The main sources of real estate law in Kenya are as follows:
Implementation of Restrictions on Foreign Ownership of Land
By gazette notice number 4512 of 2023, the NLC ordered the resurvey of tea estates in Kericho and Bomet counties, which are largely owned by foreign multinational companies. This signifies the beginning of a gradual process to convert foreign-owned freehold land and leases of a period above 99 years to leasehold titles of a maximum term of 99 years, as discussed in 2.11 Legal Restrictions on Foreign Investors.
Sustainable Real Estate Finance
There is a growing interest in sustainable real estate finance in Kenya, with notable developments including the following:
Affordable Housing Scheme (AHS)
The government of Kenya aimed to provide 500,000 affordable housing units by 2022 under the AHS but this target was not achieved. The newly elected President of Kenya aims to deliver 200,000 units per year. The latest AHS projects include Starehe Point and the Mavoko Housing Project in Machakos County. An affordable unit should cost no more than KES3 million (approximately USD23,000). The Kenya Mortgage Refinance Company was incorporated in 2018 to provide affordable long-term financing to primary mortgage lenders (eg, banks) for the onward provision of affordable mortgage products to Kenyans.
Private developers are also investing in affordable housing products independent of the AHS, including TSAVO and Acorn Holding Limited.
Large-Scale Infrastructure Projects
The government of Kenya is undertaking large-scale infrastructure projects, particularly in the roads and transport sectors. Ongoing projects include:
Smart Cities and Green Building
Key projects and deals include:
Impact of the COVID-19 Pandemic and Inflation
The pandemic and inflation have affected real estate transactions as follows:
The following digital solutions have been adopted:
These technologies will have the following impacts:
The Climate Change (Amendment) Bill 2023 seeks to amend the Climate Change Act 2016 to provide a legal and regulatory framework on carbon markets in Kenya.
The Natural Resources (Benefit Sharing) Bill 2022 seeks to establish a system of benefit sharing in natural resource exploitation between resource exploiters, the national government, county governments and local communities.
The Landlord and Tenant Bill, 2021 seeks to consolidate the laws relating to the renting of business and residential premises, and to regulate the relationship between landlords and tenants to promote stability in the rental sector.
The Land Control Bill, 2022 seeks to rationalise the law on dealings in agricultural land with the provisions of the Constitution, the Environmental and Land Court Act, the LA and the LRA. The Bill proposes to introduce Land Control Committees, which will regulate dealings in agricultural land in accordance with the law and traditions, customs and the way of life in the community of the controlled area.
There are two main categories of property rights:
The LA and LRA are the primary statutes that apply to the transfer of real estate title, be it residential, retail, industrial, business or hotels. For community land, the Community Land Act also applies.
The SPA is the primary statute governing the transfer of sectional titles.
Conducting Due Diligence
Transfer of title begins with due diligence being performed by the purchaser; see 2.4 Real Estate Due Diligence.
Preparation of an Agreement for Sale
Agreements for sale must generally meet the requirements under Section 38 of the LA and Section 3 of the Law of Contract Act, and therefore must:
The agreement is prepared by the seller’s advocates.
Obtaining Completion Documents
The seller’s advocate obtains the completion documents, which include the title document, the signed transfer document and land control board consent (where applicable). The transfer is drafted by the purchaser’s advocates.
Transfer of Title
Upon payment of the full purchase price to the seller or the issuance of suitable undertakings to the seller’s advocates for payment of the financed balance of the purchase price (if any), the seller’s advocates release the completion documents to the purchaser’s advocates. Thereafter, the transfer is lodged at the land registry for valuation of the property for purposes of assessing the stamp duty payable. Subsequently, the purchaser pays stamp duty and files the transfer at the land registry for registration.
The law does not require landowners to insure their titles. Title insurance is not common in Kenya.
Limitations Caused by the COVID-19 Pandemic
Pandemic-related restrictions resulted in:
Purchasers’ advocates conduct due diligence as follows:
Representations and Warranties
On the purchaser’s insistence, the seller may issue representations and warranties to the effect that:
Representations warranties and their survival period are not prescribed by law; they are negotiated by the parties. A seller may cap their liability as at the date of the agreement for sale, while a purchaser may negotiate to extend the seller’s liability until the date of transfer or a reasonable period after the date of transfer. A seller may also cap their financial liability to the purchase price amount.
Force Majeure and Diplomacy Clauses
No new representations and warranties were driven by the COVID-19 pandemic. However, there was increased adoption of force majeure clauses including “pandemics” as a force majeure event, thereby warranting termination or other remedies, including the suspension of obligations. For commercial leases, there was a notable increase in diplomacy clauses allowing foreign organisations to terminate leases where they can no longer operate in Kenya due to the pandemic.
Enforcement of Representations and Warranties
The agreement for sale gives the purchaser the option to:
Representation and warranty insurance is not common in Kenya.
In addition to those discussed in 1.1 Main Sources of Law, the following laws are also significant:
A buyer is deemed responsible for soil pollution or environmental contamination on their property. Accordingly, it is critical for a buyer to physically inspect the property to confirm its compliance with environmental laws before purchase.
