difficult for the population as a result of a housing shortage, higher lending rates and inflation-driven increase in the prices of housing or building/construction materials.

Towards the tail end of 2022, the Central Bank of Nigeria (CBN) commenced a redesign of the naira in order to strengthen the value of the naira, and improve the situation of the economy. Thus, the CBN ordered that the old naira notes would cease to be legal tender in the country. In line with this, the CBN imposed low cash limits and stringent requirements to deposit the old naira notes to curb illegal, corrupt and fraudulent transactions that were facilitated by the largely informal and cash-driven economy. This has been seen to have very negative effects on the real estate sector, particularly the construction subsector, as many real estate participants/vendors such as developers and builders deal in cash for purchase of building materials and payment for labour.

The high rate of demand is also a key driver of foreign and local investments into the real estate market as developers are capitalising on local demand to open up new areas for development. Developers hold the view that a significant percentage (55%–65%) of effective demand for real estate projects is driven by Nigerians in diaspora.

Some key trends in the market include the high interest rate environment, increase in the cost of building materials driven by high inflation levels and forfeiture orders on properties owned by politically exposed persons.

Some factors driving growth in the real estate market include increased infrastructure development in the country, as well as increased international developer and occupier activity, particularly of tech players. A prime example is Microsoft’s launch of its Africa Development Centre headquartered at Kings Tower.

Lekki Gardens Estate Limited, a property investment and development firm, raised a NGN25 billion Commercial Paper on the FMDQ to be used as working capital. Also, Purple Real Estate Income Plc, a real estate investment firm, launched a NGN10 billion equity public offering whose proceeds are intended to be used for debt refinancing, and acquiring income-producing real estate assets, among others.

Data from the Nigerian Building and Road Research Institute shows that over 90% of construction materials used in the construction of buildings and roads in Nigeria are imported. Growing demand shows the need to encourage local production of these materials.

Also, the urgent need for infrastructure planning has grown even more apparent in the wake of the flooding that affected over 33 states of the federation in 2022, causing significant damage and loss of lives and property.

Due to the rising value of properties in the country, and limited access to financing for the same, the population has faced a measure of difficulty in home acquisition and increasing popularity of alternative models like short-letting and fractional ownership.

Technology continues to be a catalyst for change in all areas of business and industry, and the real estate market is no exception. Disruptive technology is expected to play an important role in the manner of operations in the real estate sector, such that it will no longer be business as usual. Notwithstanding that from all indications, the players in the real estate industry are keen to adapt to the changing business environment in the country, the sector has been very slow to integrating technology into its procedures. 

Proptech companies, in the form of online real estate marketplaces, are becoming increasingly popular and recording higher levels of patronage and investor interest. Some of these proptech companies utilise blockchain and decentralised finance (DeFi) technologies, but there has been no known impact from the emergence of blockchain and other disruptive technologies on real estate transactions in Nigeria.

Interestingly, the Nigerian regulatory space is gradually becoming more open to the adoption of disruptive technologies. For instance, the Securities and Exchange Commission (SEC), in May 2022, released new regulations known as the Rules on Issuance, Offering and Custody of Digital Assets in Nigeria. These rules apply to issuers seeking to raise capital in Nigeria through digital asset offerings, Digital Asset Offering Platforms (DAOPs), digital asset custodians and fintechs. Also, the Nigeria Startup Act was passed into law and is expected to remove the legal ambiguities that have hitherto impeded the growth of start-ups. It is hoped that new real estate laws/regulations will be enacted for the adoption of emerging disruptive technologies.

The rise in technology usage, coupled with the influence of the younger demographic, particularly as it relates to the development of proptech firms, enhance the possibilities of emerging technologies significantly impacting the real estate sector in Nigeria, subject to an enabling regulatory environment.

Prior to the enactment of the Land Use Act in 1978, freehold interest existed in land. However, with the coming into force of the Land Use Act, freehold interest was abolished and the law vests all land within a state in the Governor of the state. The land shall be held in trust and administered for the use and common benefit of all Nigerians. Consequently, the title granted by the Governor to a purchaser of a parcel of land is a right of occupancy (a lease), usually for a period of 99 years, subject to renewal. Thus, effectively, there is no absolute ownership of real estate in Nigeria. The authors believe that the Land Use Act needs to be amended, to allow for the ownership of absolute interests in real estate.

Furthermore, in Nigeria, when a piece of real estate is bought, the buyer only receives an equitable title and legal title to a property does not pass until the buyer registers his interest at the lands registry office of the relevant state. The process of registration is, however, stringent and expensive, thereby preventing several buyers of real estate from perfecting their title.

