Registration of Leases: How to Secure Your Rights & Interests Over Leased Property

by | Aug 21, 2023 | Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence | 0 comments

The registration of leases could be described as a process that giving legal credence to leases by having them registered with the Department of Lands, more specifically with the Registrar of Lands for the particular jurisdiction in which the property falls.

A lease only transfers possession of a property but not ownership. For a fixed term and price, a lease confers usage rights of property to the person to whom the lease is granted (lessee) from the owner of the property (the lessor).

Section 47 of The Registered Land Act Chapter 300 of the laws of Kenya requires that where a lease is (a) for a specified period exceeding two years, (b) for the life of the lessor or of the lessee, or (c) if it contains an option whereby the lessee may require the lessor to grant him a further term or terms which, together with the original term, exceed two years, that the lease shall be in the prescribed form, and shall be completed by:

  1. opening a register in respect of the lease in the name of the lessee; and
  2. filing the lease; and
  3. noting the lease in the encumbrances section of the register of the lessor’s land or lease.

Subsequent sections (Sections 48 to 64) of The Registered Land Act Chapter 300 of the laws of Kenya define various aspects of leasing of land including issues such as the lessor’s consent to dealing with the lease, lease of charged land, the duration of leases, what happens in the event of hold-over, implied agreements by both the lessor and lessee when they enter into a lease agreement and much more.

Why Does the Registration of Lease Agreements Matter?

It is important to note that while the registration of leases is not a legal prerequisite for the recognition of a legal contract between a lessor and lessee, an unregistered lease may be valid between the parties but will offer no protection against third parties to the agreement.

The Land Registration Act, 2012, in S.36(2) essentially confirms that nothing shall be construed as preventing any unregistered instrument (lease) from operating as a contract. There is also legal precedent to support this position.

If the law does not demand the registration of leases, why should a lease be registered? A formal lease document is important for several reasons

Strengthening the Formal, Written Record Provides Legal Recognition of the Lease:

First, registering the written record of the agreement between the lessor and lessee provides irrefutable proof and evidence of the agreement. In the event of any dispute, it is easier to clarify the agreement and find a resolution.

Recognition and Protection of The Rights & Interests of Both Parties

Second, the formal registration of leases can help to protect the rights and interests of both the lessor and lessee. A registered lease confirms the agreement between the parties, and the rights and responsibilities of each party, as well as offering them protections they would otherwise be unable to claim. This can help ensure that both parties are treated fairly and their rights are respected, more so where third-party rights are entered against the property.

Protection Where Third-Party Rights Subsist

Third, registration of leases may not only facilitate transactions that may require collateral against property but also creates legal, evidentiary support proof of the agreement between the parties. The registration of a lease may also inform the parties to the agreement of any prior or superseding rights that may take precedence over the property. For example, the lease may include provisions that protect the landlord from liability if the tenant causes damage to the property or that protect the tenant from being evicted without cause. For the lessee, attempting to register the lease may expose an undeclared prior right over the property, for example, a charge or a preregistered encumbrance on the property.

Professionalism

Finally, the registration of leases can help in establishing or asserting good governance measures in the conduct of business affairs that may be necessary, especially in corporate setups. This can be beneficial for both parties, as it can help to ensure that the agreement is conducted in a smooth and orderly manner.

A simple illustration of the importance of registering lease agreements is that a registered lease creates an encumbrance on the property, the effect of which is that the lessee cannot, for example, sub-let, charge or part with possession of the land leased or any part thereof without the written consent of the lessor.

Likewise, the lessor cannot interfere with the lessee’s rights created under the registered lease. For example, the lessor cannot arbitrarily transfer ownership of the property to a third party where the encumbrance subsists.

To register a lease, the parties submit the relevant documents in the prescribed form identifying the parties to the agreement, the specific property that is the subject of the lease including information such as the tenure, size, location and any other pertinent details of the property, the duration or tenure for lease, the specified lease amount agreed upon and any other information as prescribed.

Upon registration, the lease becomes a matter of public record entered against the title deed of the property. Registering a lease helps to ensure that the lessors ownership rights are recognized and that the lessee’s rights to occupy the property are enforceable.

The Process of Registration of Leases

Lease registration is an important legal process that varies depending on the jurisdiction. In some regions, lease agreements must be registered with the local authorities to gain legal validity and protection. Invariably, the registration process typically involves the following steps:

1. Prepare the Lease Agreement:

Before registration, the parties will draft a comprehensive lease agreement that includes all the essential elements. It is never a good idea to just go online and download a template and customize that, not least of all if you intend to take out an agreement for longer than two years. Take legal counsel!

2. Pay Stamp duty and Registration Fees:

Typically, it is the lessee who pays stamp duty for the lease agreement at the applicable rates (4% within municipalities and 2% outside of those areas). Generally, these levies will also vary based on the lease duration and local regulations.