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, but they may be entered into; see 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 the fair and prompt compensation of the interested persons. Section 107 of the LA prescribes the process of compulsory acquisition, which takes place in four stages as follows.
The pre-inquiry stage
The 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 of 15% of the net gains received upon sale of the immovable property. This rate was increased from 5% with effect from 1 January 2023. Stamp duty is paid by the purchaser at the rate of 2% of the value of the property if located in a rural area, or 4% of the value of the property if located in an urban area.
The Income Tax Act prescribes transfers exempted from CGT, including the transfer of property to a registered family trust. Similarly, the Stamp Duty Act prescribes transfers that are exempt from stamp duty, including transfers to first-time homeowners under the AHS.
Taxes in Sale of Real Estate by Way of Shares
Where real estate is purchased by way of the acquisition of shares in a land holding company, stamp duty will be paid by the purchaser at the rate of 1% of the value of the acquired shares. This also applies in the event of the subsequent acquisition of the shares of the company. Furthermore, CGT will be charged at the rate of 15% of the net gain on the sale of the shares by the seller.
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 being held by a Kenyan citizen if all its beneficiaries are Kenyan citizens.
Dealings in Agricultural Land
Sections 6 (1) (a) and (c) as read with Section 9 (1) (c) of the LCA prohibit land control boards from approving:
The acquisition of commercial real estate is usually financed as follows:
Where the government is involved, acquisition may be financed by the government itself or by public-private partnerships.
The developer will typically create a legal charge over the real estate in favour of the lender.
There are no restrictions on granting security over real estate to foreign lenders, nor on making repayments to a foreign lender under a security document or loan agreement.
When granting security, the borrower will be responsible for the following costs:
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 the enforcement of a legal charge in the event of default by the borrower. If the borrower is in default for one month, the lender issues a notice of the default to the borrower, requiring the borrower to remedy the default within the notice period (at least three months if the default relates to non-payment). If the borrower fails to do so and the lender opts to exercise statutory power of sale, the lender issues another 40-day notice. Upon lapse of the notice period, the property is valued and sold. The time taken to sell the property would vary according to market demand, and could range from a month to more than a year.
The LA also provides additional remedies available to the lender: appointment of a receiver, suing the chargor, leasing the property and taking possession of the property. Enforcement of these remedies may take longer than exercising the statutory power of sale, especially if the matter is contentious.
Priority of Legal Charges
According to Section 81 of the LA, charges rank according to the order in which they are registered, unless the charge instrument states otherwise.
COVID-19-Related Restrictions on the Enforcement of Security
The government has not implemented any restrictions on a lender’s ability to foreclose or realise its collateral in real estate in response to the COVID-19 pandemic.
According to Section 81 of the LA, charges rank according to the order in which they are registered. However, existing legal charges may be subordinated to newly created legal charges by agreement between the lenders. The holder of the prior registered charge would typically sign a consent form on the subsequent charge, consenting to the creation of the subsequent security and confirming that its security ranks subsequent to the new charge. Lenders can also enter into an intercreditor agreement.
A lender is not liable for non-compliance with environmental laws since a legal charge does not constitute a transfer of the property. However, when enforcing the security by the appointment of a receiver or the leasing or taking possession of the charged property, a lender qualifies as an “owner‟ under the EMCA, and will therefore be liable for non-compliance with environmental laws.
A borrower’s insolvency does not affect a lender’s security interest. Insolvency is usually an event of default in the charge instrument that would trigger enforcement. Under Section 590 of the Insolvency Act, the administrator of an insolvent person’s estate is prohibited from interfering with a secured creditor’s right to enforce its security.
Local borrowings are typically based on the Central Bank of Kenya (CBK) rate or the base rate of each local bank, and are therefore not significantly affected by the expiry of the LIBOR index.
The expiry of LIBOR has largely affected foreign currency borrowings priced on LIBOR. According to the CBK, the proportion of loans priced on LIBOR stood at 450.6 billion as at September 2021. Therefore, the cessation of LIBOR poses a great threat to financial stability and individual financial institutions if not handled properly. Accordingly, the CBK published guidance on LIBOR transition in December 2021, in which it encouraged lenders to stop offering new LIBOR-linked products and instead offer Risk Free Rates (RFRs).
For existing loans priced on LIBOR, the CBK encouraged lenders to develop and implement fallback provisions in loan agreements. For those without LIBOR transition provisions, the CBK recommended that lenders amend the loan agreements to adopt the ISDA IBOR Fallbacks Protocol, wherever possible. Under the Protocol, LIBOR contracts will fall back to RFRs in the same currency:
Since RFRs are overnight rates, unlike LIBOR, they will be adjusted accordingly.
Under the Fourth Schedule of the Constitution, the national government is responsible for developing planning policies and co-ordinating planning by the county governments, and the county governments are responsible for county planning and development.