From the foregoing, the authors’ proposal for reform is twofold:

• an amendment of the Land Use Act to allow for absolute ownership of property; and
• a revision of the perfection process, to make the registration of acquired title easy, flexible, affordable and less time consuming.

At the time of writing in April 2023, there were no indications that the author’s proposals for reform are likely to be effected.

Historically, the category of property rights that can be acquired in Nigeria is that of absolute and derivative rights.

However, with the enactment of the Land Use Act 1978, when a person purchases a piece of real estate and obtains a certificate of occupancy from the state Governor, the buyer merely receives a leasehold for 99 years. In the event that such person later sells the property, the subsequent buyer does not receive an absolute ownership of the land/property; rather, they receive title for the remaining number of years left of the original 99 years granted in the certificate of occupancy (ie, a sublease).

Thus, the category of property rights that can be acquired in Nigeria is in the form of a leasehold.

The following laws apply to the transfer of title in real estate:

• the Constitution of the Federal Republic of Nigeria 1999 (as amended), Chapter C23, LFN 2004 (as amended);
• the Land Use Act, Chapter L5, LFN 2004;
• the Land Instrument Preparation Laws of the various states;
• the Land Instrument Registration Laws of the various states;
• the Property and Conveyancing Law, 1959 (applicable in States in the former Western Region of Nigeria and Mid-Western Region of Nigeria);
• the Conveyancing Act, 1881 (applicable in in States in the former Northern and Eastern Regions of Nigeria);
• the Stamp Duties Act, Chapter S8, Laws of the Federation of Nigeria, 2004 (as amended);
• the Mortgage and Property (Amendment) Law, Lagos State, 2015;
• the illiterate protection laws of the various states;
• the wills laws of the various states; and
• the customary laws of the various indigenous communities in Nigeria.

There are no special laws that apply to the transfer of real estate in Nigeria.

Every transaction relating to real estate (with the exclusion of leases for a period below three years) is required to be in writing and conducted via a deed.

Furthermore, the law requires the holder of a right of occupancy – ie, the seller/lessor/mortgagor – to obtain the consent of the Governor of the state where the land is situate for the transfer of title to be considered lawful and proper. In practice, however, the burden to process the Governor’s consent is often shifted to the buyer, lessee or mortgagee, as the case may be.

In order to obtain legal title over a property, a buyer/lessee/mortgagee is required to register their interest in such property at the respective lands registry office of the relevant state.

Transfers of titles are recorded at the lands registries of each state.

Title insurance is not common in Nigeria. Most deeds of transfer nevertheless contain an indemnity clause whereby the vendor/assignor agrees to indemnify the counterparty in the event of a defect in title.

The processes existing prior to the disruption of activities caused by the COVID-19 pandemic for the documentation and completion of real estate transactions still subsist.

With the increased volumes of real estate transactions, real estate participants, particularly purchasers, have become more aware of the associated risks and the need to mitigate these risks. For this reason, the need for due diligence cannot be overemphasised. Real estate buyers carry out due diligence by physically inspecting the property to confirm that it is fit for purpose. For the confirmation of title, searches are conducted at the relevant registries, including:

• the lands registry;
• the probate registry;
• the court registry; and
• the Corporate Affairs Commission, if the transfer is being made by a corporate body.

To conduct a search at a lands registry, it is usually required that a written application to conduct a search be submitted to the Registrar of Titles of the state, accompanied by the evidence of payment of the prescribed search fees and other required documents.

Upon submitting the application, the Registrar of Titles will permit the applicant to carry out a physical search of the records of the registry for the relevant property.

In the Federal Capital Territory, Abuja, searches are conducted electronically by the officials of the registry via the Abuja Geographic Information System. The search report is then issued to the applicant by the officials.

Searches at the probate registry are relevant where a property is being sold by the executors/administrators of an estate. The aim of such a search is to confirm that the persons purporting to sell the property have authority under the necessary probate documents to sell the said property. This entails filing of an application at the offices of the probate registrar.

Searches at the court registry are for determining if there is any pending/past litigation or other dispute in respect of the property proposed to be bought. The search is usually conducted upon an application to the chief registrar of the court. The application must set out the suit number and the name of any parties involved. However, this is not a common practice in Nigeria.

Searches at the Corporate Affairs Commission are aimed at verifying the incorporation status of a corporate entity and confirming the existence of any charges over the property proposed to be sold by such an entity.

