8th Mar 2021
Before you enter into an agreement for leasing land in Kenya, it is essential that you have a clear understanding of the nature of the undertaking you are committing to get into. Private leases for land are invariably for long periods of time, some even as long as twenty years or longer.
Because of the commercial interests you would be creating around the land you intend to lease, you would naturally want to be assured that you will enjoy unfettered use of land for the duration of time that you have agreed to contract it out on lease from its owner(s).
You would want reasonable assurance that the arrangement is rock-solid and will not be interrupted over the tenure you have agreed on. The dispensation of leases is to a large extent the subject of The Registered Land Act, Chapter 300 of the Laws of Kenya
Leasing Land in Kenya has not been a common or traditional practice associated with the proprietorship of land. However, it is becoming an increasingly popular enterprise as the availability of agricultural land close to the erstwhile urban centres in the country continues to wane and also due to the high capital outlays for outright purchase of commercial land which has good access to surfaced roads and public transport networks.
Ultimately, people and businesses lease land for a variety of reasons, usually with an underlying commercial reason or benefit which ensures the sustainability and profitability of the respective enterprise they wish to undertake.
It is notable that one of the many benefits (motivators?) of leasing land in Kenya is the tax-reducing nature of lease costs over business revenues and profits. In urban areas, some of the most common enterprises leasing land include roadside eateries (food vibandas and mama mboga stalls), fuel stations, garages, carwash businesses, churches, roadside car dealers and so many more. An increasingly popular venture on leased land is container malls/parks – semi-permanent structures established for business premises which can be easily relocated upon expiry of the lease.
Leasing of land for agricultural purposes is far more common. The types of agri-business that lease land range from commercial-scale green housing operations which produce a wide range of horticultural produce like wheat, flowers and even herbs, to animal-rearing enterprises which lease land for the purposes of breeding and rearing stock for sale to markets within proximity of the leased land.
The purposes are as varied as the commercial interests may be. Personally, I even know entrepreneurs who have leased land for the purpose of growing commercial forests.
A lease is a commercial interest in property granted by the owner of the property (proprietor/lessor) that confers on the person granted that interest exclusive possession of the property (lessee/tenant) for the period of time and under the terms and conditions defined under their agreement.
Basically, the agreement to lease defines the individuals making the agreement, the period of the lease, the rental/lease fee and all other terms and conditions under which the agreement has been made.
Under Section 56 ( a) of the Land Act no. 6 of 2012, the proprietor (owner) of land may lease it, or part of it, to any person for a definite term (or if for an undefined period either party may terminate the contract of lease).
Are you considering leasing land to promote or develop a commercial interest? What then are the five most critical things you need to do before you make the arrangement to lease land from its owner(s)?
Now that you have established that you want to lease land for commercial reasons you will go to the market to find potential lessors willing to lease to you land suitable for your purposes. You will have identified the why (usually the reason for which you want to lease like say an agri-business) and the when (when you wish to commence operations and for how long you want to run the lease). And once you find potential lessors, you will negotiate some basic terms (I hear people using the phrase “irreducible minimums”) before hashing out a final agreement.
You can source for information from a wide variety of sources including the internet, newspapers and other publications, property agents, lawyers, local administrators and many others.
In law, there is a general principle which loosely translated from its Latin maxim, nemo dat quod non habet means that “one cannot give what does not have”. Undertaking due diligence can therefore be loosely said to the process of establishing whether the person giving you the “thing” has the capacity to do so. While the principle largely relates to contracts of sale, in the case of leases, it is relevant.
This process should help you clarify and ascertain the following:
A lessor cannot purport to issue or confer the rights of ownership of land such as exclusive possession unless they really, truly are the owner of the land, unencumbered. It will be important to not only clearly identify the owner but also to identify the parcel of land you are leasing including its boundaries.
You will also want to ascertain that there are no other third parties that have rights to the land that may supersede or interfere with the right to exclusive possession being granted to you by the owner. These can be revealed by a simple search and may show up as registered interests such us encumbrances.
Why is any of this necessary? Let’s take a simple example where a landowner seeking to lease out the land does so to an unsuspecting tenant without disclosing the fact that the property is under a bank charge. Here are a few challenges that will arise in this scenario:
These are just some of the possible complications that could arise. Now perhaps you may be perceiving the reasons why it is important to ensure that you are fully appraised on the ownership and status of the land you want to lease before you proceed.