3. Submit Lease Registration Documents:

Provide all necessary documents, including the original lease agreement, identification documents of both parties, property title deeds, and any other required paperwork.

4. Verification and Approval:

Local authorities will review the lease agreement to ensure compliance with applicable laws and regulations and register the lease. Once approved, they will stamp and seal the document.

5. Registry Record Keeping:

The registered lease agreement is kept on record at the local land registry. This will be beneficial in case of any legal disputes or conflicts in the future.

6. Renewal or Termination:

Lease registration may require renewal after a certain period, depending on the nature of the agreement, especially for long-term leases. Because registering a lease has the same effect as placing an encumbrance on the property, registered leases will also require specific termination procedures at the local land registry.

Conclusion

The necessity of registering leases may be arguable, depending on which side of the coin you’re staring at. For both the lessee and lessor, the hassle and additional costs associated with the registration of leases, on the one hand, may seem needless. On the other hand, at the risk of running into the headwinds that could result from commercial disputes, registering a lease agreement seems like a worthwhile endeavour. Neither party would want to enter into an agreement and then find themselves at the mercy of court-based adjudication that may not be guided by a formal, written agreement recognized in law. Additionally, the parties would not want to be unduly conscripted into any other commercial disputes that may arise from the actions of either party.

It is not just good practice, it also makes a lot more sense to ensure that any long-term lease arrangements are duly registered, in the interests of both parties to the agreement.

Ps: Did you know that you can register a lease agreement that is for a shorter duration than 2 years if you wanted to?

Leases vs. Licences in Real Estate: Understanding the Differences

by | Aug 17, 2023 | Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence | 0 comments

Leases vs. Licences
Understanding the Differences:
An Introduction

In an earlier blog post, we defined Controlled Tenancies, Licenses, and Commercial Leases without a deep dive into the fundamental differences between Leases and Licenses.

Leases and Licenses are the most common arrangements for granting the right to use property.  While both serve as legal contracts between parties, they have distinct characteristics that can significantly impact the rights and responsibilities of the parties involved.

In this article, we explore the intrinsic differences between leases and licences in the context of real estate, providing valuable insights for landlords and tenants alike.

Leases vs. Licences:
Understanding Leases

Definition and Nature

A lease is a contractual agreement between a lessor (landlord) and a lessee (tenant), granting the lessee the exclusive right to possess and use the property for a specific period. Leases are often for a fixed term, such as one year, and they create a landlord-tenant relationship with the lessee paying regular rent to the lessor.

Transfer of Possession and Control

In a lease, the lessee gains possession and control of the property for the duration of the lease term. The lessor relinquishes the right to access or use the property during this time, ensuring exclusive enjoyment for the lessee.

Fixed-Term Commitment

Leases typically have fixed terms, and both parties are bound by the lease conditions until its expiration. The lessee is responsible for paying rent for the entire lease period, and early termination may incur penalties.

Rights and Responsibilities

Leases confer significant rights and responsibilities upon the lessee. They have the right to use the property for its intended purpose, subject to any restrictions specified in the lease. Additionally, they are generally responsible for maintaining the property, unless otherwise stated in the lease agreement.

Leases vs. Licences:
Understanding Licences

Definition and Nature

A licence, on the other hand, is a more limited arrangement that grants permission or access to use the property, but it does not establish a landlord-tenant relationship. Licences are revocable and do not provide the same level of legal protection as leases.

Revocability and Control

Licences are often considered revocable at will, meaning the licensor (property owner) can revoke the permission granted to the licensee (user) at any time without going through a formal eviction process.

Temporary and Non-Exclusive Usage

Licences are typically for a short period and may be non-exclusive, meaning multiple licensees can be granted permission to use the property simultaneously.

Limited Rights and Responsibilities

Unlike leases, licences do not grant possession or exclusive use of the property. Licensees may have limited rights and might only be allowed to use the property for specific purposes outlined in the licence agreement.

Conclusion

Leases and licences are distinct legal arrangements in the realm of real estate, each offering different rights and responsibilities to the parties involved. Leases create a landlord-tenant relationship, granting exclusive possession and control for a fixed term, while Licences, on the other hand, are revocable permissions for temporary and non-exclusive use of the property.

Understanding these differences is crucial for both property owners and users to make informed decisions about their real estate arrangements.

Controlled Tenancies, Licenses, Commercial Leases: The Differences & Similarities in Property Usage Arrangements

by | Aug 17, 2023 | Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence | 0 comments

Controlled Tenancies, Licenses & Commercial Leases: An Introduction

Controlled Tenancies, Licenses & Commercial Leases refer to the different types of commercial arrangements that a property owner (landlord) and the ultimate user of the property (tenant) might have between themselves. The legal arrangements which confer use of property to property users differs to a large extent on the basis of the intent that both parties had at the time they entered into their engagement, the duration or term for which the agreement was intended to subsist, the nature of commercial arrangements the parties desired to engage in besides many other factors.

