Kenya: Real Estate (3rd edition)

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding real estate law in Kenya.

This Q&A is part of the global guide to Real Estate.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate-third-edition/

  1. Overview

    Kenya is a common law jurisdiction and most common law principles relating to property apply unless expressly modified by Kenyan statute. Due to the unique cultural nuances within Kenya, there was a need to tailor property rights to cater for the diversity of Kenya’s people and their specific land needs. There was, therefore, a multitude of land-governance structures – pre and post Kenya’s independence.

    In 2012, there was an overhaul of the legislations governing the real estate sector. As such, the various land regimes were consolidated into a single comprehensive and clear policy for land in Kenya.

    Following this, the legal regimes under which real estate was administered (e.g. the Registration of Titles Act and the Registered Land Act) were repealed and replaced by new legislation. The Land Act, No. 6 of 2012 (Land Act) and the Land Registration Act, No. 3 of 2012 (Land Registration Act) were enacted to govern property in Kenya in a manner that reflects the aims of the 2010 Constitution. Noting that Kenya is comprised of a multitude of ethnicities and special interest groups, the Community Land Act, No. 27 of 2016 (Community Land Act) was also enacted to provide for the recognition, protection and registration of communal property ownership rights.

    Kenyan real estate continues to be developed at a rapid rate with infrastructure being a major focus of the government. The road and railway network in Kenya has seen significant focus in recent years and has formed the bulk of the government’s partnership with development partners.

    There has also been a surge in development by private persons with increased local and foreign investment in the real estate industry. The capital city, in particular, has seen notable changes to the skyline with commercial and mixed-use skyscrapers having been erected in the recent past. Inasmuch as in in the recent past, there was a slump in the real estate sector, investment in the real estate sector remains a high-return investment with gated residential developments being developed.

  2. How is ownership of real estate proved?

    Generally, land in Kenya is required to be surveyed and any ownership rights should be registered.
    A certificate of title issued by the Registrar in the name of any person as proprietor is conclusive evidence of such person’s ownership of that land.
    Proof of ownership depends on the manner in which one acquires the property. For instance, if the property is an apartment, a lease issued by the developer will be the relevant title instrument to the property. The lease is a bankable document.
    For properties that are freehold or leasehold, not being apartments or similar controlled developments, there will be a transfer of the property signed between the vendor and the purchaser which transfer will be registered at the relevant lands registry. Both the registered transfer and the title registered or issued in the name of the purchaser are relevant documents in proving ownership.
    A person can apply for an official search of the records of the relevant land registry to determine the registration details of any registered land (including the name of the registered proprietor of that land).

  3. Are there any restrictions on who can own real estate?

    There are three categories of land in Kenya – public, private and community.
    The Government of Kenya, through the National Land Commission, holds public land in trust for all citizens of Kenya and may only lease or license such land on a limited basis. Individuals or recognised communities can own private land and community land respectively and may do so either absolutely (on a freehold basis) or by a leasehold.

    Non-Kenyans, however, can only own land in Kenya on a leasehold basis for a maximum of 99 years. Foreigners can also not own land that is categorised as agricultural pursuant to the Land Control Board Act. These restrictions also apply to any company that is not wholly owned by Kenyan citizens.
    Under the Land Act certain transaction are deemed controlled (such as land within the first and second row from high water mark of the Indian Ocean) and require consent the cabinet secretary before transferring to foreigners.

  4. What types of proprietary interests in real estate can be created?

    There are two main types of proprietary interests – freehold and leasehold. Freehold gives the proprietor unlimited use of the land for an indefinite period of time, subject to any encumbrances or other third party rights. Pursuant to the Constitution that was promulgated in 2010, only Kenyan citizens can hold land on a freehold basis.
    Leasehold ownership is where a person obtains a lease of private land, community land or public land from the government for a specified period, subject to certain conditions specified in the lease. A proprietor of land can, in turn, give rights to the whole or a part of their land by way of lease, sub-lease, licence, wayleaves and easements.

  5. Is ownership of real estate and the buildings on it separate?

    Buildings are generally inseparable from the land on which they are erected. Indeed land includes what is on it i.e the buildings. However, leases or sectional property rights granted for portions of high-rise buildings can give legal rights to only a portion of a building without including the surface on which the building is erected. In this case, rights are given to common areas for use by all the owners or lawful occupiers of the building.

  6. What are common ownership structures for ownership of commercial real estate?

    Commercial real estate may be held in the name of an individual or a group of individuals. Other ownership structures for commercial real estate are:

    • Companies: a company can own property in Kenya. This includes foreign companies, but subject to the restriction to hold on a leasehold basis and on agricultural land as explained above.
    • Partnerships and limited liability partnerships (LLPs): These are attractive as they involve fewer statutory obligations than companies. LLPs are also tax efficient.
    • Societies: societies invest in real estate as a means to create more value for their members. The funds pooled by the members make commercial real estate quite accessible and allow the society to realise faster returns, either from rents collected or from resale of the property.
    • Trusts: For incorporated trusts, the property is registered in the name of the registered trust. Where the property is owned by an unincorporated trust, the title to the property would be in the name of the trustees, but may note that they hold it as “trustees”.
    • Real-estate investment trusts: This is a relatively new land-holding structure in Kenya. The ownership structure is similar to that of trusts as explained above, but subject to specific tax and other regulatory considerations.
    • Joint ventures: this is common where a property owner has vast land but no capital and a developer seeks to partner with a property owner through a joint venture that entails the land being transferred to a special purpose vehicle.