The principal laws for strategic planning and zoning in Kenya are the Constitution, the Physical Planning Act, the Urban Areas and Cities Act and county legislation.
The Physical Planning Act requires development permission to be obtained prior to the improvement of land, which entails the submission of building plans prepared by a qualified planner. The development permit will be issued only if the development complies with zoning laws. The permit may also prescribe conditions for undertaking the development. It is rare for the permit to prescribe requirements on the appearance of the development or method of construction. However, the methods and standards of construction are regulated under the NCA Act.
The following authorities regulate the use and development of real estate in Kenya.
The Physical Planning Act requires the developer to apply to the relevant county government for development permission. Upon receipt, the county government circulates the application to the relevant state agencies, including the Director of Survey, the NLC and NEMA, for their comments. The state agencies may object to the issuance of the development permit if the development does not comply with the law. The county government also publishes a notice in the Kenya Gazette and newspapers circulated nationwide, inviting public participation in the proposed development. After considering the comments by the state agencies and the general public, the county government may reject the application or issue the development permit.
In addition, the following approvals are required, among others.
A developer may appeal a county government's decision not to grant development permission before the National or County Liaison Committee (as applicable). The developer may lodge a further appeal against the decision of a County Liaison Committee to the National Liaison Committee. Thereafter, an appeal against a decision of the National Liaison Committee may be made to the ELC.
If NEMA declines to grant the EIA licence or revokes it, the developer may appeal such decision at the National Environment Tribunal (NET) within 60 days. A further appeal may be made to the ELC against the decision of the NET.
If the LCB declines to consent to the development of agricultural land, the developer may appeal to the Provincial Land Control Appeals Board within 30 days of the decision being delivered. A further appeal may be made to the Central Land Control Appeals Board. If the developer is not successful, they can consider effecting a change of use of the land to avoid the need to obtain the LCB consent for the development.
If the NCA declines to register a construction project, the developer may appeal to the Appeals Board established under the NCA Act.
Development agreements are not a statutory requirement but may be concluded with county or national government authorities in compliance with the law to facilitate large projects. Development agreements may be aimed at facilitating the issuance of statutory approvals, the development of infrastructure, local content requirements and the provision of social amenities, among others.
Agreements may also be entered into with utility providers, such as Kenya Power and Lighting Company, to facilitate utility provision on the development.
Physical Planning Laws
Section 72 of the Physical Planning Act enables the County Executive Committee Member for Physical and Land Use Planning to issue an enforcement notice to an owner, occupier, agent or developer of land (Recipient) if a developer commences development without a development permit or if any conditions of the development permit are not complied with. The enforcement notice will prescribe the remedial action to be taken by the Recipient, who will face imprisonment and/or be subject to fines if they do not comply with the notice.
Section 108 of the EMCA enables NEMA to issue environmental restoration orders prescribing remedial action to be taken by the Recipient to refrain from causing harm to the environment and/or restore the environment to its original state. The order may also impose fines against persons contravening environmental laws, or may award compensation to those affected by environmental degradation or pollution. The ELC may also issue environmental restoration orders.
Section 112 of the EMCA allows courts to grant environmental easements and conservation orders to preserve environmental resources.
Furthermore, part XIII of the EMCA spells out environmental offences. The consequences of committing environmental offences include revocation of the relevant licences, imprisonment and hefty fines.
Rule 28 of the National Construction Authority Regulations, 2014 empowers the NCA to set up a committee to investigate complaints against contractors and any developments if they are suspected of contravening the law. The committee may recommend the deregistration of a contractor or the revocation or suspension of their licence. Where a contractor is deregistered, all construction contracts being executed by that contractor will be terminated immediately.
Dealings in Agricultural Land
Failure to obtain LCB consent for the development of agricultural land renders all related transactions void.
The main vehicles for investment in real estate are limited liability companies (LLCs), limited liability partnerships (LLPs) and Real Estate Investment Trusts (REITs). LLCs are the most common and preferred investment vehicles, but LLPs are beginning to gain traction.
LLCs are the most common and preferred investment vehicles, and are regulated by the Companies Act 2015. LLCs have corporate personality, and the liability of the members is limited. Given this, an LLC may own property, enter into contracts and sue and be sued in the name of the company.
LLCs may be private or public. A private LLC has one to 50 members and a minimum of one director, who must be a natural person. The shares of a private LLC may not be transferred to the public. A public LLC has a minimum of one member and no restriction on the maximum number of members. It is also required to have a minimum of two directors, one of whom must be a natural person. The shares of a public LLC may be transferred to the public.
LLPs have gained traction as the real estate investment vehicles of choice, and are regulated by the LLP Act 2011. LLPs have legal personality, and the liability of the partners is limited. LLPs may also own property, enter into contracts and sue and be sued in the name of the LLP.
An LLP has a minimum of two partners and at least one manager, who must be a natural person.