By law, companies are required to register any charge or other encumbrance created over their property. As such, a comprehensive search at the Corporate Affairs Commission will disclose the existence or discharge of any encumbrance over the company’s property.

It is understood that after the outbreak of the COVID-19 pandemic, some lands registries have started to create electronic portals to enable the electronic search of properties. However, at the time of writing, the process of due diligence has largely remained the same.

The typical warranties and representations given by vendors in real estate transactions include:

• that the vendor’s title is not defective;
• that the vendor has the right to transfer;
• that the purchaser shall enjoy quiet possession of the property; and
• that the vendor shall indemnify the purchaser where the former’s title turns out to be defective or where there is a successful adverse claim against the title.

Generally, there do not appear to be new representations and warranties informed by the pandemic. Nevertheless, parties to a contract of sale of real estate properties now include pandemics and similar scenarios in their definition of force majeure events, which may excuse a default in fulfilling an obligation under the contract.

There are no known sellers’ warranties provided under the statutes with respect to the sale of real estate.

The buyer’s remedies against the seller for misrepresentation are rescission of the contract and claim for damages.

Except for where parties agree otherwise, there are generally no securities for the enforcement of the buyer’s remedies against the seller.

Representation and warranty insurance have not yet attained usage in Nigeria.

Generally, an investor in real estate should be aware of laws relating to the transfer of real estate, the registration of title, taxation, finance and anti-money laundering with regard to payments.

Generally, in Nigeria, a buyer of real estate buys a real estate asset along with all defects and encumbrances. Thus, the buyer is ordinarily expected to physically inspect the property and conduct all due diligence before purchasing the property.

Thus, to protect themselves from liability, buyers may require sellers to covenant to be responsible for all pollution or contamination.

The permitted use of, or purpose for, a parcel of real estate is usually indicated in the terms of grant indicated in the Certificate of Occupancy issued by the Governor of a state. The certificate would indicate if a parcel of land is for “residential”, “commercial”, “agricultural” or “mixed development”.

Additionally, the buyer may consult with the town planning authority in the state to seek clarification on the permitted use of real estate in the specific area where the land is located.

Furthermore, a buyer may apply for a change of use of a property if the law or terms of grant permits.

Private investors can enter into specific development agreements with public authorities for the facilitation of real estate projects.

Governmental expropriation of land is possible in Nigeria, and occurs under two main scenarios:

• governmental acquisition of land for public purpose; and
• governmental taking over where the grantee of the land breaches any of the provisions in the terms of grant.

In either case, before the government can expropriate a private land, the law requires the government to strictly adhere to the following procedure:

• a notice of intention to expropriate the land must have been served upon the landowner;
• the notice must be by personal service or by being left at the landowner’s last known place of abode or business;
• the notice served on them must be published once in the state gazette, and at least in two national daily newspapers circulating in the state;
• the government must give the opportunity to make representations or be heard on the proposed expropriation; and
• the government must pay adequate compensation, which is mostly in the form of an alternative land of equal value to the expropriated land or monetary compensation.

The taxes and levies applicable to the sale and purchase of real estate include the following.

• Capital gains tax – payable by the seller on the gains derived from the disposal of assets. It is statutorily charged at 10% of the gains.
• Stamp duties – payable by the buyer on an instrument of transfer of property. It is assessed on an ad-valorem basis.
• Personal income tax – payable on the income, profits or gain accruable to an individual party to a real estate transaction. In Lagos, state payment of personal income tax is a requirement for obtaining the consent of the Governor to the disposal of real estate. Where a company is party to the transaction, two directors of the company would be required to present proof of payment of their personal income tax.
• Ground rent is charged and payable on the grant of right of occupancy.
• A consent fee is payable as a requirement for the grant of the consent of the Governor to the sale of a property subject to a right of occupancy.
• A registration fee is payable under several land instrument registration laws of various states.

Generally, each party is responsible to pay their respective solicitors and other professionals engaged by them in furtherance of the transaction. In respect of taxes, both parties are required to be compliant in the payment of their income taxes. The seller pays capital gains tax on the profits of the sale, while the buyer pays stamp duty on the instrument of transfer. The buyer also generally bears all other costs of perfecting the title to the property.

Where a property is acquired through the acquisition of shares in a property-owning company, the transaction will not attract property taxes.

