The main sources of real estate law in Kenya are:
Affordable Housing Scheme (AHS)
The government of Kenya aims to provide 500,000 affordable housing units by 2022 under the AHS to address the low rate of home ownership in Kenya. There are several AHS projects ongoing in Nairobi and other towns. An affordable unit should cost no more than KES3,000,000 (approximately USD27,000). The AHS also aims to provide affordable financing for its beneficiaries. In this regard, the Kenya Mortgage Refinance Company (KMRC) was incorporated in 2018 to provide affordable long-term financing to primary mortgage lenders (eg, banks) for onward provision of affordable mortgage products to Kenyans.
Large-Scale Infrastructure Projects
The government of Kenya is undertaking large-scale infrastructure projects, particularly in the roads and transport sectors. Some of the projects include:
These projects increased the value of the affected and adjacent real estate. Furthermore, there was compulsory land acquisition to pave the way for such projects.
Smart Cities and Green Building
There has been an increasing demand for smart cities and more uptake of green and sustainable building solutions. Some key projects and deals include:
Impact of the Coronavirus Pandemic
The pandemic affected real estate transactions as follows:
The following digital solutions have been adopted recently.
The impact of these technologies will be:
The Landlord and Tenant Bill, 2021 seeks to consolidate the laws relating to the renting of business and residential premises and regulate the relationship between landlords and tenants in order to promote stability in the rental sector. The Bill has undergone the second reading in parliament. It will be enacted to law if adopted by parliament at the third reading and subsequently assented by the president.
The Land Control Bill, 2022 seeks to rationalise the law on dealings in agricultural land with the provisions of the Constitution, the ELC Act, the LA and the LRA. The Bill proposes to introduce the Land Control Committees (LCC) in the place of the current land control boards. The LCCs will regulate dealings in agricultural land in accordance with the law and traditions, customs and way of life in the community of the controlled area. The Bill is in the early stages of debate in parliament.
There are two main categories of property rights.
The LA and LRA are the primary statutes that apply to the transfer of title of real estate be it residential, retail, industrial, business or hotels. For community land, the provisions of the Community Land Act also apply.
SPA is the primary statute governing the transfer of sectional titles.
Conducting Due Diligence
Transfer of title begins with due diligence by the purchaser as discussed in 2.4 Real Estate Due Diligence.
Preparation of an Agreement for Sale
Agreements for the sale of real estate are generally required to meet the requirements under Section 38 of the LA and Section 3 of the Law of Contract Act:
The agreement is usually prepared by the seller’s advocates.
Obtaining Completion Documents
The seller’s advocate is responsible for obtaining the completion documents. These usually include the title document, signed transfer document and land control board consent (where applicable). The transfer is usually drafted by the purchaser’s advocates.
Transfer of Title
Upon payment of the full purchase price to the seller or 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 Coronavirus Pandemic
Coronavirus pandemic-related restrictions resulted in:
Purchasers’ advocates usually conduct due diligence as follows:
Effect of the Coronavirus Pandemic
The coronavirus pandemic compelled the Ministry of Lands and Physical Planning to fully operationalise the Ardhi Sasa platform that enables online title searches. However, the ongoing digitisation of the land registry has led to the unavailability of some property files leading to delays in obtaining land searches.
Representations and Warranties
On the purchaser’s insistence, the seller may issue representations and warranties to the effect that:
Representations and warranties are not prescribed by law. These are negotiated by the parties.
Force Majeure and Diplomacy Clauses
No new representations and warranties were driven by the coronavirus pandemic. However, the pandemic prompted increased adoption of the force majeure clause that included “pandemics” as a force majeure event warranting termination or other remedies such as 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 usually gives the purchaser the option to:
Representation and warranty insurance is not common in Kenya.
The most important laws are those discussed in 1.1 Main Sources of Law and the following:
A buyer is deemed responsible for soil pollution or environmental contamination on their property. Accordingly, it is critical for a buyer to physical inspect the property to confirm its compliance with environmental laws before purchase.
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.
The law does not prescribe requirements for development agreements. However, they may be entered into as discussed in 4.6 Agreements with Local or Governmental Authorities.
Article 40 (3) (b) of the Constitution allows the state to compulsorily acquire land for a public purpose subject to 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 inquiry stage
The post-inquiry stage
Possession and vesting
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 is 5% of the net gains received upon sale of the immovable property. 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 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 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 subsequent acquisition of the shares of the company. Further, CGT will be charged at the rate of 5% of the net gain on sale of the shares by the seller.
