The main sources of real estate law in Kenya are as follows:
Sustainable Real Estate Finance
Sustainable real estate finance continues to gain popularity in Kenya, with notable developments including the following:
Affordable Housing Scheme (AHS)
The President of Kenya aims to deliver 200,000 affordable housing units each year. The Affordable Housing Act, 2024 has been enacted into law to provide financing for the AHS by imposing a housing levy and creating an Affordable Housing Fund. The latest AHS projects include Kings Orchid and the Mabera Affordable Housing Project. An affordable unit should cost no more than KES3 million (approximately USD22,640). 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.
Smart Cities and Green Buildings
Key projects and deals include:
Impact of inflation and increases in interest rates
Rising inflation and increasing interest rates have affected real estate transactions in the following ways:
Impact of Disruptive Technologies
The following digital solutions have been adopted:
These technologies will have the following effects:
The Land Laws (Amendment) Bill, 2023 seeks to amend various land statutes. Key proposed changes include the transfer of the NLC’s power to undertake compulsory acquisition of land to the Cabinet Secretary responsible for land matters.
The Local Content Bill, 2023 seeks to create a comprehensive legal framework for the development and adoption of local content through ownership, control and financing of activities connected with the exploitation of gas, oil and other petroleum resources.
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 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.
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.
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.
If the transfer is to be effected through the Ardhi Sasa platform, the parties will be required to have Ardhi Sasa accounts. The transfer is initiated on the platform and signed by the parties electronically. Valuation of the property will be initiated online and payment of stamp duty done via ardhi pay. When the transfer is registered, the original title and registered documents are collected from the land registry.
The law does not require landowners to insure their titles. Title insurance is not common in Kenya.
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.
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.
Permitted Use
The Physical Planning Act and county laws govern zoning and planning at the national and county level, respectively. The use or development of land must be in accordance with the National and County Physical and Land Use Development Plans. The permitted use of a parcel of land is usually indicated on the title document. Where this is not the case, the permitted use can be confirmed by a search at the land registry or survey department.
Development Agreements
It is possible to enter into development agreements with relevant public authorities in order to facilitate a project; see 4.6 Agreements With Local or Governmental Authorities.
Compulsory Acquisition
Article 40 (3) (b) of the Constitution allows the state to compulsorily acquire land for a public purpose, subject to the fair and prompt compensation of the interested persons. Section 107 of the LA prescribes the process of compulsory acquisition, which takes place in four stages as follows.
The pre-inquiry stage
The 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. The seller will also pay CGT at the rate of 15% on the transfer of shares where the shares or comparable interest derive more than 20% of their value directly or indirectly from immovable property in Kenya. Stamp duty is paid by the purchaser at the rate of 2% of the value of the property if located in a rural area, or 4% of the value of the property if located in an urban area.
The Income Tax Act prescribes transfers exempted from CGT, including the transfer of property to a registered family trust. Similarly, the Stamp Duty Act prescribes transfers that are exempt from stamp duty, including transfers to first-time homeowners under the AHS.
Taxes in Sale of Real Estate by Way of Shares
Where real estate is purchased by way of the acquisition of shares in a land holding company, stamp duty will be paid by the purchaser at the rate of 1% of the value of the acquired shares. This also applies in the event of the subsequent acquisition of the shares of the company. Furthermore, CGT will be charged at the rate of 15% of the net gain on the sale of the shares by the seller.
Transaction Costs
The transaction costs typically borne by the 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.
A commercial real estate investor who is borrowing funds to acquire or develop real estate will typically create the following security:
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. However, like citizens and Kenyan corporations, a foreign lender or foreign security trustee would be required to have an Ardhi Sasa account in order for security over immovable property, which is registrable on Ardhi Sasa, to be created in their favour. For security over movable assets, the foreign lender would need to appoint a Kenyan agent (typically, Kenyan counsel) to register relevant notices at the Collateral Registry on their behalf.
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 (with the prior written consent of a prior security holder) states otherwise.
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.
Kenyan courts apply the polluter pays principle under which the person responsible for environmental damage is liable for it.
