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

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.

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!