In brief: real estate acquisitions and leases in Kenya

Acquisitions and leases

Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.

Ownership of land in Kenya takes one of two forms:

• freehold tenure: an absolute ownership of an interest in land, and subject only to the laws relating to land use; and
• leasehold tenure: an interest in land for a specific period, subject to payment of a fee to the grantor.

Other rights and interests such as head lessor, right of possession and occupancy are recognised under Kenyan laws.

Benefits and burdens on land attach through being either registered against the title or recognised by law as overriding interest.

Registerable interests include:

• charges;
• easements;
• caveats; and
• inhibitions.

Unregistered interests include:

• trusts;
• rights of way, water and profits;
• natural rights to light, air and support; and
• charges on unpaid rates, electricity supply lines, telephone lines and poles.

Communal ownership of land is also guaranteed and protected. Communal land is registered in favour of the community concerned. Any unregistered communal land is held in trust by the county government on behalf of the community.

There is no differentiation on the lease space for different types of properties (eg, retail, industrial and office).

What are the typical pre-contractual steps?

Parties to an intended transaction ordinarily execute letters of offer before executing a binding agreement for sale. Whether or not a letter of offer is binding depends largely on the drafting and the content of the document. Courts will interpret them as per the document. Term sheets are rarely used in our jurisdiction.

Vendors will ordinarily pull a property off the market where the purchaser executed the letter of offer. Even in this instance, the letter of offer often limits the timelines within which the prospective purchaser must execute the agreement for sale, failing which the property may be returned to the market. After execution of the agreement for sale, the property is taken off the market.

Estate agents may be engaged to identify a buyer or seller or a landlord or tenant. They also assist in the negotiations of the commercial terms. Agents are regulated by the provisions of the Estate Agents Act (Cap 533) and the codes of conduct published by the Estate Agents Registration Board (the Board). Agents are issued with registration certificates by the Board as well as annual practising certificates. The following persons may apply to become estate agents:

• a full member of the Institution of Surveyors of Kenya in the chapters of Valuation and Estate Management Surveyors, Building Surveyors and Land Management Surveyors;
• a corporate member of the Royal Institution of Chartered Surveyors who Is qualified to be or is a full member of the Institution of Surveyors of Kenya specified as above;
• a holder of a degree, diploma or licence from any university or college recognised by the Board; or
• any person of good character who satisfies the Board that he or she has not been convicted of an offence involving fraud or dishonesty in Kenya or elsewhere.

The Estate Agents (Remuneration) Rules 1987 provide a schedule of how an agent’s fees may be calculated based on the value of the property being sold, purchased or leased.

What are typical provisions in a contract of sale?

A standard contract of sale will contain clauses on the following, among others:

• a description of the parties and the property;
• transaction cost and payment arrangements (this is ordinarily 10 per cent on execution of the agreement and 90 per cent on completion date. The purchase price is ordinarily held by the vendor’s advocates on a stakeholder basis);
• conditions precedent;
• whether the property is being sold with vacant possession;
• completion period (typically 60 to 90 days);
• completion documents to be provided by the seller in exchange for money;
• apportionment of prorations, which ordinarily entails the apportionment of land rent and land rates as at the completion date;
• risk-allocation clauses: risk ordinarily transfers to the purchaser either on taking possession or on registration of the property in the name of the purchaser (whichever occurs earlier);
• warranties disclosure and limitation of warranties;
• dispute resolution clauses;
• capacity of the parties (when necessary);
• interest rate in respect of default; and
• what happens on breach by either party.

Investigations of genuineness of title conducted by the purchaser are done at the purchaser’s expense, including conducting a search.

Typical warranties and representations in contract for sale of land include the following:

• the vendor has not received a notice of compulsory acquisition of or repossession, and does not know of any intention to compulsorily acquire or repossess;
• the use of the property is lawful;
• no building or other structure on the property encroaches on adjoining property;
• each dividing fence and wall is on the boundary of the property;
• the property is not on a buffer zone, road reserve or public land;
• the property is not subject to any actual, pending or threatened litigation or other proceedings;
• the seller is the beneficial owner of the property; and
• the seller is not engaged in any negotiations and has not agreed to transfer, charge or alienate the property to a third party.

Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?

Environmental obligations and liabilities are borne by the property owner. Clauses relating to environmental liability and indemnity are uncommon.

What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?

Generally, no representations are made to a buyer of a property with a tenant in possession. The seller provides the buyer with a copy of the executed lease to acquaint himself or herself with the provisions. No warranties are given regarding brokerage commission.

Contractually, parties agree how the property will be handed over, either with vacant possession or with tenants in occupation.