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 by the lender. Where an administrator has been appointed, the consent of the appointed administrator or approval of a court of competent jurisdiction would need to be obtained in order to enforce security. 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.
The following taxes apply to loans.
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 may be concluded with county or national government authorities in compliance with the law to facilitate large projects. Development agreements may be aimed at facilitating the issuance of statutory approvals, the development of infrastructure, local content requirements and the provision of social amenities, among others.
Agreements may also be entered into with utility providers, such as Kenya Power and Lighting Company, to facilitate utility provision on the development.
Physical Planning Laws
Section 72 of the Physical Planning Act enables the County Executive Committee Member for Physical and Land Use Planning to issue an enforcement notice to an owner, occupier, agent or developer of land (Recipient) if a developer commences development without a development permit or if any conditions of the development permit are not complied with. The enforcement notice will prescribe the remedial action to be taken by the Recipient, who will face imprisonment and/or be subject to fines if they do not comply with the notice.
Environmental Laws
Section 108 of the EMCA enables NEMA to issue environmental restoration orders prescribing remedial action to be taken by the Recipient to refrain from causing harm to the environment and/or restore the environment to its original state. The order may also impose fines against persons contravening environmental laws, or may award compensation to those affected by environmental degradation or pollution. The ELC may also issue environmental restoration orders.
Section 112 of the EMCA allows courts to grant environmental easements and conservation orders to preserve environmental resources.
Furthermore, part XIII of the EMCA spells out environmental offences. The consequences of committing environmental offences include revocation of the relevant licences, imprisonment and hefty fines.
Construction Laws
Rule 28 of the National Construction Authority Regulations, 2014 empowers the NCA to set up a committee to investigate complaints against contractors and any developments if they are suspected of contravening the law. The committee may recommend the deregistration of a contractor or the revocation or suspension of their licence. Where a contractor is deregistered, all construction contracts being executed by that contractor will be terminated immediately.
Dealings in Agricultural Land
Failure to obtain LCB consent for the development of agricultural land may render all related transactions void.
The main vehicles for investment in real estate are limited liability companies (LLCs), limited liability partnerships (LLPs) and Real Estate Investment Trusts (REITs). LLCs are the most common and preferred investment vehicles, but LLPs are beginning to gain traction.
LLCs
LLCs are the most common and preferred investment vehicles, and are regulated by the Companies Act 2015. LLCs have corporate personality, and the liability of the members is limited. Given this, an LLC may own property, enter into contracts and sue and be sued in the name of the company.
LLCs may be private or public. A private LLC has one to 50 members and a minimum of one director, who must be a natural person. The shares of a private LLC may not be transferred to the public. A public LLC has a minimum of one member and no restriction on the maximum number of members. It is also required to have a minimum of two directors, one of whom must be a natural person. The shares of a public LLC may be transferred to the public.
LLCs are tax residents in Kenya and are subjected to tax at the rate of 30%. The taxable income is computed as the gross revenue less allowable expenses which were wholly and exclusively used in the production of income. Subsequent distribution of dividends by an LLC would be subject to withholding tax (WHT) at the rates indicated below.
A resident (or non-resident entity with a branch/permanent establishment in Kenya) will pay:
A non-resident will pay 15% WHT on all dividend and interest income.
LLPs
LLPs have gained traction as the real estate investment vehicles of choice, and are regulated by the LLP Act 2011. LLPs have legal personality, and the liability of the partners is limited. LLPs may also own property, enter into contracts and sue and be sued in the name of the LLP.
An LLP has a minimum of two partners and at least one manager, who must be a natural person.
An LLP is not recognised as a distinct person for the purposes of income tax even though it has legal personality. Accordingly, tax on income accrued in or derived from Kenya is accounted for by the partners individually and not by the LLP. Each partner will therefore pay taxes on their share of the profit earned from the LLP based on the applicable income tax rates.