Following the enactment of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations (2013), REITs have gained traction as the premier vehicle for collective investment in real estate in Kenya. They are licensed and regulated by the Capital Markets Authority (CMA). A REIT is structured as an unincorporated common law trust divided into units and established by way of a trust deed. REITs must have a licensed independent REIT trustee who holds the REIT assets on behalf of the investors and a licensed REIT manager who manages the day-to-day affairs of the REIT.
A REIT scheme may be structured as follows.
REITs are beneficial to investors because they are professionally managed and there is minimal capital risk, despite the variety of real estate products available. REITs are also exempt from corporation tax.
There are no minimum capital requirements for LLPs and private LLCs.
A public LLC must have a minimum capital requirement of KES6,750,000 (approximately USD60,000).
REITs must have:
A private LLC is required to:
Public LLCs (Listed and Non-listed)
Listed public LLCs are those listed on the Nairobi Stock Exchange. In addition to the governance requirements listed above in respect of private LLCs, public LLCs are required to obtain a trading certificate for their operations. Furthermore, listed public LLCs must comply with the Capital Markets Act and relevant regulations applicable to listed companies.
LLPs are required to:
LLPs are not obliged to convene any meetings, nor to procure an audit on their accounts except during the winding-up and dissolution of the partnership. LLPs are also not required to file tax returns.
A REIT is required to:
The REIT trustee and the REIT manager are responsible for maintaining proper records in respect of the fund, the scheme and the REIT.
Nominal fees for annual entity maintenance are payable at the companies registry and the LLP registry for LLCs and LLPs, and at the land registry for trusts licensed as REITs. For REITs, additional compliance costs are incurred towards the renewal of the licences of the REIT trustee and REIT manager, and approval fees for any public offerings. The fees are paid to the CMA.
For accounting compliance, the costs will depend on the terms of engagement negotiated with the retained accounting firm.
Leases for a term of less than 21 years grant the tenant the right to the exclusive use and quiet enjoyment of the leased premises for the lease term. The same is true for leases that have longer terms but do not confer ownership.
A licence is a permit granted to the licensee to do some act in relation to the real estate (on a non-exclusive basis) that would otherwise constitute trespass.
An easement is a non-possessory interest in another’s land that allows the holder to use the land to a particular extent or requires the owner to undertake or refrain from undertaking an act relating to the land.
Public Rights of Way
This could be a wayleave or a communal right of way.
The NLC may authorise a wayleave for the benefit of the national or county government, a public authority or any corporate body to enable them to carry out their functions in relation to the land.
The NLC may also authorise a communal right of way for the benefit of the public upon application by a county government, an association or any group of persons.
The LA provides for the following types of leases.
The LA defines a short-term lease as a lease for a term of two years or less without an option for renewal. A short-term lease is also a periodic lease.
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 an 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 impose some covenants on landlords and tenants, including:
The LTA further regulates the revision of rent of the following controlled tenancies:
The terms of a lease are contractual, except for the implied covenants under Sections 65 and 66 of the LA (see 6.3 Regulation of Rents or Lease Terms).
Length of Lease Term
The law does not prescribe the term of a lease, which is contractually agreed by the parties.
For commercial leases, the term is typically above five years to avoid creating a controlled tenancy under the LTA.
Furthermore, where the term of the lease is not specified and no provision is made for the giving of notice to terminate a tenancy, the lease is deemed to be a periodic lease pursuant to Section 57 (1) (a) of the LA. In this case, the term of the periodic lease will be the period by reference to which rent is paid.
Finally, where the lease is terminated or the term lapses and the landlord accepts rent and allows the tenant to occupy the premises for at least two subsequent months, a periodic lease from month to month is deemed to have come into force, pursuant to Section 60 (2) of the LA.
Maintenance and Repair Provisions
Sections 65 (1) (c) and (d) of the LA impose an obligation on landlords to keep the exterior parts of leased premises in a proper state of repair, and to ensure dwelling houses are fit for human habitation.
Sections 66 (1) (c) and (e) of the LA impose an obligation on tenants to keep the interior parts of leased premises and boundary marks of land in a reasonable state of repair. Tenants are also required to yield up the leased premises in the same condition they were in when the term of the lease began (subject to fair wear and tear).
The parties can agree to further terms.
Frequency of Rent Payments
The law does not regulate the frequency of rent payments, which is contractually agreed by the parties.
COVID-19 Pandemic Provisions
See 6.21 Forced Eviction.
The law does not regulate rent variation, except in the case of commercial leases governed by the LTA, which sets out elaborate notice requirements and allows the tenant to challenge the proposed variation before the Business Premises Rent Tribunal (BPRT).
If the lease is silent on rent variation, this can only be done by agreement between the parties.
Rent is varied based on a pre-agreed escalation rate indicated in the lease. The frequency of escalation is also indicated in the lease.
VAT is payable on rental income from non-residential premises. Rental income obtained from residential premises is exempted from VAT payment under part II of the First Schedule of the Value Added Tax Act 2013 (VAT Act).
The tenant bears the following costs:
The maintenance and repair costs for common areas are paid by the landlord or the management company from the service charge paid by the tenants. These costs are apportioned amongst the tenants.