While on the face of it controlled tenancies, licenses and even registered leases may appear to be one and the same thing, in commercial and legal practice, for example, a controlled tenancy will differ significantly from a registered lease (commercial lease). Both of these will also differ significantly from licenses.

It is important to comprehend their intrinsic differences because they impose different obligations on the parties, confer different rights of use and ultimately possess uniquely different features which, if not sufficiently well understood, may cause one or both of the parties to unwittingly bind themselves into an arrangement that may not adequately represent their intentions. Even worse, the arrangement entered into may not guarantee them the rights and protections they may need to defend their commercial positions in the event of a dispute.

We will seek to explore the differences between these different types of commercial arrangements and how they.

Controlled Tenancies, Licenses, Commercial Leases: 
What is Controlled Tenancy?

A controlled tenancy is defined under section 2 of the Landlord and Tenant Act (Shops, Hotels and Catering Establishments Act), Chapter 301 of the Laws of Kenya as a tenancy for a shop, hotel or catering establishment which has:

  1. Been reduced into writing; or
  2. Hasn’t been reduced into writing but which is for a period not exceeding five years; or which contains a provision(s) for termination, other than for breach of covenant, within five years from commencement thereof; or which relates to premises specified by the Minister in a Gazette Notice to be a controlled tenancy.

Generally, where tenancy subsists but without a formal written document, that tenancy is defined as a controlled tenancy. The intent to confer tenancy is evident. However, what isn’t outrightly determinable is the nature of the agreement between the two parties.  By failing to reduce the lease agreement into a clear and concise written form, the agreement cannot be easily understood and referenced in the future.

In such cases, it is foreseeable that disputes may arise for various reasons. Landlords can arbitrarily raise rents, for example.

In Kenya, controlled tenancies are regulated by the Business Premises Rent Tribunal which would remedy disputes by, for example in the case indicated where a landlord arbitrarily raises rents, capping or restricting such arbitrary hikes by the landlord.

Controlled tenancies cannot be terminated except as provided for in the Act in Section 7. The rules in this section override anything stated to the contrary, even where there is a written agreement between the parties to the controlled tenancy, as established by S.4(1) of the Act.

In most countries, controlled tenancies typically subsisted where there was a shortage of affordable housing, and the government wanted to ensure that low-income tenants are not priced out of the market.

In Kenya, the Business Premises Rent Tribunal oversights the landlord-tenant relationship to ensure that neither party unduly exploits or leverages their position to take advantage of the other, more so that the rights of tenants are observed by landlords who exercise greater leverage in the relationship.

The Business Premises Rent Tribunal also provides a dispute resolution mechanism via which the tenancy-landlord relationship can be administered within the law. For this reason, it is unlikely that one may encounter controlled tenancies in most commercial premises these days – most landlords would deem the involvement of a state agency in their business operations as disruptive, certainly not nearly worth the trouble it may potentially cause.

Where controlled tenancies subsist, it is the government that typically establishes a system for regulating rents and may even provide other forms of support to landlords, such as subsidies or tax breaks, to encourage them to offer controlled tenancies.

To illustrate this, a hypothetical example where Controlled Tenancy could be inferred would be one where a restaurant operator (in this case the tenant) and their landlord have an oral agreement for the space under tenancy for a period of 3 years and the landlord attempts to evict the tenant on the grounds that the tenant has defaulted in paying rent for a period of a month after such rent has become due.

This is because the Act provides that the landlord would only have grounds to do so if the tenant has defaulted in paying rent for a period of two months after such rent has become due or payable or where the tenant has persistently delayed in paying rent which has become due or payable.

Landlords tend to have a deep aversion for controlled tenancies because, under the Act, disputes between landlords and tenancies for these types of arrangements are referred to the Rent Tribunal – a statutory body whose mandate it is to determine rental prices and conditions where a landlord fails to adhere to the Act.

A landlord cannot, therefore, evict a tenant under a controlled tenancy, arbitrarily change the rent price, or even vary any other material aspects of the tenancy without the authority of the Rent Tribunal. While the terms of a controlled tenancy may vary depending on the jurisdiction, they typically include restrictions on the amount of rent that can be charged, as well as other provisions that are designed to protect the rights of tenants. For example, controlled tenancies may have strict rules about how and when landlords can increase the rent, or they may require landlords to provide certain services or amenities to tenants.

Controlled Tenancies, Licenses, Commercial Leases:
What is a License?

A license is a commercial arrangement that grants the person to whom it is granted (licensee) permission from the owner of the land (licensor) to use the land for an agreed purpose and for a particular amount of time but without being granted exclusive possession of the property.

Unlike a lease which grants the lessee possession of the property, a licensee has no interest in the property. A licensee can exclude everyone else from the property except the licensor.

