Real estate finance law in Kenya

Yes.

Yes, lenders can take a charge over land. A charge (defined as an interest in land securing the payment of money or money’s worth) shall only have effect as a security and shall not operate as a transfer of any rights in the land from the creator of the charge (the “Chargor/Borrower”) to the beneficiary of the charge (the “Chargee/Lender”).

Under Kenyan law, it is only possible to prepare charges over land. Security can be taken over land by way of a charge and/or informal charge. All buildings and things attached to the earth are deemed immoveable property and are subject to the same charges over the land upon which they are situate.

N/A

Yes – a proprietor whose land or lease is subject to a charge may create (and have registered) a second charge in the same manner as the first charge. A charge may contain provisions addressing priority matters – the general rule is otherwise that charges shall rank according to the order in which they are registered.    

It is prevalent market practice for charge documentation to provide that a creator of a charge may only transfer the property that is the subject of the charge with the prior consent of the lender.    

Where this provision is contained in a charge, the registrar is prohibited from registering any transfer of the charged property unless the relevant lender’s written consent to such transfer is produced to the registrar.

Yes – the proceeds of sale of charged land are, by statute, applied in the following order:

• to settlement of any rates, rents, taxes, charges or other sums owing and required to be paid on the charged land (therefore to the relevant county government, national government, revenue authority or state agency as the case may be)
• to discharge of any prior charge-holders
• to payment of all costs and reasonable expenses properly incurred and incidental to the sale (and any attempted sale) of the property
• to discharge of all outstanding sums advanced under the charge, together with interest and other monies due
• to discharge any subsequent charges and any residue to the creator of the charge.  

An “all monies” charge may be created over land.  

Yes - a lender may take security over rent by way of a charge through a deed of assignment of rental income.

Security over bank accounts of a borrower may be taken by a lender by way of a fixed or floating charge.

Fixed charge

The lender has control over the borrower’s bank accounts. This restricts the borrower’s rights to withdraw funds without first obtaining the consent of the lender.

Floating charge

The borrower’s rights are not restricted, and they are authorised to retain control of the bank accounts. However, if a specified event occurs, as outlined in the charge document, the floating charge converts into a fixed charge.

A proprietor of land may transfer land by way of an instrument in the prescribed form (or in such other form as may be approved by the registrar). Land transfer registration involves the conduct of a government valuation of the property to be transferred for stamp duty purposes, the settlement of the assessed stamp duty and submission of the duly stamped transfer documents to the Land Titles Registry for formal registration and issuance of a title deed to the new proprietor.

A proprietor of land may encumber the property by executing a charge over the land in the prescribed form in favour of a lender. The charge must be submitted for registration at the Land Titles Registry, after the applicable stamp duty has been paid on the charge instrument, where it will be recorded as an encumbrance against the title to the property.

If an instrument of transfer of land is not registered at the relevant Land Titles Registry, the instrument does not result in a valid transfer of the land.

Similarly, if an instrument of charge of land is not registered at the relevant Land Titles Registry, the charge exercise is incomplete and the document will only operate as a contract.  

The creation of security over immoveable property involves the execution by all parties (the creator of the charge and the lender taking the security) of a charge in prescribed form, which execution is verified by a prescribed person (including an Advocate of the High Court of Kenya). The charge is thereafter stamped by the Collector of Stamp Duty. This stamping exercise must be completed within 30 days of the execution of the charge. After stamping, the charge should be registered at the Land Titles Registry. If the charge is created by a company, it will also need to be registered at the Companies Registry (within 30 days of its creation).

The rate of stamp duty payable on the principal instrument of charge is 0.1% of the amount to be secured by it. Any counterpart copy is stamped at a nominal rate. The Government statutory fees for registration of a charge at both the Land Titles Registry and Companies Registry depends on the nature of the transaction and the loan amount.

Yes.  

A new security isn’t always required when a lender changes. The requirement of a new security depends on the loan agreement’s specific terms and any amendments made. If the original terms are unchanged, the security will typically remain in effect, but significant changes might necessitate revisiting the security documentation. 

Much depends on the terms and conditions of the lease.