REITs
Following the enactment of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations (2013), REITs have gained traction as the premier vehicle for collective investment in real estate in Kenya. They are licensed and regulated by the Capital Markets Authority (CMA). A REIT is structured as an unincorporated common law trust divided into units and established by way of a trust deed. REITs must have a licensed independent REIT trustee who holds the REIT assets on behalf of the investors and a licensed REIT manager who manages the day-to-day affairs of the REIT.
A REIT scheme may be structured as follows.
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 also enjoy tax exemptions (see 8.5 Tax Benefits).
REITs are available in Kenya (see 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity). They may be unlisted or listed on the Nairobi Securities Exchange. Foreigners are allowed to set up and invest in REITs provided that they comply with the applicable laws. In order to register a REIT, the prescribed minimum capital requirements (see 5.4 Minimum Capital Requirement) must be met, and the CMA must declare the REIT to be an authorised scheme.
The advantages of REITs are that:
Despite the benefits, there is still a low uptake of investment in REITs in Kenya for various reasons including low investor awareness, market volatility and high set-up costs.
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 USD50,945).
REITs must have:
Private LLCs
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
LLPs are required to:
Unless required under their partnership agreements, LLPs are not obliged to convene any meetings, nor to procure an audit on their accounts except during the winding-up and dissolution of the partnership. LLPs are also not required to file tax returns.
REITs
A REIT is required to:
The REIT trustee and the REIT manager are responsible for maintaining proper records in respect of the fund, the scheme and the REIT.
Nominal fees for annual entity maintenance are payable at the companies registry and the LLP registry for LLCs and LLPs, and at the land registry for trusts licensed as REITs. For REITs, additional compliance costs are incurred towards the renewal of the licences of the REIT trustee and REIT manager, and approval fees for any public offerings. The fees are paid to the CMA.
For accounting compliance, the costs will depend on the terms of engagement negotiated with the retained accounting firm.
Leases
Leases for a term of less than 21 years grant the tenant the right to the exclusive use and quiet enjoyment of the leased premises for the lease term. The same is true for leases that have longer terms but do not confer ownership.
Licences
A licence is a permit granted to the licensee to do some act in relation to the real estate (on a non-exclusive basis) that would otherwise constitute trespass.
Easements
An easement is a non-possessory interest in another’s land that allows the holder to use the land (or a portion of it) to a particular extent or requires the owner to undertake or refrain from undertaking an act relating to the land.
Public Rights of Way
This could be a wayleave or a communal right of way.
The NLC may authorise a wayleave for the benefit of the national or county government, a public authority or any corporate body to enable them to carry out their functions in relation to the land.
The NLC may also authorise a communal right of way for the benefit of the public upon application by a county government, an association or any group of persons.
The LA provides for the following types of leases.
Short-Term Leases
The LA defines a short-term lease as a lease for a term of two years or less without an option for renewal. A short-term lease is also a periodic lease.
Periodic Leases
The following are periodic leases:
Long-Term Leases
A lease is long term if it is for a period over two years.
Leases of a period of 21 years and above may confer an ownership interest to the lessee.
Future Leases
Future leases are leases for a term that is to begin on a future date not being later than 21 years after the date on which the lease is executed. A future lease for a period above five years must be registered.
The terms of a lease, including the rent amount, are negotiated by the parties. However, Sections 65 and 66 of the LA impose some covenants on landlords and tenants, including:
The 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 at the rate of 16%. 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 or parent company 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 of a period of 21 years and above and which confer ownership 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.
A lease can be terminated by the government in cases of compulsory acquisition; see 2.9 Condemnation, Expropriation or Compulsory Purchase.
Restrictions on Damages
There are no statutory limitations on damages that a landlord may collect in the event of a tenant breach. However, under the common law rules governing the award of damages and case law, general damages are at the discretion of the trial court. For special damages, the landlord would have to prove actual losses that have been incurred in monetary terms as a direct result of the tenant’s breach.
Remedies
The remedies available to a landlord are contractually negotiated. Typically, the lease will provide for a security deposit that will be forfeited in the event of a default by the tenant. See 6.16 Forms of Security.