An example of a license may include an event at a stadium or other privately-owned venue which allows the licensee to allow entry and exit of the event’s patrons including making gate collections and even selling food and beverages. Cinema-goers, for the time that they are in the cinema hall, are licensees of the property owner. Another example includes marketing billboards which are placed with a client(s) who are not the proprietor(s) of the land

A contractual license provides express or implied permission to enter or use the property in exchange for some consideration. In Kenya, the vast majority of Radio Frequency Base Stations (cellphone tower masts) are operated on commercial licenses. In our practice, we see an increasing number of owners of property who have sunk boreholes on their property granting limited operator licenses to licensees who then pay a licensing fee to operate a water point on the land and whose water delivery bowsers are granted licenses to draw and dispense water from the licensors land.

Controlled Tenancies, Licenses, Commercial Leases:
What is a Commercial Lease?

A commercial lease in Kenya is a lease agreement that is used to rent out a commercial property, such as an office building or a retail space. Like other lease agreements, a commercial lease in Kenya typically includes terms and conditions that specify the rights and responsibilities of the landlord and the tenant, as well as the rental amount and other important details.

What Terms are Indicated in Commercial Leases?

The terms of a commercial lease in Kenya may vary depending on the specific property and the needs of the landlord and tenant, but some common provisions may include:

  • The length of the lease: This is the amount of time that the tenant is agreeing to rent the property for.
  • The rental amount: This is the amount of money that the tenant agrees to pay the landlord each month in exchange for using the property.
  • The security deposit: This is an amount that the tenant typically pays the landlord at the beginning of the lease. The landlord holds this money in case the tenant causes any damage to the property or fails to pay the rent.
  • The terms for renewing the lease: This specifies whether the tenant has the option to renew the lease at the end of the initial lease period and, if so, under what conditions.
  • The terms for terminating the lease: This specifies the conditions under which the tenant or landlord can terminate the lease early, such as if the tenant fails to pay the rent or violates some other lease agreement provision.
  • The terms for making alterations to the property: This specifies whether the tenant is allowed to make any changes to the property (such as painting or installing new fixtures) and, if so, what conditions must be met.

In Kenya, commercial leases are typically governed by the Law of Contract Act and the Rent Restriction Act, which establish the rights and responsibilities of landlords and tenants and provide a framework for resolving disputes.

Conclusion

While the fundamental purpose of these arrangements is to facilitate commercial relationships between landowners and other parties who may be interested in utilizing them to extract their commercial value, these arrangements differ significantly in their administration and in their derived rights and in the different obligations they create to the parties in the arrangement.

If you intend to secure or offer a controlled tenancy, a lease or even a license over property, then it behoves you to understand the different obligations and rights of each arrangement and to find the arrangement that best suits the economic activity you intend to undertake.

Researching your different options and consulting with a legal expert are both good places to start. Here’s to safe, pragmatic and sound investing!

Leasing Land in Kenya: A Beginner’s Guide to Understanding Lease Agreements

by | Aug 11, 2023 | Agricultural Land, Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence | 0 comments

Leasing Land: What are Lease Agreements?

Leasing land, and in general, leasing property for a rental fee is one of the most lucrative ways to profit from the ownership of real estate assets. Leasing allows the property owner (landlord) to earn a passive income from their property while simulteneously allowing the lessee (tenant), the ability to utilize property they would otherwise be unable to afford to purchase outright.

In the world of real estate, lease agreements play a vital role in providing a legal framework for property rentals. Leases, or lease agreements are the binding legal agreement entered into by the proprietor/owner of a property (also referred to as the lessor or as landlord) in which the rights of use of the property are conferred to a lessee or tenant, and which clearly stipulates the terms and conditions under which the property can be used and the relationship that subsists between the two parties.

Leasing Land: Why is Leasing Growing in Popularity?

The most basic premise that makes leasing attractive is that it allows two parties to engage for economic benefit – one to utilize an asset they may not be able to afford to purchase to either generate an income or derive some other form of benefit, and the other to benefit by merely owning that asset.

Leasing, in particular the leasing of agricultural land, as an investment strategy, has gained significant traction post-pandemic as more property investors seek to diversify their risk exposure in the real estate market and augment their incomes.

While it is becoming increasingly unattractive to merely buy land speculatively, acquiring property which, on the other hand, can at the very least generate some revenue, is becoming an increasingly attractive proposition. Especially among the middle-class bourgeois, who tend to buy land almost exclusively for residential development in the indeterminate future, or speculatively. The slew of economic challenges currently being experienced both as a result of the Covid pandemic and due to events globally, has cooled off the hitherto bullish market sentiment on the acquisition of land. In particular, the acquisition of small-holder plots (burotti maguta maguta) which are notoriously difficult to sell or lease in the secondary market where there is no immediate value proposition in terms of generating an income.

For both prospective tenants seeking to rent a property and landlords looking to lease out their property investments, understanding lease agreements is critical for ensuring a smooth and secure rental experience.