The transaction costs typically borne by the seller are:
The transaction costs typically borne by the purchaser are:
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 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:
Acquisition of commercial real estate is usually financed by:
Where the government is involved, acquisition may be financed by the government itself or 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:
When granting security, the borrower will be responsible for the following costs:
In addition, the borrower is usually responsible for the lender’s enforcement costs, including legal fees.
The following requirements must be met.
Enforcement of a Legal Charge
Section 90 of the LA prescribes the formalities for 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 to the borrower a notice of the default 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 does not 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 LA also provides for other remedies available to the lender, that is, appointment of a receiver, suing the chargor, leasing the property and taking possession of the property.
Priority of Legal Charges
According to Section 81 of the LA, unless otherwise stated in the charge instrument, charges rank according to the order in which they are registered.
Covid-Related Restrictions to 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 coronavirus 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 inter-creditor agreement.
A lender is not liable for non-compliance with environmental laws since a legal charge does constitute a transfer of the property. However, when enforcing the security by appointment of a receiver or 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, therefore, not significantly affected.
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 the guidance on LIBOR transition in December 2021. In the guidelines, the CBK 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 the lenders amend the loan agreements to adopt the ISDA IBOR Fallbacks Protocol, wherever possible. Under the Protocol, the LIBOR contracts will fall back to RFRs in the same currency, that is 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. This requires the submission of the 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, 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 Physical Planning Act requires the developer to apply to the relevant County Government for development permission. On receipt of the application, the County Government circulates the same to relevant state agencies, including the Director of Survey, the NLC and NEMA for their comments. The state agencies may object to 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 on the proposed development. After considering the comments by the state agencies and the general public, the County Government may reject or issue the development permit.
In addition, the following approvals are required, among others.
If the County Government declines to grant development permission, the developer may appeal against the decision 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 license or revokes the same, the developer may appeal against the decision at the National Environment Tribunal (NET) within 60 days of the decision. A further appeal may be made to the ELC against the decision of the NET.
If the LCB declines to consent to 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 towards facilitating issuance of statutory approvals, development of infrastructure, local content requirements and provision of social amenities, among others.
Agreements may also be entered 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 any conditions of the development permit are not complied with. The enforcement notice will prescribe the remedial action to be taken by the Recipient. The Recipient will face imprisonment and/or be subject to fines if they do not comply with the notice.
Section 108 of 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 award compensation to those affected by environmental degradation or pollution. The ELC may also issue environmental restoration orders.
Section 112 of EMCA allows courts to grant environmental easements and conservation orders to preserve environmental resources.
Further, part XIII of EMCA spells out environmental offences. The consequences of committing environmental offences include revocation of the relevant licenses, imprisonment and hefty fines.
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 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 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.
Limited Liability Companies (LLCs)
LLCs are the most common and preferred investment vehicles. They 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 1-50 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 which must be a natural person. The shares of a public LLC may be transferred to the public.
Limited Liability Partnerships (LLPs)
LLPs are gained traction as real estate investment vehicles of choice. They 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.
Real Estate Investment Trusts (REITs)
Following the enactment of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations (2013), REITs gained traction as the premier vehicle for collective investment in real estate in Kenya. REITS 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 a development REIT (D-REIT) or an income REIT (I-REIT) or an Islamic REIT.
D-REITs investors pool resources for purposes of acquiring eligible real estate for development and construction. On completion of construction, the D-REIT may be converted to an I-REIT.
I-REITs investors pool resources for purposes of acquiring long-term income-generating real estate. The capital gain and rental income is 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 since 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:
Private LLCs are required to:
Public LLCs (Listed and Non-listed)
Listed public LLCs refer to 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 CMA Act and relevant regulations applicable to listed companies.
LLPs are required to:
LLPs are not obligated to convene any meetings or 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 are required to:
Fees payable at the companies’ registry and limited liability partnerships registry (for LLCs and LLPs) and the land registry (for trusts licensed as REITs) for annual entity maintenance are nominal. 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 of a Term below 21 Years
These leases grant the tenant the right to the exclusive use and quiet enjoyment of the leased premises for the lease term.
A licence is a permit granted to the licensee to do some act in relation to the real estate (usually on non-exclusive basis) which act would otherwise constitute trespass.
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 refrain from or undertake 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 land.
The NLC may also authorise a communal right of way for the benefit of the public on application by a County Government, an association, or any group of persons.
The LA provides for the following types of leases.
The LA defines short-term leases 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 (discussed below).
The following are periodic 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 ownership interest to the lessee.