It is common for leases to contain an alienation clause that provides that any transfer/assignment of the lease will be subject to (among other matters):

• the old tenant first obtaining the written consent of the landlord (and secured lender, as the case may be)
• the landlord, old tenant and new tenant entering into a tripartite deed of assignment of lease to ensure that the new tenant is bound by the terms of the lease and to the effect that the old tenant shall cease to be under any obligation or possessed of any rights in respect of the lease.  

Generally, Kenyan law allows for the settlement of disputes through foreign jurisdictions (whether courts or arbitral tribunals) where the choice of jurisdiction is clearly expressed in the contract.

However, there are exceptions. Kenyan courts will not recognise a foreign jurisdiction clause and/or judgement if:

• it contradicts public policy
• the dispute involves Kenyan land or property (which falls under Kenya’s exclusive jurisdiction)
• the enforcement of a foreign judgement would conflict with Kenyan law
• there is lack of reciprocal enforcement where there is no treaty or agreement for the recognition and enforcement of foreign judgements (or arbitral awards) between the two jurisdictions.

Yes – Kenyan law allows for the enforcement of arbitral awards without review. There are statutory grounds for the refusal of recognition or enforcement of an arbitral award, including if the High Court found that the recognition or enforcement of the arbitral award would be contrary to the public policy of Kenya.

Yes – Kenyan law allows for the enforcement of foreign judgements of certain countries (Australia, Malawi, Seychelles, Tanzania, Uganda, Zambia, the UK, Rwanda) without the need to file suit in Kenya under the Foreign Judgements (Reciprocal Enforcement) Act (the “Act”). Such judgement will need to be registered within 6 years of the date of judgement. Such registration may be set aside on limited grounds set out in Section 10 of the Act.

Foreign judgements of other countries may be enforceable in Kenya under the Act, subject to the provisions of the Act. The judgement creditor will be required to file a suit supported by a certified copy of the judgement. The judgement-debtor may then be able to resist the suit on the grounds that the judgement had been improperly obtained or would not have been obtained if the original proceedings had been brought in Kenya or for similar reason.

Statute sets out the enforcement options available to a person who has taken a charge over land (or lease). A charge-holder may either:

• sue the creator of the charge for any monies due and owing under the charge
• appoint a receiver of the income of the charged land
• lease the charged land (or sublease the land, if the charge is over a lease)
• enter into possession of the charged land
• sell the charged land. 

 Appointment of Receiver

This is initiated by serving upon the creator of the charge (the “Chargor”) a notice to appoint a receiver. The charge-holder (the “Chargee”) may only proceed with the appointment of the receiver after the lapse of 30 days from the date of the notice.

The receiver has the power to demand and recover all of the income of which the receiver is appointed, by action or otherwise, in the name of the Chargor and to give effectual receipts of the same.

No court order is required to serve the notice.  

Lease of the Charged Land

This is initiated by serving upon the Chargor a notice to grant a lease. The Chargee may only proceed with the grant or execution of the lease after the lapse of 30 days from the date of notice. 

No court order is required to serve the notice.

Entry into possession of the Charged Land

Where this enforcement option is selected, a charge-holder shall first (after the expiry of a notice to the Chargor to repair the default in obligation) serve upon the Chargor a notice of intention to enter the land at a date not later than 1 month from the date of service of the notice.

The power of entry may only be exercised after obtaining a court order.  

Selling the Charged Land

A charge-holder entitled to exercise this remedy is permitted to achieve the sale by private contract (at market value) or by public auction (with reserve price) as well as other means (e.g. by way of sub-division; by way of sale of whole or part of the land).  

No court order is necessary to initiate the exercise of this remedy.

Kenyan statute provides for an implied covenant in every charge of land that the creator of the charge is bound to repair and keep in repair all buildings and improvements upon the charged land, as well as ensure by insurance (or other means) that resources will be available to make good any damage to the land.

It is standard practice to include these covenants in a charge, and in addition, provide for step-in rights to a charge-holder entitling (but not binding) it to repair and maintain a property or take out or renew appropriate insurance against its damage if it feels necessary to do so.

If the charge-holder elects to so repair or maintain the land (or the buildings or improvements on it), or take out/renew insurance on the property (or the buildings or improvements on it), it is standard practice (and the charge usually provides) that the charge stand as security for these costs.      

