Leasing Land in Kenya s becoming an increasingly popular due to the high capital outlays for outright purchase of commercial land which has good access to surfaced roads and public transport networks.
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.
Here is a simple process for entering into a lease
1. Search For The Property
The first step is finding land that is suitable for your purposes. You will have identified the reason for which you want to lease land, when you wish to commence operations and for how long you want to run the lease. Once you find potential lessors, negotiate some terms athat will be incorporated into a Lease 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.
2. Undertake Due Diligence
In law, there is a general principle that “one cannot give what does not have”. Due diligence is the process of establishing whether the person giving you the land has the capacity to do so.
This process should help you clarify and ascertain the following:
- The Who: Who exactly owns the land you intend to lease
- The What: What are you leasing and exactly how much acreage are you receiving?
- The Where: Where exactly is the land you are leasing situated?
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.
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.
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.
3. Have a Written Agreement
The law only recognizes oral leases that do not exceed a two year, non-renewable term.
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.
The agreement will cover much wider terms other than price and duration to include issues such as assignment of responsibility for government levies, 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.
4. Register Your Lease Agreement
Registration is the process that gives legal credence to leases by having them registered with the Registrar of Lands for the particular jurisdiction in which the property falls.
Section 47 of The Registered Land Act Chapter 300 of the laws of Kenya requires that a lease is registered if it is;
- for a period exceeding two years,
- for the life of the lessor or of the lessee, or
- 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 that exceed two years,
The reason for registration of leases 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.
5. Create an Exit Plan
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.
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.
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
Advantages of Leasing Land
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.
Disadvantages of Leasing Land
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.
FAQ
What Is a lease
A lease is an agreement that grants exclusive possession of property from the owner of the property (proprietor/lessor) to another person (lessee/tenant) for a period of time and under the terms and conditions defined under their agreement.