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 implies some covenants on landlords and tenants, including:
The LTA further regulates the revision of rent of controlled tenancies, ie:
There was no legislation enacted to regulate coronavirus pandemic-related issues. Pandemic reliefs are negotiated by the parties.
The terms of a lease are usually contractual save for the implied covenants under Sections 65 and 66 of the LA (discussed in 6.3 Regulation of Rents or Lease Terms).
Length of Lease Term
The law does not prescribe the term of a lease. This 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.
Further, 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
Section 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 ensure dwelling houses are fit for human habitation.
Section 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 as they were 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. This is contractually agreed by the parties.
Coronavirus Pandemic Provisions
Coronavirus pandemic provisions are discussed in 6.21 Forced Eviction.
The law does not regulate rent variation unless in the case of commercial leases governed by the LTA that 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 usually caters for the following costs:
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 caters for 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 usually indicates the insured risks that may include fire, burglary and natural disasters. In recent times, insurers have offered cover for losses suffered due to the coronavirus 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 provided that such restrictions are permitted by law.
Further, the law imposes user restrictions on tenants. The Physical Planning Act and county legislation regulate 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. The landlord’s consent is usually granted on the following conditions:
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 (defined in 6.3 Regulation of Rents or Lease Terms) over business premises to protect tenants from exploitation, including arbitrary rent revisions and illegal evictions.
Leases in Respect 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 is no legislation regulating leases during the coronavirus 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 a security deposit held by the landlord throughout the term of the lease. The security deposit will be forfeited in the event of default.
The tenant has no right to occupy the leased premises upon expiry of the commercial lease. The landlord should call for yield up of the premises by the tenant and issue eviction notices if necessary. Thereafter, the landlord may evict the tenant as discussed in 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:
Section 73 of the LA allows the landlord to terminate a lease:
The lease may also allow for early termination by the parties. This is usually by giving reasonable notice. Termination may also be permitted in the event of the occurrence of an event of force majeure.
Controlled tenancies (defined in 6.3 Regulation of Rents or Lease Terms) may only be terminated in accordance with the LTA that 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.
Termination of commercial leases can also be challenging since these leases usually do not contain termination provisions to avoid creating controlled tenancies under the LTA. In these instances, termination is usually by agreement between the parties or by issuance of reasonable notice. Reasonable notice depends on the circumstances of the case.
Short-term leases of a term of two years or less without the option of renewal are not registrable.
Long-term leases of a period above 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 stamped with duty. Stamp duty is 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 will typically meet the registration costs and the legal fees of their advocates and the landlord’s advocates.
Long term leases conferring ownership, that is, 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 4% of the value of the leased premises, if located in an urban area. Upon registration, a title will be issued to the lessee. The lessee will cater for 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 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 of 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.
Coronavirus Eviction Moratoriums
There are no statutory coronavirus eviction moratoriums in Kenya. The parties may contractually agree to reliefs, including rent moratoriums, rent reductions or freeze in rent escalation. Eviction moratoriums are uncommon. The tenant may also invoke the force majeure clause if the coronavirus pandemic is recognised as an event of force majeure in the lease. Alternatively, the parties can enter a termination agreement setting out terms for early termination of the lease.
A lease can be terminated by the government in cases of compulsory acquisition as discussed in 2.9 Condemnation, Expropriation or Compulsory Purchase.
The price of construction projects is usually determined by the procurement method. For government-related contracts, competitive bidding is generally required, therefore, it is preferred that the price of the project is 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. This would cushion a contractor if the construction costs exceeded the estimates.
Design and construction of a project may be allocated as follows.
Construction risk is largely managed as per the terms of the construction contract that may provide for:
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:
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 builder’s lien.
Notably, the Government Proceedings Act prohibits exercising lien over government property.
In order for a project to be inhabited:
The sale of non-residential premises is subject to VAT under the VAT Act.
However, in the case of David Mwangi Ndegwa v Kenya Revenue Authority (KRA)  eKLR, the High Court held that VAT is not payable on 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 usually mitigate tax liability by:
The landlord or owner has the obligation 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 payment of service charge.
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 non-resident. WTH on rental income earned by a non-resident is 30%, WTH on dividend income earned by a non-resident is 15% and WTH on professional fees earned by a non-resident is 20%.
WTH is deducted by the payer at source and remitted to KRA.
Gains from disposition of real estate are subjected to the CGT as discussed in 2.10 Taxes Applicable to a Transaction.