Due diligence is often thought of as merely a formal search exercise. However, one can also take a broader view by asking probing questions about the veracity of ownership and by going as far as visiting the local administration offices to ascertain the status of the land.
Sometimes, an informal enquiry can yield much more than a formal one, providing many unexpected answers. It is usually a sign of bad faith when certain revelations on paper are markedly different from what is stated as knowledge on the ground, especially if the owner fails to disclose a material fact or makes misstatement of facts.
If you are going to have commercial interests established on a piece of land, it behooves you, the investor, to ensure that that interest is protected. It starts with a keen undertaking of due diligence measures.
While certain oral agreements can be recognized by law in the event of a dispute, there may be finer points within the agreement that can only be clarified by having a written agreement. It is therefore good practice to always have a written lease agreement.
The preference for a written agreement would really be to ensure strict adherence to what was discussed and concluded by both parties but it also favors you who is taking on the lease by ensuring that your rights are recognizable in defense against an owner who may seek to renege on your agreement.
A written agreement also precludes messy oral arguments outside of what was agreed upon and recorded. The law only recognizes oral leases that do not exceed a two year, non-renewable term. The agreement will cover much wider terms other than price and duration to include issues such as assignment of responsibility for government levies (ground rent and rates in the case of leasehold land), maintenance, removals as well as any other responsibilities, termination of the agreement, assignment of costs for restoration of the property, payment of registration fees and much more.
A written agreement helps the parties to go over and beyond the legally implied rights and responsibilities. The debate as to whether to have an oral or written agreement can be solved by the following question – do you want to be crystal clear as to where both parties stand, and in particular, in the event of a dispute regarding the land?
If you are entering into a lease agreement that is, at the minimum, a two-year renewable lease agreement, then it is important to have the lease registered under the relevant land registry.
Get professional assistance to have the terms and conditions of the agreement brought into resolution with the lessor. If you want to exercise the option of renewing the lease at the end of the term or to have the first right of purchase in the event that the lessor wants to sell the land at the end of the lease period, it is important to ensure that the lease is registered.
The reason for registration of lease is for the protection of both the lessor and lessee’s rights to be duly noted with the implied rights, duties and obligations of both parties taking precedence. In the event, for example, that a landowner is declared bankrupt or dies, a registered lease may serve the purpose of recognizing and protecting the rights of the lessee when a trustee to the bankrupt person or administrators to the estate of the deceased lessor are appointed.
For the purpose of registration, leases that have a duration of for 25+ years are treated in much the same way as transfers, with stamp duty payable at the applicable rates for transfers.
Ultimately, however, even with a registered lease, the rights of ownership still vests with the lessor so that, for example, the lessees may not sublet the land without the authority of the lessor
It is rarely considered at the beginning of a venture to have an exit plan or to plan too many steps ahead of all the details that need to be sorted out at the time you are entering into the lease agreement. However, it is smart practice to have a clear sense of the end from the beginning, especially for commercial reasons.
One of the implied conditions on expiry of a lease is that the lessee will hand over possession of the land in the condition in which it was delivered to him by the lessor. While this may be provided for in the registered lease agreement, it is important to consider clearly and plan ahead for the exit, which will include planning for what happens to any improvements you may have added on to the land in the time you were leasing it, and the costs associated with returning the land back to the condition in which it was originally handed to you, the lessee.
Your exit plan simply provides for the period immediately prior to disengagement with the lessor.
After signing a new lease agreement, be sure to have it registered. Some lessees go as far as to even register restrictive instruments. It may seem like “overkill” but in the age of broken agreements, it may eventually prove to be wisdom.
By recording your interest in a property you are leasing, you will secure your right to be notified of any changes in the status of the property, thereby avoiding the misfortune of later learning that the property was perhaps sold by the owner to a third party or that the property has been encumbered during the tenure of your lease to a third party with rights that supersede your own and which may later interfere with your tenure over the property, even when you are keeping up with your obligations to the owner.
If you would like to understand more about leasing land in Kenya, a good place to start is to understand some of the jurisprudence established on the same.
we frequently got asked if an allotment letter is a legal document in Kenya? Yes, an allotment letter can be used as a legal representation of ownership but it doesn’t come anywhere close to having the same recognition as a title deed. Because of the sheer number of fraudulent misrepresentation(s) that could arise from merely holding a letter of allotment, it isn’t advisable to lease property held under a letter of allotment, especially where the purpose for which the lease represents a significant commercial interest. You might also want to consider that traditional lenders are unlikely to provide loans against such property as collateral.