In this comprehensive guide, we will delve into the core concepts of lease agreements, explore the key elements of a lease agreement, the different types of leases, and shed light on the advantages and drawbacks that leasing affords both landlords and tenants. We will in a follow-up post, explore the registration of leases, the key distinctions between registered and unregistered leases and the importance of registering lease agreements, especially as relates to commercial leases.

Did you know agriculture is the largest economic sector in Kenya, and that the vast majority of agricultural production on commercial scale is achieved on leased land?
What opportunities lie in the leasing of property in Kenya? start by gaining some basic knowledge of land leasing as a commercial activity.

Leasing Land in Kenya: A Beginner’s Guide to Understanding Lease Agreements

Leasing Land: The Key Elements of a Lease Agreement

In Kenya, unless otherwise provided in a lease instrument, lease agreements are governed by the general provisions of Part VI of the Land Act, 2012 as provided for under S.55(1) of the Act.

A well-drafted lease agreement should encompass essential elements to protect the interests of both parties involved. Here are the key elements found in a typical lease agreement:

1. Details of the Parties Involved:

The agreement will clearl identify the lessor (landlord) and lessee (tenant) with their full legal names and addresses, and clearly define the relationship between the parties to avoid any confusion.

2. Property Description:

The agreement will include a detailed description of the property being leased, including its physical location, physical address, unit number or land reference number (if applicable), and any specific areas or amenities accessible to the tenant.

3. The Term or Duration of the Lease:

It will specify the duration of the lease, whether it’s a fixed-term lease, month-to-month lease, or any other arrangement and clearly outline the start and end dates of the tenancy.

4. Rent and Payment Terms:

State the monthly rent amount, the due date, and the preferred payment method. Additionally, mention any penalties for late payments or bounced checks.

5. Security Deposit:

Detail the amount of the security deposit and the conditions under which it will be fully or partially refunded at the end of the tenancy.

6. Utilities and Maintenance Responsibilities:

The agreement will clarify which party is responsible for paying utility bills and maintaining the property. Typically, landlords handle major repairs, while tenants handle day-to-day or routine maintenance.

7. Restrictions and Rules:

Outline any restrictions on subleasing, pet ownership, smoking, and other specific rules that tenants must abide by during their tenancy. In overview, the lease agreement may also include details about the rights and responsibilities of the landlord and tenant, such as who bears responsibility for paying utilities, property maintenance, responsibility for paying land rent and rates. It may also include exit provisions which speak to the condition upon which the property reverts into the control of the owner, as well as provisions on limitations of use such as provisions on subletting, use or storage of certain fuel types on the property, restrictions on the admission of domesticated animals and pets or even restrictions on the number of occupants allowed on the property.

8. The Period of Notice:

The agreement will include the notice periods required for lease termination or lease renewal. This will provide clarity on the actions required by either party at the end of the lease term.

9. Legal and Late Fees:

Mention the legal actions that may be taken if either party breaches the agreement and the potential consequences, such as eviction. Also, specify any late fees charged for delayed rent payments.

10. Endorsement of the Agreement:

Ensure both parties sign the lease agreement and date it. Signatures validate the contract and show mutual agreement to its terms

Leasing Land: Understanding Different Types of Leases

In the Kenyan context, lease agreements may be broadly classified into the following three categories:

Periodic Leases

Periodic leases, as defined in Section 58 of the Land Act 2012, are lease agreements whose term or duration is unspecified and where the parties to the agreement make no provision by which notice of termination of the agreement has been defined. In this case, the tenancy may be from week to week, month to month, year to year or such other period on which the rent is based. Further, for agricultural land, periodic leases are deemed to have a term of six months. Where a land owner permits the exclusive occupation of his land or any part of it by any person at a rental, but without any agreement in writing, that occupation is deemed to be a periodic tenancy. For periodic lease arrangements, termination takes the form of notice by either party to the other, with the length of the period of notice not exceeding the period of tenancy.

Short-Term Leases

The Land Registration Act, 2012 Section 58, stipulates that a short-term lease is a lease made for a term of two years or less without the option for renewal and includes periodic leases where the owner of land permits the exclusive occupation of the land or any part of it by any person at a rent but without any agreement in writing. Notably, short-term leases may be made orally or in writing and are by their nature not registrable interest in land. These leases, as distinguished from periodic leases, have a defined term.

Registered Leases

Lease arrangements that have a fixed term that extends beyond 2 years and those with the option to renew beyond two years and also the option for termination through the issuance of a notice, (but which are not by their nature periodic leases) are termed as general leases. Leases with a term exceeding 2 years should be registered.

Registration of Leases: How to Secure Your Rights & Interests Over Leased Property

Leasing Land: Advantages of Leasing

Leasing comes with several noteworthy benefits:

1. Cost-Efficiency

Leasing enables businesses to access expensive assets without incurring the full upfront cost of ownership. Instead, they can make periodic payments, preserving valuable capital for other essential operations.