Rental Income Tax
Rental income tax is paid by residents earning rental income of KES288,000-15,000,000 annually. 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 expenditure are allowable deductions when determining a person’s taxable income.
REITs also enjoy the following tax exemptions:
Many factors can stimulate or slow down changes and disruptions in the real estate sector. These include laws and regulations, technology innovations, environmental developments, natural disasters, health calamities and war. Much has happened in the Kenyan context, shaping the current real estate trends and developments.
While focusing on the recent trends and developments, the article first presents an overview, mainly following the updates covered in an article in the preceding year (the 2021 Guide), then proceeds to highlight how real estate is changing through the emerging trends that have the potential to radically transform the property industry.
Law and regulations
Sectional Properties Act, 2020
As reported in the 2021 Guide, the new Sectional Properties Act 2020 (the Act) came into force on 28 December 2020, effectively repealing the Sectional Properties Act, 1987.
A key provision in the Act is the requirement that all long-term subleases issued before the commencement of the Act, intending to confer ownership of apartments, flats, maisonettes, townhouses or offices, be reviewed within two years of the commencement date of the Act and converted to sectional units in accordance with the Act and regulations made pursuant to the Act.
There was opposition from stakeholders regarding two issues related to this requirement, namely:
The Sectional Properties Regulations, 2021 (the Regulations) were gazetted on 10 December 2021 and, with these Regulations, the Act has been operationalised. These address the concerns raised by stakeholders on exempting the following long-term leases from the requirement to convert them into sectional units:
Nairobi City County Development Control Policy
In the quest to minimise cases of haphazard and uncontrolled developments within Nairobi and promote sustainable urban development, the Nairobi City County Development Control Policy (Sessional Paper No. 1 of 2022) was tabled at the Nairobi City County Assembly on 12 February 2022 for approval.
The Director General of the Nairobi Metropolitan Services explained that the City’s robust and rapidly growing real estate sector requires a stable regulatory framework in order to harness the existing potential for growth. The policy exhaustively analysed the current development control guidelines and developed new guidelines to be applied across the various development zones and areas of the City.
It is expected that the revised regulatory framework will translate to good planning outcomes and contribute to a better built environment.
Landlords and Tenants Bill
There is proposed a new Landlord and Tenant Bill dated 12 February 2021 (the Bill) intended to introduce a consolidated legal framework to govern landlord and tenant relationships and balance the interests of landlords and tenants.
The existing laws are largely deemed to be skewed in favour of tenants. In addition, many critics consider some controls in the existing laws as non-progressive as they strain the operations of many businesses and institutions.
As of 28 March 2021 when this article was finalised, the Bill had not progressed to the first reading at the National Assembly.
In the 2021 Guide, the firm reported that the Kenya Mortgage Refinance Company (KMRC), a public-private partnership firm formed by the government of Kenya, was established as a key institution to support the affordable housing pillar of the government’s Big 4 Agenda.
KMRC is a non-deposit-taking financial institution with the single purpose of providing long-term funds to primary mortgage lenders in order to increase the availability and affordability of mortgage loans to Kenyans.
The KMRC had its inaugural bond issue as it officially rang the bell on 14 March 2022 to mark the listing and commencement of trading of KMRC corporate bonds on the Nairobi Securities Exchange (NSE). It is reported that KMRC’s first tranche of its KES1.4 billion medium-term note programme was oversubscribed by more than 400%, netting applications worth KES8.114 billion. This is observed as a major milestone affirming growing issuer and investor confidence in the bond market, and support for the sector.
The Progressive Impact of COVID-19
Reduced leasing of office space
In the 2021 Guide, the firm highlighted the unprecedented increase in modifications incorporating alternative clauses in lease agreements to provide relief to parties, as guided by the disruptions caused by the COVID-19 pandemic (the Pandemic).
As other effects of the Pandemic continue to be visible, there is a noticeable decrease in the leasing of commercial office space. The uptake of commercial leases has declined as organisations continue to work remotely. However, with reduced COVID-19 cases leading to the revision of restrictions put in place to manage the Pandemic, it is anticipated that organisations may consider returning to working from office spaces and, as a result, leasing of office spaces may increase in the coming year.
Increased uptake of banking facilities
Based on a banking industry customer satisfaction survey conducted by the Kenya Bankers Association (KBA), there has been a sustained uptake of digital banking services, a trend accelerated by the advent of the Pandemic in 2020 as customers sought to avoid contact-based interactions.
Mobile banking and internet/online banking expanded access to financial services in answer to the challenges arising from government responses to the Pandemic, such as lockdowns, which increased the need for contactless financial products and services.