    In addition to legislation governing real estate, the above structures are governed by the relevant sector specific legislations.

  7. What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?

    Legal due diligence of a commercial property would include:

    • carrying out an official search on the title to the property;
    • confirming whether the permitted use of the property is in fact commercial;
    • obtaining copies of building plans and the necessary approvals, including local authority approvals and environmental approvals;
    • conducting a search on the proprietor of the property e.g. applying for a search on the company where the property owner is a company; and
    • establishing whether the property stands on a restricted area e.g. a road, reserve or a riparian reserve. A surveyor in consultation with the necessary authorities would undertake this. In addition, a surveyor can be engaged to confirm that all beacons are in place.
    • Confirming whether or not the property is listed in the Ndung’u Report on irregularly or illegal acquired land.
    • Trying to obtain as many copies of documents from the registered proprietor or the lands registry (where the records are public) that would provide a history on the property including the various transfers and other transactions that have taken place.
  8. What legal issues (if any) cannot be covered by usual legal due diligence?

    Non-registrable interests (e.g. overriding interests) may not be able to be established by legal due diligence. Overriding interests under Kenyan law include undisclosed trust relationships, rights of compulsory acquisition, natural rights of light, air, water and support, etc. Presently, it is also a challenge to confirm matters related to compliance with environmental law issues other than licensing at the point of construction. In addition, some authorities are also not forthcoming with enquires made to them on issues such as riparian land or road reserve.

  9. What is the usual process for transfer of commercial real estate?

    The current procedure for transfer of commercial real estate entails:

    • initial agreements on the basic commercial terms of the transaction which can be recorded in
      heads of terms;
    • legal due diligence, as outlined above;
    • review and negotiation of sale agreement;
    • ensuring that all consents and other documents that are to accompany the transfer of the property have been obtained e.g. consent of the National Land Commission, payment of any outstanding land rent or rates;
    • preparation, execution and attestation in prescribed form of the transfer instrument;
    • payment of capital gains tax or obtaining an exemption for capital gains tax on the transfer (as applicable);
    • valuation of the property for stamp duty by a government valuer, payment of the stamp duty and stamping the transfer instrument;
    • registration of the transfer instrument; and
    • issuance of a title in the name of the new proprietor of the property.

    The above process relates to the transfer of the property as an asset.

  10. Is it common for real estate transfers to be effected by way of share transfer as well as asset transfer?

    Real estate in Kenya can be transferred either by transfer of the asset or by transfer of shares in a
    land-holding entity. However, people shy away from share transfers where the company is a trading company, as opposed to a land-holding company, as buyers do not want to inherit corporate issues when purchasing the company as opposed to an outright purchase of the property.

  11. On the sale of freehold interests in land does the benefit of any occupational leases and income automatically transfer

    On the sale of freehold land, the occupational leases and income would automatically transfer to the new owner of the land. However, where the lessee is not given notice of the sale of the property by the lessor, the lessee will not be liable for continuing to pay rent to the outgoing lessor until notice of the sale is given to the lessee.

  12. What common rights, interests and burdens can be created or attach over real estate and how are these protected?

    Under Kenyan real estate law, the common forms of encumbrances that may be created over land are:

    • Leases and licences: A proprietor of land may grant a lease or a licence to any person for a period of time and charge rent or a fee for the grant of rights to use or possess.
    • Legal charge: This is where a lender’s interest in land is registered in order to secure the fulfilment of an obligation to a lender.
    • Easements and wayleaves: Both of these are registrable interests which are granted to allow the grantee a right of way, a right to create a restriction or to require the owner of the property to carry out an action. These encumbrances do not however give the grantee rights to possession of the property.
  13. Are split of legal and beneficial ownership of real estate (i.e. trust structures) recognised?

    Ownership of land under a trust structure is recognised under Kenyan law. The trust relationship does not have to be disclosed or registered in order for the rights of the beneficiary/beneficiaries to be enforceable. However, for the beneficiaries to enjoy any stamp duty exemption there must have been signed documents documenting the trust arrangement. Please note that trust structures do not work where the intention is to make a foreigner own agricultural land.

  14. What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?

    The main taxes associated with commercial real estate ownership and transfer of commercial real estate are:

    • Land rates: Payable annually to the government of the county where the property is located.
    • Stamp duty: Payable when transferring a property, when obtaining a lease and when charging or discharging a property.
    • Capital gains tax: Payable upon the transfer of a property. It is calculated on the net gain on the transfer.
    • Value Added Tax: Chargeable on all rent paid in respect of the leasing or other letting of a commercial property. The sale of commercial property is also chargeable for VAT.
    • Ultimately corporate tax: on income derived from the property.
  15. What are common terms of commercial leases and are there regulatory controls on the terms of leases?