2. Flexibility

For businesses that require to set up in diverse locations which may require them to either be in one location for limited or short spells, or which require them to have robust mobility, room for expansion, or even those that require up-to-date equipment or technology, leasing offers the flexibility to upgrade or change assets easily, giving them an edge over the competition.

3. Lower Maintenance Burden

In many cases, the lessor assumes responsibility for maintaining the leased asset, saving the lessee from any additional maintenance costs they would have otherwise incurred if they outrightly owned the asset(s).

4. Taxation Benefits

To the lessee, costs associated with leasing, including the rentals payable to the lessor, are tax-deductible. This reduces their tax liability on the business they undertook using the land or property they leased. This benefit allows businesses leasing land or other property to significantly write off these costs of doing business against their revenues thereby reducing their tax burden.

Considerations and Drawbacks

While leasing presents numerous advantages, it’s essential to consider potential drawbacks:

1. Limited Control

As the lessor maintains ownership, lessees may face restrictions on modifying or using the asset in certain ways. This may limit their utility for the asset in turn stifling their growth.

2. Early Termination Penalties

The premature termination of leases often results in penalties and/or additional fees, affecting the lessee’s finances. If an unforeseen event occurs that may cause the lessee to terminate the lease, say for example, if that event causes the business to shut down permanently, then this can leave the lessee in a precarious financial situation that may be difficult to mitigate.

Conclusion

Leasing is an integral form of investment in real estate. It offers access to valuable assets and properties without the burden of full ownership, providing flexibility to capital in the use of many real estate assets. Understanding the intricacies of leasing empowers individuals and businesses to make informed decisions. The benefits of leasing, such as cost-efficiency and flexibility, greatly outweigh any drawbacks, making it a pragmatic, viable and attractive option for many entities seeking to thrive in a highly dynamic marketplace such as the real estate market in Kenya.

As a property investor, if you haven’t yet begun to pay attention to this mode of investment in real estate, you need to pay closer attention to the vast opportunities that exist in the market today to generate stable income and utility from the land you own. We can help you achieve this!

Capital Gains Tax Skyrockets to 15% From January 1′ 2023- Investors Brace for Impact!

by | Dec 27, 2022 | Property Market Advisory Series, Real Estate Market Intelligence, Writer's Commentaries | 0 comments

Capital gains tax hike sparks outrage among property investors and realtors! Secretly, I have heard the plausible argument, steeped in political sentiment, that the threefold hike is targeted at weakening the political clout of a particular community.

What is Capital Gains Tax?

Capital gains tax is a tax that is levied on the profit made from the sale of certain types of assets, such as real estate or stocks.

Commencing January 1st 2023, capital gains tax, which had previously been levied at 5% on the gain made will henceforth be levied at 15%.

It is important to note that there are some exemptions that apply in the levying of capital gains tax.

Capital Gains Tax, often referred to as just CGT, is levied when a property is transferred.

In real estate transactions, CGT is levied on the vendor or transferor of the property against the capital gain that the vendor makes.

As the name suggests, the tax is levied on the capital gain that the vendor has made at the time of sale.

History of Capital Gains Tax in Kenya

Capitals gain tax was reintroduced in Kenya via the Finance Act of 2014. The tax came into effect on January 1’ 2015 following a 30-year hiatus since 1985. The tax has been levied at 5% since its reintroduction.

The operationalization of the tax came with some hitches between 2016 and 2019 as it transitioned between manual and electronic payment modes

Notably, a legal challenge between the Kenya Bankers Association and Kenya Revenue Authority when the latter twinned the payment of capital gains tax with the payment of Stamp Duty.

Outlook 2022: Making Money in Real Estate in Kenya in 2022 & Beyond

“Understand the emerging trends, discover where the opportunities will be, and learn how you can position yourself to profit from the marketplace in 2022 and beyond ….”

Newly Introduced Change in Capital Gains Tax Rate

Commencing January 1’ 2023, CGT will be levied at 15% as amended by the Finance Act of 2022 (Finance Act), which will see the rate of capital gains tax (CGT) levied increase from 5% per cent to 15%.

Calculation of Capital Gains Tax

By way of a formula, CGT could be expressed thus:

CGT                                               =                 5% (Net Transfer Value – Adjusted Cost of Property)

Where the
Net Transfer Value                     =                Transfer Value – Any Incidental Costs (that the vendor incurs on the sale)

Adjusted Cost of Property        =                Cost of acquisition + Enhancement Expenditure (including the cost of defending title over property and incidental costs of acquiring property)

Some Notable Exemptions to CGT in Kenya

Not all property transactions are subject to CGT.

For example, a property whose ownership is transferred to a beneficiary of an inheritance is exempt.

Similarly, the vendor of a residential property who has been the owner-occupier of that property for a period of at least three years immediately preceding its disposal is also exempt.

The Finance Act also describes what qualifies to be termed as a transfer of property for the purpose of levying CGT.