Each tenant bears the cost of installing individual utility meters (water, electricity, etc) for the leased premises, and pays utility costs directly to the utility providers.
For shared utilities, the landlord or management company will apportion the costs to the tenants, who will pay the landlord or management company in the form of service charges for onward payment to the utility providers.
The landlord insures the building while the tenant insures the contents in the leased premises, including the assets of the tenant within the premises. The lease indicates the insured risks, which may include fire, burglary and natural disasters. In recent times, insurers have offered cover for losses suffered due to the COVID-19 pandemic. There is no data on the uptake of these types of cover or recovery rates for pandemic-related losses.
The landlord may contractually restrict the use of the leased premises by a tenant if such restrictions are permitted by law.
Furthermore, the law imposes user restrictions on tenants, with the Physical Planning Act and county legislation regulating the use and development of land in Kenya. These restrictions may be indicated on the title document. The LA also implies covenants on the use of leased premises by tenants.
Section 67 (2) (e) of the LA restricts tenants from developing the leased premises beyond what is permitted in the lease. The landlord’s consent would be required for restricted developments, and is granted on the following conditions:
The LA applies to all leases, whether residential, industrial or commercial. The following categories of leases are governed by specific laws.
Controlled Tenancies Under the LTA
The LTA regulates controlled tenancies (see 6.3 Regulation of Rents or Lease Terms) over business premises to protect tenants from exploitation, including arbitrary rent revisions and illegal evictions.
Leases of Dwelling Houses Under the Rent Restriction Act (Rent Act)
The Rent Act regulates tenancies relating to dwelling houses of a standard rent of below KES2,500, to protect tenants from exploitation by landlords.
Leases Over Agricultural Land
The LCA regulates dealings in agricultural land, with the aim of advancing agricultural activities and restricting ownership by foreigners.
There has been no legislation regulating leases during the COVID-19 pandemic period.
Under Section 73 (1) of the LA, the landlord has the right to terminate the lease if the tenant is declared bankrupt or goes into liquidation.
A landlord can ensure performance of the tenant's obligations through holding a security deposit throughout the term of the lease, which will be forfeited in the event of default. Some landlords may also accept bank guarantees as security.
The tenant has no right to occupy the leased premises upon the expiry of the commercial lease. The landlord should call for the yielding up of the premises by the tenant, and should issue eviction notices if necessary. Thereafter, the landlord may evict the tenant; see 6.21 Forced Eviction.
The lease would typically prohibit the assignment of the lease or permit assignment subject to the landlord’s consent. If permitted, a tenant may assign its rights over all or part of the leased premises on the following conditions:
Section 73 of the LA allows the landlord to terminate a lease if the tenant:
The lease may also allow for early termination by the parties giving reasonable notice. Termination may also be permitted in the event of the occurrence of a force majeure event.
Controlled tenancies (see 6.3 Regulation of Rents or Lease Terms) may only be terminated in accordance with the LTA, which requires the other party’s consent to be obtained. The aggrieved party can challenge termination at the BPRT. In this case, termination of the lease will be subject to BPRT’s orders.
The termination of commercial leases can also be challenging, since these leases do not contain termination provisions so as to avoid creating controlled tenancies under the LTA. In these instances, termination is by agreement between the parties or by the issuance of reasonable notice, which depends on the circumstances of the case.
Short-term leases for two years or less without the option of renewal are not registrable.
Long-term leases for more than two years are required to be registered under the LRA.
Leases are required to comply with the formalities of a valid contract. The lease will also be subject to stamp duty, charged at the rate of 2% of the average annual rent. The stamped lease is lodged at the relevant land registry for registration. An entry of the registered lease will be made on the title document and on the deed file of the property maintained by the land registry. The tenant meets the registration costs and the legal fees of their advocates and the landlord’s advocates.
Long-term leases conferring ownership (ie, leases for a period of 21 years and above) are deemed to be transfers of title. Accordingly, stamp duty is payable at 2% of the value of the leased premises if located in a rural area, or at 4% of the value of the leased premises if located in an urban area. Upon registration, a title is issued to the lessee, who bears the registration costs and the legal fees of their advocates and the landlord’s advocates.
Where a lease is lawfully terminated by a landlord as discussed in 6.19 Right to Terminate a Lease, the tenant may be evicted by the issuance of an eviction notice of at least three months. Eviction must comply with the law, particularly Section 152G of the LA.
A tenant may apply to the ELC to challenge the eviction notice.
For controlled tenancies, the tenant may challenge the eviction notice at the BPRT. In this case, eviction will be subject to the BPRT’s orders.
For commercial leases, the tenant may challenge the eviction notice in courts of law. In this case, eviction will be subject to the court’s orders.
For leases in respect of dwelling houses of a standard rent below KES2,500, the tenant may challenge an eviction notice at the Rent Tribunal. In this case, eviction will be subject to the Tribunal’s orders.