The acquisition of interest or right in land in Nigeria by foreign investors is restricted by Acquisition of Lands by Alien laws of several states in Nigeria, save for where such interest or right in land is less than three years, including any option for renewal. The acquisition of real estate by foreigners in Nigeria is subject to obtaining the prior consent of the Governor before executing the relevant instruments for acquiring the land.

Alternatively, an alien can acquire interest in real estate in Nigeria through a special purpose vehicle such as an incorporated company whose majority of members are Nigerians.

Acquisitions of commercial real estate are generally financed through:

• debt or equity capital raises, including sukuk;
• mortgages;
• real estate investment trusts; or
• joint ventures.

Typically, an investor who is borrowing funds to acquire/develop real estate secures such financing against the property proposed to be acquired through a mortgage.

Generally, there are no known restrictions on granting security over real estate to foreign lenders, apart from the existing restriction on ownership of real estate by foreign investors.

For every loan or investment imported into Nigeria via a Central Bank of Nigeria-approved channel for the importation of capital, there shall be no restriction on repatriation and repayments, provided that upon importation of the funds, the foreign lender obtained a Certificate of Capital Importation from the financial entity through which the capital was imported into Nigeria.

Several fees and taxes are required to be paid towards the perfection of securities created over real estate, including:

• stamp duty, which is required to be paid on the instrument creating the security;
• a consent fee, which is required to be paid towards obtaining the Governor’s consent;
• registration fees, which are to be paid for registration of charges at the Corporate Affairs Commission where the borrower is a company; and
• registration fees, which are payable at the lands registry.

Generally, there are no known rules or requirements to be complied with before creating a security over real estate. In the case of a corporate body, it has all the powers of a natural person and can create security over its real assets unless its articles of association provide otherwise.

The mode of enforcing security is generally dependent on the type of security created.

Where the security created is a legal mortgage, the lender will be entitled to enforce the security once the power of sale has arisen and become exercisable.

The power of sale arises when:

• the instrument creating the security is by deed;
• no intention against sale is expressed in the deed; and
• the facility maturity date has passed.

The power of sale becomes exercisable when one of the following occurs:

• a notice requiring payment has been served on the borrower for a period of at least three months;
• some interest on the facility is left unpaid for a period of at least two months; or
• the borrower is in breach of a covenant of the deed, other than the covenant to repay.

However, where the security created is an equitable mortgage, the lender is required to institute legal proceedings for the court to grant the lender power to exercise these rights.

Generally, secured creditors receive preference over unsecured creditors. Thus, there are no additional steps required to give priority to the lender’s security interest, save for the usual duty to register the mortgage/charge at the relevant lands registry and the corporate affairs commission.

There are no known policies or regulations enacted by governmental authorities during the COVID-19 pandemic that restrict lenders’ right of foreclosure or ability to realise collateral.

It is possible for existing secured debt to become subordinated to newly created debt. By the provision of the Companies and Allied Matters Act, a fixed charge generally takes priority over an initially created floating charge, unless the terms for the grant of the floating charge prohibits the granting of any later charge having priority over the floating charge coupled with a notice of that prohibition to the fixed chargee at the time when the charge was granted to him.

Existing secured debt can also be subordinated by the execution of a subordination agreement.

As established earlier, the title holder of a property is generally responsible for the property, except where the title holder, by agreement, assigns such responsibility to any other person, such as the occupier of the property.

A person merely holding security is not the title holder of the property, and, thus, may not be held accountable for any pollution of the real estate. However, where the security has been enforced and the property sold, any buyer of such property may, subject to the circumstances, be liable.

All security interests validly created by a borrower in favour of lenders prior to the borrower becoming insolvent are enforceable against the borrower, and the borrower’s estate.

However, any other transaction entered into by the directors of a company after insolvency proceedings have commenced are void and of no effect.

With the expiry of LIBOR at the end of 2021, the banking institutions from the five currencies covered by LIBOR developed alternative reference rates to ease the transition from LIBOR to wit:

• the Sterling Overnight Index Average (SONIA), for pounds sterling;
• the Secured Overnight Financing Rate (SOFR), for United States dollars;
• the Euro Overnight Index Average (EONIA), for the euro;
• the Tokyo Overnight Average Rate (TONAR), for Japanese yen; and
• the Swiss Average Rate Overnight (SARON), for Swiss francs.

The key consequence of the expiry of LIBOR for borrowers whose loan agreements were created using the LIBOR rate is the need to amend the terms of the loans to reflect an alternative reference rate, based on the rate reference selection agreement.

New lending will also now be governed by any of the alternative reference rates adopted by the parties.