A lender exercising a power of sale may, with leave of the court, purchase the property. A court shall not grant leave unless the secured lender satisfies the court that a sale of the charged land to the secured lender is the most advantageous way of selling the land.

In any event, where a charged land is to be sold by public auction, a secured lender is permitted to bid provided that their bid is the greater of:

• the highest price bid for that land at the auction
• an amount equal to or higher than the reserve price, if any, put upon the land before the auction, whichever amount is the greater.

N/A  

The answers below assume that the real estate is held in a Kenyan SPV (limited liability company) to provide an alternative to enforcement of the charge over real estate. 

Yes – security over shares may be granted to a foreign lender. 

Yes – second ranking security over shares can be taken.

For a charge over shares, such charge should be registered at the Collateral Registry (a registry created by the Moveable Property Security Rights Act).

Where the shares to be charged are listed on the Nairobi Securities Exchange, and are dematerialised, the security should be registered in accordance with the Central Depositories Act. This involves the delivery to the Central Depository and Settlement Corporation (through a Central Depository Agent) of a duly filled in and signed securities pledge form for the security interest to be recorded.

Where the security over the shares is created by way of a deposit of share certificates, the lender should take deposit of the share certificates together with:

• a duly executed memorandum of deposit setting out the terms and conditions of the deposit, including the enforcement rights
• signed but undated share transfer forms. 

Notice of such deposit should be filed at the Collateral Registry.

A security interest in a share will only be effective against third parties if a notice with respect to the security right is registered at the Collateral Registry.

• execution of the security document by the lender and the owner of the shares and the deposit of the relevant share certificates with the lender (together with duly executed but undated share transfers)
• application to the Collector of Stamp Duty for an exemption from payment of stamp duty on the security document
• presentation of the security document for registration at the Collateral Registry; this is an online process – there are no registration costs in this connection.  

No. 

Enforcement of a security over shares is achieved by completing the share transfer forms under the power of attorney granted to the secured lender in the charge (or memorandum of deposit of shares, as the case may be) to transfer the shares to a third party. The secured lender then stamps the share transfer form and notifies the Companies Registry of the change in shareholding. The Company Secretary then registers the change in the register of members.

Shareholder loans are not statutorily subordinated. Where these exist, it is a common requirement by lenders that these loans be subordinated by way of a subordinated agreement entered into prior to drawdown or provision of financial accommodation to a corporate borrower. 

The lease structure is informed by a combination of legal frameworks and practices, including the Land Act, Land Registration Act, Law of Contract Act, the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act and case law. Commercial leases commonly range from 1-6 years with the option to renew for a further term. The lease generally covers aspects like rental amounts payable, responsibilities of the parties, property maintenance and methods for resolving disputes. Commercial leases need to be stamped and properly registered with the relevant authorities as required to make the lease enforceable. 

With regard to shops, hotels and catering establishments, parties are free to determine the term of the lease. However, a 6-year initial lease term is common.

There is no prescribed lease term. By law, title to land may be acquired by long-term leases exceeding 21 years created out of private land. In the circumstances, where a long-term lease is contemplated, landlords are usually careful to provide for a length of lease term shorter than this period coupled with an option to renew.  

The following applies to shops, hotels and catering establishments.

Termination

The termination of a controlled tenancy* may only be achieved by the landlord issuing a tenant a notice to that effect in the prescribed form and otherwise in compliance with statute: the Landlord and Tenant (Shops, Hotels and Catering Establishments) Act (the “Act”).

The termination of other commercial leases that do not constitute controlled tenancies is governed by the agreed provisions contained in the commercial leases in that regard.

Renewal

Generally, any commercial lease renewal terms will be as agreed between the landlord and tenant, whether the commercial lease constitutes a controlled tenancy or not. The Act does not provide for an express right to renewal of a lease to the tenant in a controlled tenancy.

*Controlled tenancies are those leases for shops, hotels and catering establishments that either have not been reduced into writing; or, if reduced into writing:

• are for a period not exceeding 5 years, or
• contain provisions for termination (otherwise than for breach of covenant) within 5 years from commencement, or
• relate to premises gazetted as such by the Cabinet Secretary responsible for commerce.