COVID-19 Eviction Moratoriums
There are no statutory COVID-19 eviction moratoriums in Kenya. The parties may contractually agree to reliefs, including rent moratoriums, rent reductions or freezes in rent escalation. Eviction moratoriums are uncommon. The tenant may also invoke the force majeure clause if the COVID-19 pandemic is recognised as a force majeure event in the lease. Alternatively, the parties can enter into a termination agreement setting out the terms for early termination of the lease.
A lease can be terminated by the government in cases of compulsory acquisition; see 2.9 Condemnation, Expropriation or Compulsory Purchase.
The price of construction projects is determined by the procurement method. For government-related contracts, competitive bidding is generally required, so it is preferable for the price of the project to be fixed or capped. The price would typically include the construction costs and professional fees for the project team.
For negotiated contracts, there is more flexibility on pricing. The cost may be estimated but free of any cap. The parties may also enter a cost-reimbursable agreement, which would cushion a contractor if the construction costs exceeded the estimates.
The design and construction of a project may be allocated as follows.
Construction risk is largely managed as per the terms of the construction contract, which 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 a builder’s lien.
Notably, the Government Proceedings Act prohibits the exercising of liens over government property.
For a project to be inhabited, a certificate of practical completion must be issued by a qualified architect, and a certificate of occupation must be issued by the relevant county government.
The sale of non-residential premises is subject to VAT under the VAT Act.
However, in David Mwangi Ndegwa v Kenya Revenue Authority (KRA)  eKLR, the High Court held that VAT is not payable on the sale or purchase of both residential and non-residential premises. KRA obtained a stay of this judgment pending determination of an appeal of the High Court’s decision. In 2020, the Tax Appeals Tribunal in National Bank of Kenya Limited v Commissioner of Domestic Taxes (Tax Appeals No. 14 of 2017) ruled that KRA will continue to charge VAT on the sale and improvement of non-residential premises until the appeal in the David Mwangi Ndegwa case is determined. The appeal is still pending.
Large real estate investors mitigate tax liability by:
The landlord or owner is obliged to pay land rates to the relevant county government if the business premises are within an urban area. However, the tenants contribute towards land rates by way of the payment of service charges.
The Valuation for Rating Act exempts some properties in urban areas from the requirement to pay land rates, including churches, burial grounds and charitable institutions.
Withholding Tax (WHT)
Foreigners are subject to WHT, which is levied at different rates depending on the category of income earned. The rate also depends on whether the foreigner is a resident or a non-resident. WHT is 30% on rental income earned by a non-resident, 15% on dividend income earned by a non-resident, and 20% on professional fees earned by a non-resident.
WHT is deducted by the payer at source and remitted to KRA.
Gains from the disposal of real estate are subject to CGT; see 2.10 Taxes Applicable to a Transaction.
Rental Income Tax
Rental income tax is paid by residents earning annual rental income of between KES288,000 and KES15 million. The tax can be paid monthly, quarterly, semi-annually or annually at the rate of 10% of gross rent received per month.
This tax is not applicable to non-residents.
There are no specific tax benefits from owning land. However, the following expenditures are allowable deductions when determining a person’s taxable income:
REITs also enjoy the following tax exemptions:
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Development in Kenya’s Real Estate Sector
The Sectional Properties Act
The Sectional Properties Act (the Act) No 21 of 2020 was enacted to align with the provisions of the Constitution of Kenya, 2010 and the Land Laws enacted in 2012, thereby repealing the Sectional Properties Act No 21 of 1987.
The Act provides the framework for division of buildings into units known as sectional units which can be owned by individuals while the common areas of the buildings are proportionately owned by all owners of the units as tenants in common.
In addition, the Sectional Properties Regulations, 2021 were gazetted in 2021 with an aim to operationalise the Act and outline the procedure for registration of sectional plans and conversion of long-term leases duly registered to sectional titles.
Salient features of the Sectional Properties Act
The following are the salient features and a brief discussion of the same from the Act.
Benefits and challenges
Once the Act is fully operational, stakeholders expect to receive the following benefits:
Despite the benefits of the Act, there are several challenges that have emerged in its implementation, including:
Ownership of sectional properties encourages vertical developments, resulting in increased activity and investment in the housing market, which is a much-needed boost in this sector, considering the government’s affordable housing agenda. As such, it is imperative that the Ministry and stakeholders work together to fully implement the Act.
The National Land Information and Management System dubbed “Ardhisasa”
Ardhisasa, launched on 27 April 2021, is an online platform that allows stakeholders and interested parties to interact with land information held, and processes undertaken by, the government. It allows for the lodgement of applications for various services which are handled through the platform and responses presented through it.
The system seeks to eliminate fraudulent and other manipulative dealings concerning land transactions and documents. The following are the expected benefits once the system is fully operational.
To transact on Ardhisasa, one is required to create an individual or corporate account. Once an account is created, a person is required to upload details of their parcel or property for verification, which entails an audit of the manual records for that specific parcel. Upon completion of verification, the conversion process is considered complete and one can then deal with the parcel of land on the Ardhisasa platform.