KBA’s survey established that following the Pandemic, six out of every ten bank customers (58.4%) preferred mobile banking, with another two out of ten (20.3%) recording their preference for internet/online banking. This is against 52% and 23%, respectively, in 2020.
Accelerated rate of digitisation and virtualisation
One of the positive impacts of the Pandemic is the accelerated rate of digitisation and virtualisation of business and society. The Pandemic has been a driver of change following the decrease in in-person meetings, paper-based transactions, travel and other day-to-day operations.
On 26 March 2021, Safaricom, the largest telecommunications provider in Kenya, announced the launch of trials for the trail-blazing 5G technology for customers. The 5G service was activated in Nairobi, Kisumu, Kisii and Kakamega projecting the expansion to 150 additional sites across nine towns over the next 12 months. Faster networks such as 5G will continue to fuel and power digitisation and virtualisation.
The firm highlighted the implementation of the National Land Information Management System (NLIMS) by the Ministry of Lands and Physical Planning in the 2021 Guide. NLIMS is in line with the government’s policy to digitalise all land transactions and remove the current manual system.
NLIMS was officially rolled out on 27 April 2021 and land transactions are to be effected through this portal. However, currently only the Nairobi Registry is live on the portal. The Central Registry as well as all District Registries are still running manually.
Construction of the Nairobi Expressway
The government of Kenya is currently constructing a 27km (17-mile) Nairobi Expressway to connect Jomo Kenyatta International Airport (JKIA) in the east of Nairobi to Westlands, Nairobi.
The Nairobi Expressway is a major infrastructure and expected to significantly impact the real estate sector as it will open up areas like Mlolongo, Syokimau, Athi River and other satellite towns. It is also projected that the Nairobi Expressway Way may lead to the appreciation of prices of nearby properties.
Environmental, Social and Governance (ESG)
According to the United Nations Environment Programme, the building sector contributes up to 30% of global annual greenhouse gas emissions. As a result, there have been increased discussions with the aim of reducing global warming and climate change.
In the Kenyan context, there is more awareness and application of ESG standards in real estate. Developers now consider green or more sustainable buildings by using eco-friendly materials or smart technology, affordable and social housing. The Architectural Association of Kenya (AAK) launched Safari Green Building Index, a green building rating system that assesses the environmental performance of projects.
Other relevant developments include the Nairobi Stock Exchange introducing the ESG Disclosures Guidance Manual as a guide for listed companies. The Central Bank of Kenya has introduced Guidance on Climate-Related Risk Management to commercial banks and mortgage finance companies aimed to assist financial institutions in integrating climate change risk and opportunities in their governance structures.
Apart from the developers, property buyers can also consider environmental issues when conducting due diligence on a property.
Adapting to the concept of shared workspace
The concept of shared workspace or office space is not new in the global context. However, it gained prominence in Kenya since the Pandemic altered working practice from the traditional office setup to remote offices. This also ties in with the observation above in relation to the reduced leasing of office space.
The Global Coworking Growth Study 2020 predicts that by the end of 2024 the number of coworking spaces will reach around 40,000. Kenya will likely play a significant part in these statistics with the increase in shared working spaces in Nairobi.
This period of digital transformation has precipitated emerging technologies throughout the real estate sector, including construction, marketing, property management, sale and purchase, and legal.
Kenya, being a leading technology and innovation hub in Africa, has not stayed in the shadows. Kenya’s first 3D printed house was officially opened in Athi River in 2021. There is also a new 3D printed housing project coming up in Kilifi known as Mvule Gardens Complex, which is touted as Africa's largest 3D printed affordable housing project.
In addition, the accelerated rate of digitisation and virtualisation has led to the development of real estate customers who prefer digital experiences, as opposed to the traditional paper-based approach. There are more automated rental and purchasing property platforms with almost all realtors now having their own websites, which typically include property listings, information to help buyers and sellers, and links to the developers with whom they are working. Also, there is an increased use of virtual realities such as 3D virtual tours that essentially eliminate in-person site visits.
The property technology innovations highlighted in this article are an exciting trend. Some common attributes of applying technology in any sector include significant improvements in operational efficiency in land registration, faster pace and sophistication in the industry, and robust discussions on the correct regulatory approach.
The firm believes that there will be fascinating changes given that property technology is catching on in Kenya and trusts that all stakeholders are positioning for opportunities within the property technology industry.
The upcoming elections on 9 August 2022 may slow down some of the emerging trends and developments but the view is that this impact on the real estate industry is likely to be short term.