Here are some other real estate transactions where a property being transferred is exempted from the levying of capital gains tax:

      • Land transferred by an individual whose transfer value is Kshs. 3 million or less.
      • Where land has been compulsorily acquired by the government for infrastructure development.
      • Agricultural property situated outside a municipality that is smaller than 50 acres in size.
      • Property transferred/sold to administer the estate of a deceased person within two years of the death of the deceased/court decision.
      • Land that is vested in a liquidator or receiver
      • Property transferred between spouses or former spouses or their immediate family.
      • Transfer of property for securing a debt/loan
      • Where deemed by Treasury to be in the public interest, transactions of exchange of property that occur when companies are restructured.

Documents to be Submitted as Proof of Payment of CGT

Property vendors are required to submit an acknowledgement slip for the payment of capital gains tax.

Alternatively, where an exemption applies, then an exemption slip should be submitted for the transfer to be registered.

Why Has Capital Gains Tax Been Increased

It’s simple. The government needs to raise taxes in an economy that has been hit by multiple shocks.

Drastically reduced activity in the real estate sector would account for lower volumes of sales/transfers and correspondingly lower collections of tax on these types of transactions.

It is no secret that real estate transaction volumes have taken a particularly heavy hit since 2020, causing jitters to many property investors in both commercial and residential property markets in the country.

Kenya, like many other countries globally, has been hard hit by the economic uncertainty that followed the unprecedented ravages of the Covid 19 pandemic.

Exacerbated by the looming global economic recession, high inflation rates, high cost of living, the rising cost of credit, an over-leveraged economy and a generally sour economic mood, the government will continue to seek out fiscal measures that will raise taxes.

By offering very high returns on public borrowing at a time of correspondingly high inflation, especially on infrastructure bonds, the government has stifled capital inflows in the property transfer market by draining out all the liquidity that could be directed at private investing.

In any event, very few attractive property investments can match the 14% ROI being offered on say public infrastructure bonds at this time.

At these rates, even traditional lenders would be more inclined to consider lower-risk assets (read here, government paper) than assets that have higher risk and take longer to realize.

Given the economic climate, raising CGT at this time makes sense. It is “low-hanging” fruit. Also, Kenya has had one of the lower rates for CGT on the continent. Perhaps this too may also provide justification for the hike..

Secretly, I have also heard the plausible arguments, albeit steeped in political innuendo, that the tripling of the tax overnight is targeted at weakening the political clout of a particular community. Of course, that could be dismissed as conspiratorial. However, in the current dispensation, it is clear that nothing is what it has been sold as. Or, even that what something is, and what it is touted to be are not necessarily the same thing.

A three-fold increase overnight does seem rather overstated, especially given the government’s stated goal to increase homeownership. The move is regressive, to say the least!

Likely Impact of Increase of CGT on Property Market

It would be unexpected that the rise in the cost of taxes would result in diminished sales. Not in the current economic climate. Fiscal policy planners would have anticipated this and would be fairly certain that investors’ need to liquidate real assets in favour of cash to either refinance their operations or adjust to the current inflationary pressures would far outweigh their desire to hold on to their property – especially if those properties are not currently generating any income.

Conclusion:

While capital gains tax is based on self-assessment, individuals transacting property that meet the thresholds for the levy of capital gains tax should ideally maintain proper records of their transactions, in particular for any improvements that they may undertake during the tenure of their ownership of the property. These will be crucial in the accurate calculation of any capital gains tax liability.

The increase in CGT will adversely affect investor perceptions but this will more than likely be short-lived in the grand design of things.

Why Pension-Backed Mortgages in Kenya Are Unlikely to Return in The Near Future

by | Dec 27, 2022 | Property Market Advisory Series, Real Estate Market Intelligence, Writer's Commentaries | 0 comments

To state it simpler, pension-backed mortgages are secured against the savings a contributor in a mortgage scheme has amassed.

Pension-Backed Mortgages: What Are They?

Pension-backed mortgages are mortgages that can be accessed by contributors to retirement benefit schemes which allow the contributor(s) to leverage their savings in pension schemes to access financing.

To state it simpler, pension-backed mortgages are secured against the savings a contributor in a mortgage scheme has amassed.

Naturally, no fiscally-responsible government would allow a contributor to access 100% of their pension contributions to meet their housing requirements since the very essence of those contributions is to create a nest egg for the contributor’s retirement.

Inevitably, therefore, the assets against which the loan (mortgage) is secured, are partially against the contributor’s savings in the pension scheme and partially against the asset (house) against which it was borrowed.

Synopsis of Enactment of Pension-Backed Mortgage Regulations

In April 2020, the Government of Kenya, through the then Treasury Cabinet Secretary, published the Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020. The amendments were made by the Tax Laws (Amendment) Act, 2020 to Section 38(1A) of The Retirement Benefits Act, No.3 of 1997.

Intended Purpose of Pension-Backed Mortgage Regulations

By allowing members of retirement benefits schemes to leverage their amassed contributions in their respective pension schemes, the goal was to unlock financing that could be targeted at home ownership, thereby accelerating the country’s homeownership goals that were a critical pillar of the Government’s Big 4 affordable housing agenda.