Estoppel certificates are not recognised or required under Kenyan law.

Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?

The law provides that interests appearing in the land register shall bear priority in the order of which they were presented for registration. Thus a lease ordinarily ranks above a security instrument if it was first in presentation for registration.

Should a lender exercise the rights of sale of property or other remedies available to it, it does so subject to the rights of the lessee.

It is unusual in practice to require a subordination or a non-disturbance agreement, but in large-value lending subordination may be required.

What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?

Security deposits are very common in leases. In a sale transaction, the contract ordinarily provides for the transfer of the deposit to the new owner on the completion date. Rent escalations are agreed to contractually in the lease instrument and therefore rent resets and reviews are quite uncommon.

What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?

Conducting an official search at the land registry against the title is the bare minimum action taken prior to crystallising any land transactions. The government guarantees title, but the same may be subject to challenge (see question 13).

In addition to conducting a search, buyers protect themselves by:

• requiring sellers to give certain warranties and indemnities;
• engaging a surveyor to confirm the status and location of the premises;
• undertaking historical searches on the property by reviewing the correspondence files; and
• seeking information relating to the property from other authorities, such as the county government and the survey offices;

Priority of documents is based on the basis of the first to present for registration at the land registry. However, in the contract parties may agree to a different priority.

It is not customary to obtain government confirmation on zoning but prospective buyers or tenants may either conduct a search at the Lands Registry or county offices to determine the user of the property or in the alternative require the seller or landlord to give a warranty on the user of the property.

Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?

It is not the practice in Kenya to have engineering or environmental reviews conducted.

Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?

It is within the purview of lawyers to review leases. In reviewing leases, lawyer seek to establish the scope of liability of their respective clients. Issues such as use, improvement and maintenance of the property, insurance, consequences of default and yielding up of the property are negotiated in a lease.

What other agreements does a lawyer customarily review?

In addition to reviewing leases, advocates review any headleases, easements, caveats and restrictive agreements noted against the title. They also review licences and approvals, service agreements, valuation reports and zoning reports. Lawyers also ordinarily review the Ndung’u Report and Kenya Gazettes to try to ascertain whether the property was possibly illegally acquired.

How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?

The closing of sale, lease and financing transactions is very different. On the completion date for a sale, a typical list of deliverables will include:

• the original title;
• an executed transfer in respect of the property in favour of the buyer;
• spousal consent (if applicable);
• land rent clearance certificate;
• rates clearance certificate;
• consent to transfer;
• colour passport photos of the seller or the seller’s directors;
• copies of the seller’s personal identification number certificate;
• copies of the seller’s identity card, certificate of incorporation or certificate of registration (as applicable); and
• a map of the property.

In respect of financing, the above documents are required, save that a duly executed security instrument is required in place of a transfer and the photos are not required.

Following completion, valuation and stamping commences and thereafter registration. This process ordinarily takes between two to five weeks form the completion date.

Land rent and land rates are typically apportioned as at the completion date.

Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?

The general practice is that completion should occur at the office of the vendor’s advocate. In practice, this does not happen but photocopies of the completion documents are sent to the purchaser’s lawyers to confirm before payment of the balance of the purchase price. The transfer instrument Is executed in the presence of the advocate representing either party or other authorised person who witnesses and confirms that the instrument was freely and voluntarily executed.

What are the remedies for breach of a contract to sell or finance real estate?

The remedies available to either party in a sales contract are either as provided by law or contractual. In most contracts, however, parties agree on the remedies available to either party for breach. The remedies ordinarily available to a seller are specific performance, retention of the deposit, or the deposit and the cost of disposal of the property to a third party. The buyer, on the other hand, may sue for specific performance or call for a refund of the deposit. Either party may also sue for damages.

What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?

As a matter of practice, a lease agreement will generally include the remedies that each party is entitled to in case of any default or breach by the other party. A tenant’s remedies are mainly:

• termination of the lease;
• a suit for breach;
• injunctive relief against the landlord to compel the landlord to:
• carry out required repairs; and
• cease entry of the premises at unreasonable times; or
• to stop an eviction without notice or a court order.

A landlord may, on the other hand, terminate a lease and enter into possession, which results in the eviction of the tenant. To evict the tenant, the landlord has to apply for an eviction order from a court of law. The landlord may also demand interest or bring an action for recovery of rent arrears and damages or ‘distress for rent’ (the latter allows the landlord to seize and sell movable goods on the leased premises for payment of rent arrears due).

An injunction can also be sought to restrain the lessee from committing a breach or further breach of the lease terms.