No.

Controlled tenancies are provided with security of tenure which prevents arbitrary eviction of tenants. The landlord’s powers to increase rent is also limited. A landlord who wishes to evict a tenant or increase rent must provide the requisite notice to the tenant to this effect. The tenant retains the right to object the eviction or increase of rent by referring the matter to the Business Premises Rent Tribunal. The status quo prevailing before the issuance of the particular notice will remain until determination of the case which could take a number of months (if not years).  

This is a contractual matter for agreement between the landlord and tenant. Generally, rent is payable in advance, either on a monthly or quarterly basis.

This is a contractual matter for agreement between the landlord and tenant. It is common for office and retail leases to provide for a rent escalation during the term of the lease.

This is a contractual matter for agreement between the landlord and tenant. Usually, the rent tends to go upwards-only based on the current market rental value and what is mutually agreed upon between the parties. There are certain commercial leases that provide for the rent to be assessed on the tenant’s turnover, particularly retail leases.

Shops/Hotels/Catering Establishments

The landlord of a controlled tenancy may only alter any terms of the lease (including rent provisions) upon due notice to the tenant to this effect. The tenant who wishes to oppose such notice may do so by referring the matter to the relevant tribunal. It is also open to a tenant of a controlled tenancy to seek a reassessment of the rent of a controlled tenancy. 

Dwelling Houses

Dwelling houses (houses, parts of houses or rooms used as a dwelling or place of residence), the rent of which does not exceed KES 2,500 per month, are subject to rent restriction legislation (covering rent and increases in rent).

Legislation implies a condition on all leases that a lessee is under an obligation to keep buildings comprised in a lease in a reasonable state of repair.

Where only part of a building is leased, legislation implies a condition on a lessor to keep the roof, all external and main walls and main drains, and the common parts and common installations and facilities, including common passages and walkways, in a proper state of repair.

The landlord.  

The landlord is responsible for insuring the building as a whole. Generally, leases tend to provide for obligations on the part of both the tenant and the landlord to take out any relevant insurance that applies to them. Leases also tend to provide for an obligation on the part of the tenant to at all times maintain property insurance upon all the tenant’s improvements and personal property. 

In commercial leases, the tenant is responsible for paying VAT at the prevailing rate which is currently at 16%.

The landlord is responsible for settling all rates, taxes, dues and other outgoings that are payable in respect of the leased premises, unless otherwise agreed with the tenant.

These costs however may be recouped by the landlord through the payment of a service charge.

Apart from the rent payable in accordance at the time and in the manner set out in the lease, the tenant will be responsible for the settlement of any service charges agreed to be paid under the lease – these service charges will typically cover security, maintenance of plant and pipes, fire alarms, cleaning retained parts, garbage collection, insurance, staff, electricity, etc.

Other outgoings payable by the tenant will also include utility costs related to water and electricity that are consumed by the tenant.

Yes – this may be accomplished by incorporating provisions in the lease that clearly outline the intended uses of the service charge payments, including the landlord’s outgoings and the management costs. 

Yes. 

Where a charge over land is to be enforced by the secured lender, and the secured lender has elected to exercise its power of sale of the charged land, the secured lender has to ensure that a forced sale valuation is undertaken by a valuer before exercising its power of sale.

The valuer for this purpose has to be one registered and licensed to practice as a valuer in accordance with the Valuers Act.

Where the power of sale is to be exercised by way of private contract, the secured lender is permitted to rely on a valuation carried out by a valuer registered with the Institute of Surveyors of Kenya.  

The public has access to information and documentation submitted to the National Environmental Management Authority (NEMA, the implementing government agency of environmental policy) in connection with an environmental impact assessment, together with NEMA’s decision and reasons thereof on terms and conditions that NEMA may prescribe.

It is open for any person to retain the services of a NEMA-approved, licensed and registered expert in connection with environmental impact assessments, audits and reports.

There is no explicit provision on this type of liability. Generally, where a lender has used its step-in rights under a charge and has assumed control and responsibilities, it is possible for a lender to be liable. That would only apply insofar as the breach can be attributed to the lender.