Legal Challenge to Pension-Backed Mortgage Regulations

In May 2020, civic-activist-turned-politician, Okiya Omtatah, with the backing of the Association of Retirement Benefits Schemes and the Association of Pension Trustees and Administrators filed an application in the High Court of Kenya challenging the legality of the regulations.

Enactment of Pension-Backed Mortgage Regulations

Thereafter, in September 2020, the legislature approved, vide Legal Notice Mortgage Regulations LN 192 Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020 – an amendment to the Retirement Benefits Act. The regulations were published on September 14, 2020.

Operationalization of Pension-Backed Mortgage Regulations

As per the regulations, it would fall within the purview of the individual pension schemes to determine the procedure by which their members would apply to access their contributions into the scheme for the purpose of applying for a pension-backed mortgage. The regulations required individual members to make their application through the trustees of the scheme. Trustees from the different pension schemes would consider applications relating to the utilization of the benefits by members and review their consistency with the retirement act and scheme rules.

Pension schemes would be given a year until September 14, 2021, in which they would “operationalize” the issuance of pension-backed mortgages, allowing their members to access their savings to acquire homes.

Ruling on the Legal Challenge to Pension-Backed Mortgage Regulations

Subsequently, on 23rd November 2022, the judge hearing the Judicial Review Application 095 of 2020, Republic v National Assembly & 2 others – the petition filed by Mr Omtatah – issued a judgement quashing the regulations that brought pension-backed mortgages to life in Kenya, citing a flawed process in their enactment due to lack of public participation.

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Why were the Pension-Backed Mortgage Regulations deemed unconstitutional?

Because lawmakers did not allow for stakeholder engagement or robust public participation in the legislative process, Parliament, in passing the regulations that birthed pension-backed mortgages, had failed to meet the thresholds required by Article 118 (1) of the Constitution.

Major Proposals by the Pension-Backed Mortgage Regulations

As per the regulations, in a defined contribution scheme, an amount not exceeding 40 per cent of the member’s accrued benefits shall be available to a member for the purchase of a residential house, provided that such sum shall not exceed seven million shillings.

The residential houses that would have been eligible for purchase under these regulations would have to have been certified for occupation before the intended purchase – precluding the possibility that the funds could be used to either develop property on vacant land, or even secure houses being sold under off-plan schemes. Eligible homes for purchase would include those developed under government initiatives, such as the AHP, and those being offered for sale by private developers, SACCOs, insurers and entities running tenant purchase arrangements.

Pension fund trustees would have been allowed to offer members the option to deploy the mortgage funds as either a guarantee to access a mortgage or utilize their benefits for the purchase, but not both.

Further, scheme members would only be allowed to access the benefit as a one-off, locking out members who were already receiving their pension earnings and those who had already attained retirement age.

Reception towards Pension-Backed Mortgages?

The idea of pension-backed mortgages in Kenya is not new. It was initially touted more than a decade ago. Not until 2020 were there any hard and fast regulations to facilitate the realization of homeownership via pension-backed mortgages.

Now that there have been missteps with this initial substantive effort, it seems less likely that pension-backed mortgages will become a reality.

The new regulations caused a stir when they were first announced with a very warm reception to the idea that pensions, traditionally deferred resources, could be used to access homeownership. On the other hand, uptake did not reflect the original enthusiasm.

The market has had several challenges that muted interest in pension contributors, not least of which have been the lean economic times following the Covid-19 pandemic and a looming recession as we enter 2023.

Nonetheless, the new regulations were perceived as a positive step in the right direction. While they were well within their rights to do so, it is telling that the new regulations were fundamentally opposed by industry stakeholders.

Which Way Forward for Pension-Backed Mortgages?

On the face of it, the opposition of the industry stakeholders via their constituent bodies, the Association of Retirement Benefits Schemes and the Association of Pension Trustees and Administrators, is obviously merited on the grounds that industry stakeholders were not involved in the formulation of the new regulations.

However, it is also indicative of an industry that isn’t particularly interested in actively seeking approaches to meeting the needs of its membership – the actual contributors to the pension schemes.

Indeed, it would be interesting to see if these same industry bodies will actively spearhead initiatives that could eventually make pension-backed mortgages a reality. They could do so by either proposing amendments to the regulations that had been proposed or even actively lobbying Parliament to relook at those regulations and championing the establishment of a workable framework of solutions that would make pension savings accessible to prospective homeowners.

Conclusion

The pension industry in Kenya controls over KES 1.5 trillion in assets with under 20% penetration of the formal labour market in the country. There is a glaring opportunity here not just to spur homeownership, but also to grow the industry.

Pension-backed mortgages would be an effective tool to deepen the conversation between finance and growing access to homeownership. Stakeholders will need to partner on initiatives like this if the goals of homeownership are to be achieved.