In Nigeria, the governmental controls applicable to planning and zoning across the regions and localities are generally stipulated in the planning and zoning laws enacted by each state.

At the federal Level, the Urban and Regional Planning Act regulates the development of new, and the refurbishment of existing, buildings.

At the state level, the Urban and Regional Planning Law of each state regulates the development of new buildings.

At the federal level, the Federal Capital Development Authority regulates the development and designated use of individual parcels of land under the Urban and Regional Planning Act.

At the state level, each state, by virtue of its Urban and Physical or Regional Planning Laws, has a Ministry of Physical or Urban and Regional Planning, which regulates and designates the use of individual parcels of land.

In Lagos State, the regulating law is the Urban and Regional Planning and Development (Amendment) Law, 2019, and the regulating authorities are the Lagos State Building Control Agency and the Planning Permit Authority.

The process for obtaining a building permit necessarily involves the submission of an application for a planning permit accompanied with other relevant documentation, including the technical drawings, analysis and reports of the proposed development.

Upon submission of the required documentation, the application may be granted or refused.

Sections 8 and 16 of the Lagos State Urban and Regional Planning and Development (Amendment) Law, 2019 empower any member of the public, any tier of government, non-governmental organisations and professional bodies to submit written objections against an intended development.

By the provisions of Section 33 of the Urban and Regional Planning and Development (Amendment) Law, 2019, the Planning Permit Authority may consider representations made to it by a person, body or organisation to be affected by an intended development.

Any intending developer who is dissatisfied with the decision taken on their application for a permit by the Physical Planning Authority may appeal to the Physical Planning Appeals Committee.

If the decision reached by the Appeals Committee is still not favourable to the developer, they may appeal, as of right, to the High Court of the state, within 28 days of receiving the written notification of the decision of the Committee.

While it may be possible and, indeed, necessary to sometimes enter into agreements with local government authorities and/or utility suppliers to facilitate a development project, it is not typical/common in Nigeria to enter into such agreements.

In Lagos, any development that is being undertaken contrary to the specific use granted under a planning permit shall be asked to revert to the original plan.

Failure to carry out any of the directives within the stipulated time shall result in the building being removed at the developer’s expense, by the appropriate authority; in this case, the Lagos State Building and Control Agency.

Similar provisions are also generally applicable in other states of the federation.

The types of entities available to investors to hold real estate are:

• a private limited liability company;
• a public limited liability company;
• a limited liability partnership;
• a real estate investment trust or company; and
• an incorporated joint venture.

The vehicle to be adopted in each instance ought generally to be informed by the objective of the investor. In Nigeria, the most common vehicles for holding real estate assets are a private limited liability company and an incorporated joint venture.

Private Limited Liability Company

A private company is one that is stated in its memorandum of association to be a private company. It is registered under the Companies and Allied Matters Act, and it has a distinct personality from its shareholders.

The total number of members of a private company cannot exceed 50.

There is a restriction on the transfer of its shares.

It can be wholly owned by a foreigner, but subject to the provisions of the Acquisition of Lands by Alien Laws. However, in practice, it must have at least one Nigerian director.

Public Company

A public company is registered under the Companies and Allied Matters Act, and it has a distinct personality from its shareholders.

There is no restriction on the number of members, and there is no restriction on transfer of shares.

Its shares can be traded on the Stock Exchange, and the shares can be offered to members of the public.

Limited Liability Partnership

A limited liability partnership is a body corporate formed under the Companies and Allied Matters Act, and has a separate personality from its partners.

It has perpetual succession and a change in partners does not affect the existence, rights or liabilities of the limited liability partnership.

There must be at least two designated partners, of which at least one must be resident in Nigeria.

Real Estate Investment Trust or Company

A real estate investment trust or company is a body corporate incorporated for the sole purpose of acquiring intermediate or long-term interests in real estate or property development. It may raise funds from the capital market through the issuance of securities.

The trust may be constituted for the sole purpose of acquiring a property on a “trust for sale” for the investors, and in such trust, the investors will acquire units in the trust, through which they will be entitled to receive periodic distribution of income and participate in any capital appreciation of the property concerned.

A real estate investment trust is regulated by the Securities and Exchange Commission.

Private Limited Liability Company

The minimum issued share capital of a private limited liability company is NGN100,000. For companies with foreign participation, the required minimum issued share capital is NGN10 million.

Public Limited Liability Company

The minimum issued share capital of public limited liability companies is fixed at NGN2 million. For companies with foreign participation, the required minimum issued share capital is NGN10 million.