The following statutes prescribe other remedies available to landlords in the event of a tenant breach:
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. This position was recently confirmed in the case of National Bank of Kenya Limited v Commissioner of Domestic Taxes (Income Tax Appeal Nos. E155 & 533 of 2020) where the High Court held that Kenya Revenue Authority (KRA) was justified in charging VAT on the sale of commercial property since commercial land and buildings are not expressly listed as exempt supplies in the VAT Act. This was a departure from the earlier finding in David Mwangi Ndegwa v KRA [2018] eKLR, where the High Court held that VAT is not payable on the sale or purchase of both residential and non-residential premises. The appeal against the finding in the latter case 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. Tenants may 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 and interest 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.
Interest earned from loans obtained from foreign sources for purposes of investing in the energy or water sectors, or in roads, ports, railways or aerodromes is exempt from WHT pursuant to Legal Notice No. 91 of 2015.
CGT
Gains from the disposal of real estate are subject to CGT; see 2.10 Taxes Applicable to a Transaction.
Rental Income Tax
Rental income tax is paid by residents earning annual rental income of between KES288,000 and KES15 million. The tax is charged monthly at the rate of 7.5% of gross rent received per month. No expenses or capital deductions are allowed to be deducted while computing the tax.
This tax is not applicable to non-residents. Rental income earned by a non-resident is subject to WHT at the rate of 30% of the gross rental income received.
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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info@ikm.dlapiperafrica.com www.dlapiperafrica.com/kenyaDevelopment in Kenya’s Real Estate Sector
Kenya has a dynamic real estate sector that is evolving constantly to adapt to the needs of the market and has registered exponential growth over the years.
This article highlights some of the recent legal and policy developments and market trends in the sector.
Real estate due diligence obligations on a purchaser: Dina Management Limited v County Government of Mombasa
In the landmark judgment in Dina Management Limited v County Government of Mombasa & five others [SC Petition No8 (e010) of 2021] (the “Case”), the Supreme Court (the “Court”) considered the level of due diligence that should be undertaken to support a claim that one is a bona fide purchaser of land. This judgment sets a precedent for thorough due diligence in property transactions.
A bona fide purchaser is one who buys land for value without notice of another’s claim to the land.
Under Section 26 of the Land Registration Act, 2012, a certificate of title constitutes clear evidence that the person named as an owner of land is the land’s absolute and indefeasible owner except where the land was obtained by fraudulent means, illegally, or through corruption.
Facts of the case
The Mombasa County Government challenged the validity of the title of property belonging to Dina Management Ltd. because the first owner had obtained the title in 1989 unprocedurally and it was public land.
The Court’s decision
The Court ruled that the property was public land that could not give rise to a private proprietary interest.
The Court concluded that Dina Management Ltd. could not benefit from the defence that it was a bona fide purchaser as it should have “been more cautious in undertaking its due diligence”.
For property investors, the judgment implies that a purchaser is now required to take steps to investigate the history of land and “go to the root of the title”, as opposed to simply concluding that the title held by a seller is evidence of the seller’s legal ownership.
These steps include:
Legislative and Policy Developments
The Affordable Housing Act, 2024
With the rapid increase in Kenya’s population, the government has embarked on an ambitious affordable low-cost housing programme targeting an average of 250,000 units a year. The aim is to give millions of Kenyans access to affordable housing, create job opportunities and support the local construction industry.
The Affordable Housing Act, 2024 (AHA) was enacted as law on 19 March 2024 to provide a legal framework for the implementation of the affordable housing programme.
The enactment of the AHA comes after a ruling by the High Court declaring the affordable housing levy unconstitutional, as discussed below.
The Affordable Housing Levy
The AHA introduces a mandatory levy known as the Affordable Housing Levy (the “Levy”) which shall be at the rate of 1.5% of:
The Levy must be remitted to the Kenya Revenue Authority (KRA) on or before the ninth working day after the end of the month, and failure to do so will result in the accrual of a penalty of 3% on the unpaid amount.