    The Land Act and the Land Registration Act govern leases. The former provides the substantive provisions of a lease in Part VI of the Land Act, while the latter provides for the registration of leases. Although the Land Act contains general provisions to be incorporated into the lease, parties to a lease may agree to exclude all or part of these provisions. Therefore, parties to a lease have the freedom to agree on the terms of their lease, provided that such terms are lawful.

    Common terms of commercial leases in Kenya include:

    • Duration: The parties are at liberty to agree on the term of the lease. However, there is an implication if the term of a commercial lease is less than five years. Tenants of such leases are deemed controlled tenants under the Landlord and Tenants (Shops, Hotels and Catering Establishments) Act. The terms of that statute will be implied in the lease as provided in the statute.
    • Demise: This provision forms the agreement to grant the lease over the property specified in the lease document.
    • Rent: The parties may agree on the amount of rent that shall be payable between them. There is no set scale of rent.
    • Rent review: Parties are permitted to set a mechanism for review of the rent during the term of the lease.
    • Permitted use: The lease may set out the permitted use of the property by the lessee.
    • General obligations of both lessor and lessee: general do’s and don’ts of each party.
    • Service charge: The lessor is at liberty to impose a charge for services that may be provided by the lessor or by a lessee-owned or third party management company.
    • Assignment: This provision would spell out the circumstances in which assignment of the lease may be allowed or restricted, as well as any consents that may be required before any assignment or other parting with possession of the property.
    • Forfeiture: This provision sets out the instances when the lease may be forfeited prior to the expiry of the lease term.
    • Yield up: This sets out the manner and condition in which the lessee is to return the premises to the lessor.
  16. How are use, planning and zoning restrictions on real estate regulated?

    Use, planning and zoning restrictions are imposed on property in Kenya pursuant to Kenya’s physical planning laws. The Physical and Land Use Planning Act commenced in August 2019, repealing the previous legislation governing these matters. The legislation seeks to ensure that physical planning across the country is standardised and that any development within Kenya conforms to set policies and the national physical and land use plan. Landowners are required to obtain prior development permission before embarking on any activity that is deemed as a development. The by-laws of the relevant county also apply to properties located within that county.

  17. Who can be liable for environmental contamination on real estate?

    Kenya’s environmental legislation broadly gives responsibility to all persons for their contribution to environmental contamination. The owner of premises or the operator of a project are, however, specifically obligated to ensure compliance with environmental laws, including directions given to them by relevant authorities in the course of carrying out a development which is likely to have environmental consequences. An owner in this case includes a lessee or other occupier of land.

  18. Is expropriation of real estate possible?

    Expropriation of land does occur in Kenya and is termed compulsory acquisition. The law sets out the procedure for compulsory acquisition, including the mechanisms for compensation of landowners upon compulsory acquisition. Where land is acquired compulsorily, compensation may take any of the following forms:

    • monetary compensation;
    • allocation of alternative parcels of land of equivalent value, comparable geographical location and land use;
    • the issuance of government bonds; or
    • equity shares in a government-owned entity.
  19. Is it possible to create mortgages over real estate and how are these protected and enforced?

    Under previous land regimes, mortgaging was allowed and the property mortgaged would be conveyed to the mortgagee and only re-conveyed to the mortgagor upon the fulfilment of the mortgagor’s obligations to the mortgagee. However, the Land Act abolished the concept of mortgages in 2012. As such, parties now enter into a charge document with terms that include the obligation, the events of default. This charge instrument would then be registered against the title to the property. Unlike the mortgage in previous regimes, the charge acts only as security and not as a transfer of the property. In the event of default by a chargor, a chargee has various ways of enforcing the security, including the statutory power of sale, the power to lease the property and the appointment of a receiver of the income of the charged land.

  20. Are there material registration costs associated with the creation of mortgages over real estate?

    The concept of mortgages was abolished. However, in order to register a charge over property, the following costs apply:

    The cost of registration of a charge is nominal.

    However, before a charge can be registered, the chargee is liable for stamp duty on the charge at the rate of 0.1% of the amount secured by the charge.

    In addition, there are other costs associated with charging a property, including cost of valuation of the property and legal costs.

  21. Is it possible to create a trust structure for mortgage security over real estate?

    Lenders can appoint a security trustee under Kenyan law. In this case, the person appointed will hold the security on behalf of various persons whose interests are secured by the security provided.

  22. What is the main legislation relating to commercial real estate ownership?

    The main legislation relating to ownership of commercial real estate in Kenya is:

    • The Constitution of Kenya, 2010;
    • The Land Act;
    • The Land Registration Act;
    • The Stamp Duty Act, Chapter 480, Laws of Kenya.
    • The Community Land Act;
    • The Physical and Land Use Planning Act, No. 13 of 2019;
    • The Land Control Act, Chapter 302 Laws of Kenya;
    • The Landlord and Tenants (Shops, Hotels and Catering Establishments) Act, Chapter 301 Laws of Kenya; and
    • The Environmental Management and Co-ordination Act, No. 8 of 1999.