Real Estate Investment Trust or Company

Real estate investment trust companies generally operate as fund/portfolio managers. As such, they are required to have a minimum paid-up capital of NGN150 million before registration.

There is a requirement that all entities must be registered and fully maintain the minimum threshold and limits required of them at every point in time.

In addition, all companies are expected to file annual returns, audited accounts, tax returns and general changes in the company’s leadership and management with the appropriate regulatory authority, at every given time.

Furthermore, real estate investment trusts/companies are expected to file valuation reports and mandatory rating reports bi-annually.

The cost of procuring accounting professionals to assist with the books largely depends on the volume of transactions conducted and the professionals engaged, whilst the cost of filing at the relevant regulatory offices is as prescribed by the said regulatory agency, as may be revised from time to time.

The law recognises leases and subleases as the type of arrangement whereby a person is allowed to use real property for a limited period without buying it outright.

The law does not distinguish between different types of commercial leases.

Although lease terms generally reflect the agreement of parties, and parties are at liberty to negotiate what they deem appropriate and necessary, the tenancy and rent control laws of the respective states provide for some statutory terms that are implied in every lease.

Similarly, although the amount payable as rent is largely a reflection of the agreement of parties, the Tenancy Law of Lagos State, which has a limited geographical jurisdiction within the Lagos State, permits an existing tenant to apply to the court for an order declaring that an increase in rent imposed by the landlord is unreasonable.

Also, where there is no agreement between the parties as to the terms of the lease, the tenancy laws of various states generally regulate the lease transaction.

In Nigeria, during the COVID-19 pandemic in 2020, there was no known legislation enacted to address the effect of the pandemic and the attendant disruptions caused by the lockdowns, on lessor-lessee relationships.

Length of Lease Term

The length of a lease is a fundamental term in a lease agreement as leases have to subsist over a defined or certain period of time. This term is subject to the agreement of the parties. The foregoing notwithstanding, the term of the lease must always be lesser than the length of time remaining on the lessor’s right of occupancy.

Maintenance and Repair of the Real Estate Occupied by the Tenant

Matters concerning maintenance and repairs are dependent on what the parties agree to in the lease agreement. However, it is usual for the lessor to be responsible for structural repairs, while the lessee bears responsibility for other parts of the property. The tenant is expected to keep the property in a tenantable state excepting fair wear and tear. 

Frequency of Rent Payments

This is another very important term in a lease agreement. Depending on the length of the lease, rent is usually due on or before the lease anniversary date. Furthermore, unless the parties agree to vary the length of the agreement, rent shall be paid as frequently as the length of the lease. However, for places covered by the Tenancy Law of Lagos State, giving and receiving a premium/rent more than one year in advance is illegal, regardless of the term of years granted.

Also, under the Lagos State Real Estate Regulatory Authority Law 2021, tenants who take an annual lease may, on condition, be entitled to pay rent on a monthly basis.

Coronavirus Pandemic Issues

The outbreak of COVID-19, and the manner in which it caught the world off guard, is one experience that has shaped the manner in which parties commit to commercial agreements. Notably, parties now take cognisance of pandemics or endemics as force majeure events that are inserted in commercial agreements.

Generally, the practice is for lessors, when granting a lease, to insert a rent review clause in the agreement. This clause allows the lessor to obtain the market rental value obtainable on the property as of the review date.

Typically, the lease agreement may state the timeframe within which the rent will be reviewed. The practice is for the lessor to notify the lessee of the intent to activate the rent review option in the agreement.

In the event that the parties are unable to agree on the revised rent to be paid, an expert opinion may be sought, and where the lessor arbitrarily increases the rent, the lessee may be entitled to approach the courts for an order declaring the increase as unreasonable where the property is within the geographical coverage of the Tenancy Law of Lagos State.

Some factors considered in a rent review are any pre-agreed modality/rate specified in the lease agreement and the current rental value for similar properties in the neighbourhood.

The Finance Act, 2020, expressly excludes lands and buildings, and interest in lands and buildings, from the definition of taxable “goods” and “services” under the VAT Act. Thus, VAT is not payable on rent.

Apart from rent, tenants generally bear some extra costs, which may include solicitor’s fees, property agency fees, a service charge for utilities, land use charge or tenement rate, business permits where the property is for commercial use, and where the lease exceeds three years and is to be registered, the lessee will also be required to bear the cost of the registration of the lease. 