The Cabinet Secretary of the National Treasury is allowed under the AHA to exempt certain persons or income from deduction of the Levy on the recommendation of the Cabinet Secretary of Lands, Public Works, Housing and Urban Development. The Cabinet Secretary is yet to gazette this exemption.
Categories of affordable housing units
The AHA categorises affordable housing units as follows.
Establishment of the Affordable Housing Fund and Affordable Housing Board
The AHA will establish the Affordable Housing Fund (the “Fund”), which will receive the Levy for the development of affordable housing units. The Fund will, among other functions, provide low-interest loans or low-monthly-payment home loans for acquisition of the affordable housing units.
The Fund will be managed by the Affordable Housing Board (the “Board”). Under the AHA, the Board will present a five-year affordable housing investment programme every five years for approval by the Cabinet Secretary of the National Treasury and Parliament.
The following eligibility conditions apply for an affordable housing unit.
Tax relief and deductions are allowable under the AHA as follows.
Private investors in the Affordable Housing Programme are also offered the opportunity to develop and construct affordable housing units along the following lines.
Conclusion
The AHA marks a step towards achieving affordable housing in Kenya. It also presents a viable opportunity for private investors to invest in the affordable housing programme. Its effectiveness will nonetheless require streamlined co-ordination, financial prudence, and effective stakeholder engagement if the benefits are to be realised.
Currently, the AHA is facing legal hurdles as a case has been filed in the High Court of Kenya seeking to quash it in its entirety.
The Real Estate Regulation Bill, 2023
The Real Estate Regulation Bill, 2023 (the “Bill”) is a bill of Parliament that seeks to provide a mechanism for regulating the registration of real estate agents, land companies and developers. Its objective is to protect real estate purchasers and curb the rampant fraud within the sector.
The Bill is yet to be passed into law and is currently at the second reading stage in Parliament.
The key provisions of the of the Bill cover the following.
The Land Laws (Amendments) Bills, 2023
There are two versions of the Land Laws (Amendments) Bill, 2023 (the “Bills”):
The Bills seek to amend the following statutes:
The Bills are in the second reading stage of the bill process. Some of the notable proposed legislative amendments in the Bills include the following.
Main Market Trends and Developments in the Real Estate Sector
This section will cover new emerging trends in the real estate sector, the economic outlook and its impact on the real estate industry.
Finance trends and access to credit
Access to credit – and particularly the interest rates at which it can be accessed – by real estate developers and purchasers is a key factor in the growth of the real estate sector. The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) is responsible for setting the country’s monetary policy, including its base lending rates.
In periods of accommodative monetary policies, including lower base lending rates, we expect an increase in real estate property sales, along with a rise in investments. Similarly, in times of monetary policy contraction, the desire to purchase real estate property decreases, leading to a corresponding decline in investment activity.
The base lending rates are considered the main avenue by which monetary policy affects economic activity. In February 2024, the MPC revised the base lending rate upwards from 12.5% to 13.00% to curb inflation and support the Kenyan shilling. This was the highest rate in over ten years.
Increased base lending rates lead to banks exercising risk-based loan pricing, where it offers borrowers higher interest rates. This locks out potential investors from accessing credit for financing real estate development or purchasing property.
However, with the increasing stability and strengthening of the Kenyan shilling, as well as weaker inflation, the CBK is expected to ease monetary policy in the last quarter of 2024, and this could result in a reduction in base lending rates.
The Nairobi County’s high-rise development proposal
The Nairobi City County Government (the “County”) has, with Sessional Paper No 1 of 2023 on Nairobi City County Development Control Policy, proposed to amend the zoning regulations to alter the maximum allowable building heights in different sections of the city. This includes raising the height limit from four floors to fifteen floors in residential zones such as Kilimani and Kileleshwa and potentially permitting structures as tall as 75 floors in the Central Business District and its environs.
This proposal has sparked an uproar and resulted in objections from at least 26 professional and resident associations in Nairobi. While it attempts to address the city’s increasing housing demand, thereby stimulating economic growth through a surge in construction activities, it may lead to the following risks and challenges by:
The County must mitigate the above challenges through the following:
Effective engagement is essential to address stakeholders’ apprehensions and incorporate diverse perspectives into decision-making processes. The County must also demonstrate transparency, accountability, and responsiveness in soliciting feedback and addressing concerns raised by the stakeholders.