Currently, the conversion process is only being undertaken with regard to properties located within Nairobi, with the intention of progressively rolling out the system to other areas of the country. The way properties are generally identified is set to change for many properties, with land reference numbers and inland registry (IR) numbers being replaced with title numbers in the format NAIROBI/BLOCKXX/XX for properties in Nairobi, for example.
Owners whose properties are not in the above format are required to first undertake conversion of the title before verification is carried out. In this regard, the Ministry has published lists of various properties in the Kenya Gazette containing the old land reference numbers, its acreage and the new title numbers in the aforementioned format.
Be that as it may, implementation of the Ardhisasa system has had various teething issues, which include:
These challenges, among others, have resulted in a backlog at the Ministry, bringing the vibrant real estate practice in Nairobi to a near halt, thus adding to the plight facing various users.
Nonetheless, digitisation of land records is instrumental in the efforts being made by the government to ease doing business in Kenya and to revolutionise land ownership. The introduction of the Ardhisasa system is a step in the right direction to resolve historical land-related issues and promote investor confidence by using technology. This has been upheld by a recent High Court decision where Justice Anthony Ndung’u, in dismissing an application to reinstate manual transactions, highlighted that“we are in a digital age and that is the way to go. In my view and having found that the Ministry followed a process that was above board, it is easy to see this application as an attempt to resist change and this mirrors this country’s past experience in the migration to digital television and the reluctance with which stakeholders took in the uptake of our very own case management system in the judiciary”.
Capital Gains Tax (CGT)
CGT was introduced in Kenya in 1975 and suspended in June 1985, when Kenya was seeking to spur growth in the mining sector and real estate market and to deepen local participation in capital markets. It was reintroduced effective 1 January 2015 and was aimed at widening the tax net and increasing revenue collection for the government.
CGT is chargeable as a percentage on the net gain accruing on the transfer of property situated in Kenya and is usually payable by a seller/transferor. The rate was 5% on the net gain up until 31 December 2022, after which it increased to 15% from 1 January 2023 when the Finance Act 2022 became effective. This aligns the rate with other countries in the region (Ethiopia – 15%, Uganda – 30%, Rwanda – 30%, Tanzania – 10% for residents and 20% for non-residents).
The increase in CGT is seen as a major blow to taxpayers who will pay higher taxes upon the sale of properties, thus lowering the return on investment resulting in increased cost of purchasing, thereby depressing overall investment in the real estate and other sectors. Further, stakeholders have argued that the increase would have a negative impact on Kenya’s competitiveness as an economic hub and investment destination.
However, the government considers that the increase in CGT may not necessarily deter investors as the rate is still low compared to other East African countries and countries such as South Africa, Botswana, Egypt and Ghana. In addition, Kenya is considered to be the main economic hub of East Africa and is among the top fastest-growing African economies, being ranked fourth in Africa for ease of doing business.
Appointment of private valuers
In 2022, the Ministry appointed more than 247 private valuers in different parts of the country to assist in carrying out valuation of properties for the purposes of stamp duty. This is a welcome move as it helps to clear the backlog of valuations at the Ministry and gives an alternative to government valuation which can sometimes be very slow and time-consuming.
Though welcomed, industry players have raised concerns on the cost implications of using such private valuers as their fees and costs are negotiated and paid separately, which may end up being more expensive than the widely-utilised government valuers.
Emerging Trends in the Real Estate Sector
ESG and real estate
Nowadays, developers cannot downplay the importance of ESG factors as various stakeholders in the real estate space increasingly expect key players to communicate and deliver strategies that have embedded ESG matters. ESG principles are increasingly driving investor, consumer and occupier behaviour in the real estate market, as well as the government’s focus on initiating and implementing affordable housing projects.
Generally, stakeholders tend to place more trust in organisations that demonstrate a sustained interest in communities, the environment and good governance. On a massive scale, many large-scale investors from Europe, the US and the Middle East are focused on ESG, and it is unlikely that assets will be marketable that do not comply with basic ESG. It has been stated that future developments are at risk of becoming irrelevant if they are not ESG-compliant.
Owing to the major role that banks play in the development of real estate capital ecosystems, stakeholders have noted increased interest in ESG projects and have been able to structure specific milestones into transactions that, if met, may translate into a funding benefit to clients. These benefits stem from achieving certain specific targets, such as solar capacity, water consumption and green spaces, and socially important aspects like transformation and housing of the developments. The real estate market is driven by quality and the need for flexibility, and has seen increased demand and interest in the industrial sector such as purpose-built warehousing, affordable residential housing, corporate accommodation and alternative asset classes, such as digital real estate, student housing and other similar alternative segments.
Real Estate Investment Trust (REITs)
In Kenya, REITs are regulated by the Capital Markets Authority and can be classified into two main types namely:
There are two further classifications of REITs based on whether the offers are restricted or unrestricted.
Restricted I-REITs refer to issues or offers made out to professional investors, who are either individuals or registered groups of persons, for a minimum subscription of at least KES5 million. An example of a restricted I-REIT is the Imara I-REIT by the Local Authorities Pension Trust (Laptrust) which was recently listed on the Nairobi Securities Exchange’s (NSE) Main Investment Market.