The lessee normally bears the financial cost of maintaining and repairing common areas such as car parks and gardens. The usual practice is that a lessee contributes an allotted portion of the cost for maintaining the common areas via the payment of a service charge.

The cost for utilities and telecommunications that serve a property are usually discharged by the tenants who are the consumers of such services.

The party obligated to insure a property is mostly determined by the nature of the property. Where the property is singular, it is not unusual to pass the obligation to insure same to the tenant. However, where the property comprises terraces or a block of flats, the landlord will usually take out a single insurance policy over the property as a whole, and may, subject to the agreement of the parties, pass the cost on to the tenants. This insurance, however, strictly covers the property and not the tenant’s fixtures, fittings and other properties within the property. Thus, the tenants will still be required to take out insurance over their properties.

Generally, tenants have not recovered unused rents paid as a result of office closures, as such recovery is not as of right and is dependent on the lease agreement between the parties involved.

A landlord can, by express clauses in the lease agreement, restrict the tenant’s use of the property.

Further to the above, the Lagos State Tenancy Law, 2011, also contains provisions that restrict tenants’ usage of leased properties.

The tenant or lessee may be permitted to alter or make improvements to the real estate. This can be stated in the lease agreement or the lessee may apply for, and obtain, the consent of the lessor in writing.

A failure on the part of the lessee to obtain the express written permission of the lessor before embarking on alteration or improvement of the real estate can be a ground for forfeiture of the lease.

Under the Lagos State Tenancy Law, 2011, which is applicable in Lagos State, where a lessee, having previously obtained the written consent of the lessor, proceeds to make improvements on the property and the lessor determines the lease, the lessee shall be entitled to claim compensation for the improvements made.

The authors are not aware of any laws regulating leases of particular categories of real estate in Nigeria.

A tenant’s insolvency indirectly determines the tenancy relationship, unless the parties otherwise agree.

The forms of securities obtained by landlords include the following:

• making a security deposit of a certain amount agreed upon by the parties, coupled with the circumstances under which the landlord shall have access to, and make use of, the security deposit;
• obtaining a performance bond from the lessee’s bank, to cover for the lessee’s inability to offset their rent; and
• obtaining a third-party guaranty for the payment of the lessee’s rent, in the event of default.

On the expiry of a lease term, the tenant may hold over the rented property. At law, such tenant has become a statutory tenant or tenant-at-will, and the landlord is prohibited from forcefully re-entering the property. To recover the premises from the tenant, the landlord is required to approach the courts for an order.

There is nothing that the landlord can do to guarantee that the tenant will leave on the originally agreed date.

Generally, whether a tenant can validly assign/sublease the interest in the property is entirely dependent on the agreement of the parties. The parties may agree that the lessee shall be allowed to sublet, assign or part with the possession of the premises, subject to obtaining the prior written consent of the lessor.

Events that can give the landlord the right to terminate the tenancy include:

• the tenant being in arrears of rent;
• the tenant constituting a nuisance;
• the tenant conducting illegal or illicit activities in the leased property;
• the tenant altering or carrying out improvements on the property without the express consent of the landlord;
• the tenant assigning or subletting the property without the express consent of the landlord;
• the tenant causing a serious damage to the property;
• where the premises is required by the landlord for personal use;
• where the premises has been abandoned;
• where the premises is unsafe and unsound as to constitute a danger to human life or property; and
• the violation of a term or condition in the lease agreement.

A lease for a period exceeding three years is statutorily required to be stamped at the Federal Inland Revenue Service and registered at the lands registry of the state where the property is located. The stamping or registration is usually done after the parties have obtained the governor’s consent.

Leases for three years and below, which are regarded as tenancies, are also required to be stamped but they are not required to be registered. Stamp duty on tenancies is payable ad valorem but there has been little or no enforcement of this requirement.

In the event of default, a tenant can be forced to leave the property by the landlord approaching the courts for an order to that effect. A landlord is not permitted to forcefully compel the tenant to leave, other than through a court order.

The process of evicting a tenant is usually slow and may last up to six months or more.

The government can terminate a lease for overriding public interest, by a revocation of a right of occupancy, whether statutory or customary.

The timeframe for a government compulsory acquisition is not certain and may take six months or more.

Generally, the government gives notice of acquisition and pays monetary compensation to the holder of the right of occupancy sought to be compulsorily acquired.

The most common structures used to price construction projects are:

• fixed-price/lump-sum contracts;
• a unit price contract;
• cost-plus;
• a target estimate; and
• a guaranteed maximum cost contract.