AI’s potential to transform Kenya’s real estate industry
In Kenya’s dynamic real estate landscape, Artificial Intelligence (AI) presents endless opportunities and opens doors to unprecedented possibilities.
Property valuation
Traditional property valuation involves tedious and time-consuming site visits, data collection and manual data analysis which are often subject to error. AI algorithms can streamline this process by automating data collection and analysing various data points, such as property location, market trends and historical transactions, to provide more accurate property valuations.
Predictive analytics
AI-powered predictive analytics can forecast market trends, property demand and pricing fluctuations. This information is valuable for developers, investors and real estate agencies in planning their strategies and investments, which ultimately leads to improved business outcomes.
Marketing
AI can be utilised for property marketing through AI-powered features such as virtual reality (VR) and augmented reality (AR). VR and AR can be utilised for virtual property tours, which can cater for potential buyers across the globe. This will allow the potential buyers to virtually walk through the properties for sale or lease.
Customer service chatbots
Real estate companies in Kenya can deploy AI-powered chatbots on their websites and social media platforms to handle customer inquiries and assist with basic transactions. For example, the National Land Information System dubbed “Ardhisasa” has a chatbot that utilises AI technology to provide users with personalised assistance and information regarding the system and real estate matters.
Smart buildings
AI can be utilised in the real estate sector to optimise building operations and energy efficiency. Smart building systems equipped with AI algorithms can monitor and control heating, ventilation, and air-conditioning systems, lighting, security, and occupancy levels in real time, resulting in cost savings and sustainability. For example, the iconic Britam Tower in Nairobi utilises AI technology to monitor the tower’s energy and utility consumption.
Conclusion
Overall, the adoption of AI in the real estate sector in Kenya is still in its infancy, but is steadily growing as the Government of Kenya, the private sector, and other stakeholders in the real estate industry recognise the potential for increased efficiency, accuracy, and innovation in real estate transactions.
ESG
Kenya’s real estate sector is starting to adopt ESG principles, thus demonstrating a commitment to sustainable development and ethical business practices. This trend mirrors a global shift towards sustainability, with ESG considerations becoming essential for ensuring long-term corporate success and promoting community welfare.
The adoption of ESG principles in the real estate sector is influenced by both legal obligations and industry-driven initiatives, reflecting a comprehensive approach towards sustainability in Kenya’s business landscape.
Legal framework and ESG integration
The Companies Act under Section 655 (4) (b) mandates corporate directors to evaluate ESG issues that might influence a company’s future performance. This underscores the importance of integrating ESG considerations into corporate governance and decision-making processes.
Furthermore, legislative proposals such as the Preservation of Human Dignity and Enforcement of Economic and Social Rights Bill, 2021 and the Carbon Credit Trading and Benefit Sharing Bill, 2023 aim to establish frameworks for enforcing economic and social rights and regulating carbon credit trading respectively.
In addition to legal mandates, private sector initiatives are pivotal in advancing ESG principles. The Nairobi Declaration on Sustainable Insurance and the Kenya Bankers Association’s Sustainable Finance Initiative exemplify the insurance and banking industries’ drive towards incorporating ESG considerations into business models.
Real estate industry and ESG trends
Despite the absence of mandatory ESG compliance requirements for the real estate industry under Kenyan law, some stakeholders have proactively engaged global and local ESG standards to integrate sustainability principles into their projects. The following are key trends within the sector.
Conclusion
The integration of ESG principles within Kenya’s real estate sector exemplifies a holistic approach to sustainable development, balancing environmental stewardship, social responsibility and ethical governance. Through a combination of legal mandates and industry initiatives, Kenya is fostering a real estate sector that not only contributes to economic growth but also promotes the wellbeing of its communities and the environment. As these trends continue to evolve, the Kenyan real estate industry is set to play a pivotal role in the global movement towards sustainable development.
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