On the other hand, unrestricted I-REITs are open to all investors but must be listed. An example of an unrestricted I-REIT is Acorn’s Student Accommodation I-REIT responsible for the Qwetu and Qejani student housing projects.
In contrast to I-REITs, D-REITs offers are restricted and, as such, offers are made only to professional investors.
Some of the benefits of REITs as an investment tool can be summarised as follows:
In conclusion, the introduction of REITs in Kenya is to positively impact both the real estate sector and investment opportunities. With the benefits stated above, REITs will provide investors with a new and convenient way to diversify their investment portfolios, while also enhancing the availability of funding for real estate development in the country. As a result, REITs are expected to continue playing a key role in the growth and development of the Kenyan real estate sector in the coming years.
The Big Four Agenda and the Kenya Vision 2030 by the Kenyan government has resulted in the following examples of purpose-driven developments.
The Ministry for Investment, Trade and Industry, through the Special Economic Zone Authority, has prioritised several critical manufacturing sectors, including but not limited to textiles and apparels, leather products, agro-processing, MSMEs development, and research and innovation, among others.
As a result, industrial parks have become an emerging trend in the real estate sector. The development of industrial parks aims to reduce the costs associated with meeting key infrastructural needs for light industries such as good transport networks, high voltage electricity, adequate water supply and good network coverage.
The government has set aside industrial parks to form part of the special economic zones enjoying tax incentives to encourage investment and to reduce operational costs.
The Affordable Housing Programme seeks to implement the right to accessible and adequate housing as envisioned in the Kenyan Constitution, as well as the Sustainable Development Goal (SDG) 11 that seeks to make cities and human settlement inclusive, safe and more sustainable. The government has managed to build establishments such as the Park Road Affordable Housing Project, River Estate Affordable Housing Programme, Mukuru Affordable Housing Programme and Mavoko Affordable Housing Project.
The government continues to partner with private investors to construct affordable housing and create platforms such as Boma Yangu, which allows Kenyan citizens to save towards home ownership.
The impact of this programme on the real estate sector is that there will be an increase in high-rise buildings. This is likely to reduce the cost acquisition of property while promoting human dignity, establishing social equity and also creating legal interests in real property that could be used as security or collateral.
The demand for student housing in Kenya is on the rise, with new student housing developments being constructed around major universities. This trend is driven by the growth in the education sector and the need to provide affordable, secure and comfortable accommodation for students.
Apart from student housing provided by the educational institutions and those surrounding the said educational institutions, investors have embarked on the construction of developments such as Qwetu and Qejani to cater for students from various institutions.
Digital real estate – what is it?
Digital real estate exists in the metaverse. The metaverse is a series of three-dimensional virtual worlds built to allow users to interact much like they do in real life. In the metaverse, you can meet people, attend events, buy things and even hold title to digital real estate. The metaverse is accessible with a computer or a smartphone, and is therefore easily accessible to many people.
Just like in the real world, you can do anything you want with digital real estate, including renting, selling, demolishing existing structures, building new structures, or giving someone else the right to build or rent your digital plot.
You may wonder why anyone would buy land in a world you cannot see, smell, hear or touch. There are many reasons – for example, you could open a digital billboard business selling advertisement space. Businesses can create digital twins of their company headquarters for meetings while virtual arenas and stadiums can host events, thereby creating interactive experiences and opening a new revenue stream.
The metaverse is a new concept which is still in the early stages of development, especially in Africa. Thinking back to the days of the beginning of the World Wide Web (WWW), it seemed ridiculous to buy a website or a URL, but we know how valuable they are now. With the continuing advancement of technology, it may be worthwhile to own a piece of digital real estate.
Fractional ownership is the percentage ownership in an asset, allowing an individual to own a part of a valuable asset without raising the funds to buy the entire property outright. The individual owners of the asset are entitled to share the benefits, such as usage rights, income sharing, priority access and reduced rates. Kenyans and many people the world over have practised fractional property ownership in groups without knowing it, albeit on a small scale.
Fractional ownership became common as the world developed ease of mobility and interaction, thereby permitting opportunities to own property in different geographical regions, thanks to innovative platforms that allow ownership of property (or at least a piece of it) in other countries and to reap returns. Fractional ownership is becoming increasingly popular in Africa. Companies taking up the concept and offering platforms that allow people to invest in property anywhere in the world are reaping the benefits of diversified portfolios for their clients.
A common form of fractional ownership is timeshare, where buyers purchase the right to occupy and use a unit of real estate over specified periods, although this is marketed mainly for vacation homes.
The fundamental concepts of fractional ownership are not well developed in Kenya, but it seems likely that going forward it might end up gaining popularity, especially among the middle class who are looking to invest in high-end properties left for high-net-worth individuals, without the traditional complex and sometimes inefficient process of purchasing property riddled with high costs, cunning middlemen and other complexities.
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