Traditional Design-Bid-Build

In the case of a traditional design-bid-build:

• the owner employs an architect or designer to develop the architectural design of the proposed development;
• bids are taken from general contractors; and
• the winning bid is selected, and the general contractor is contracted to build the project.

Owner-Builder Operation

Here, the owner of the property has the responsibility of designing and constructing the project by themselves, or may subcontract the process to another entity, but reserve the decision-making rights for themselves.

Turnkey Operation

Under this arrangement, the owner employs the services of a contractor, who assumes the responsibility of designing and constructing the project.

Indemnifications, warranties, limitations of liability and waivers of certain damages are all devices used to manage construction risks.

Indemnification clauses operate to apportion liability to a party who, by their action or omission, in connection with the contract, causes loss or damage to the other party in the contract, and places on the party the need to compensate the injured party for a specific loss in monetary terms, equal to the loss suffered.

Limitation of liability clauses operate to limit the amount payable by each party for damage caused by them to the other party through acts of negligence.

For waivers, the parties may agree to mutually waive a claim for consequential damages.

On warranties, a party may give certain assurances to the other party of the truthfulness or genuineness of certain facts ascribed to them in a contract.

The above devices are subject to legal limitations that include whether the other party was aware of the existence of such devices at the time of entering into the contract.

Schedule-related risk is managed on construction projects through:

• identifying risks;
• assessing possible exposure to the risks;
• setting plans in motion to mitigate or respond to the risks; and
• being on the lookout for further risks or possible reoccurrence.

In Nigeria, parties are allowed to agree that an owner is entitled to monetary compensation if certain milestones and completion dates are not achieved. This is based on the prevailing doctrine of commercial transactions, which is that the parties can freely negotiate the terms of their contract.

It is common for owners to request additional forms of security to guarantee that the contractor would perform its services as agreed under the contract.

Unless otherwise agreed by the parties, contractors are not permitted to take a lien on, or otherwise encumber, a property in the event of non-payment. It is advisable for the contractor to institute an action before a court of law to recover payment for work done.

The Lagos State Building Control Agency Regulations 2019 mandate every developer to obtain from the Agency a certificate of completion and habitation upon completion of construction. This certificate must be obtained before a new development can be occupied.

VAT is not payable on real estate transactions.

In order to mitigate tax liability, the purchaser of a large real estate portfolio is allowed to stamp several originals of the instrument of transfer as one.

There are taxes payable on the occupation of a business premises, including television licence rates payable pursuant to the Radio and Television Byelaw (No 9) 2010.

There are no known exceptions to the payment of taxes on the occupation of business premises.

The lessee is required to deduct Withholding Tax (WHT) at the rate of 10% from the lease rentals and remit the WHT to the tax authorities. However, in practice, lease agreements do provide that the rent shall be net of taxes, thus enabling lessors to receive the total amount specified as rent.

For foreign investors whose country of origin has a double taxation treaty with Nigeria, WHT would be charged at the rate of 7.5%.

Individuals who derive rental income from real estate are liable to pay personal income tax at a rate between 7% and 24% of the rent received, depending on the amount of the rent.

In a similar manner, companies that receive rental income from real estate are liable to pay between 20% and 30% of the rent received as CIT.

Exemptions

Companies with an annual gross turnover of less than NGN25 million are exempt from paying CIT.

Real estate investment trust companies approved by the Securities and Exchange Commission are also exempted from paying CIT on their rental and dividend income that was earned in a financial year, provided that at least 75% of such income is distributed within 12 months.

Gains accruing from the disposition of real property are taxable as capital gains tax. The capital gains tax payable is assessed at a rate of 10% of the value of the property disposed.

There are tax benefits that accrue from owning real estate in Nigeria. Real estate investment vehicles (which include trusts and companies) generally qualify for a Pioneer Status Incentive (PSI) granted under the Industrial Development (Income Tax Relief) Act.

Entities that qualify for a PSI in Nigeria are granted a tax holiday for a cumulative period of five years, comprised of a three-year initial period and an additional two years. Also, such entities are precluded from paying withholding tax on dividends payable to their investors and shareholders, thereby allowing the investors and shareholders to receive dividends in full.

The Finance Act 2019 has further incentivised real estate investment vehicles to the extent that:

• real estate investment companies are exempted from paying CIT on rental and dividend income earned in a financial year, provided that at least 75% of such income is distributed within 12 months; and
• real estate investment companies can claim dividends paid and mandatory distributions to its shareholders, as tax deductibles, for the purpose of CIT.