The Sale Agreement and the Transactional Costs involved in Transfer of Property

1.0 Sale Agreement and Deposit
Once the search has been conducted, the Vendors advocates prepare the sale agreement. Upon execution by both parties, the agreed deposit is paid by the purchaser through their advocate to the seller’s advocate account. Standard sale transactions in Kenya take 90 days and the standard deposit is 10%.

2.0 Property transactional costs

Buyers will incur certain transactional costs when buying either residential or commercial property in Kenya.

          i.            Stamp Duty/Land Tax: This levy is centered on the property value and the State relies on the amount returned by the Government Valuer or the purchase price agreed upon, whichever is higher.

            o     4% for land/property within a municipality

            o     2% for agricultural land or property outside a municipality

            o     1% if a property is registered as a company and transfer is by way of shares rather than title Legal fees:

Each party pays for their own legal fees based on a percentage of the purchase price on a scale stipulated in the Advocates Remuneration Amendment Order, 2014. The only exception which appears to be a common practice, is where buyers are required to pay legal fees for both parties when buying an apartment. The argument for this is based on the fact that the seller’s lawyer is the one who does registration for all the leases on behalf of the buyer.

Commercial properties attract VAT and the current prevailing rate is 16% of the purchase price.

         ii.            Agency fees: The agent is paid by the party who instructs them; either by the seller who instructs the agent to market their property or the buyer who instructs the agent for a property acquisition. The fee is on a scale capped at a maximum of 3% of the property’s value.

        iii.            Registration and disbursement fees: Buyers are generally responsible for the cost of registration of titles in their name(s) together with other disbursement costs as may be advised by the seller’s advocate.

 

Essential Clauses of a Commercial Lease to Protect the Landlord

 Introduction

A Lease Agreement (the “Lease”) sets out the rules to govern the relationship between the Landlord and the Tenant. It is a legal contract, as well as an immensely practical document full of crucial business details and deep legal implications. As a landlord, it is important to have a Lease that includes essential clauses that protect your rights and interests.
Failure to include these clauses may result in loss of income, liability for damages or lengthy and costly legal disputes in Court. This legal alert highlights some of the essential clauses of a lease protecting the landlord and provides a rationale for each clause.

Essential Clauses of a Lease Agreement

i) Essential Clauses of a Lease Agreement

A permitted user clause is an important provision in leases that specify the type of business activity or use that is allowed on the leased premises. This clause restricts the tenant from using the property for purposes that are not permitted in the lease. The rationale for the inclusion of the permitted user clause is;

Zoning and planning regulations:

Protection of the Landlord’s Investment:

Compliance with insurance requirements:

Compliance with Lender requirements:

In summary, the clause is necessary to protect the landlord’s investment, comply with planning regulations, insurance and lender requirements and avoid potential legal issues.

ii) Security Deposit Clause

The Security Deposit Clause acts as a form of insurance for the Landlord, protecting them from losses in case the tenant fails to fulfill their obligations. The security deposit clause must specify that the deposit shall not be used as rent for the months leading up to the lapse of term of lease. This clause must also specify how the deposit will be utilized before refunding after the lapse of lease.
The clause must specify the order of utilization of deposit as follows;

·      1

To settle all outstanding bills with respect to water, electricity, telephone, insurance, etc.;

·      2

To conduct repairs and maintenance of the rented premises;

·      3

. To settle all penalties and/or interests accrued from outstanding rent and service charge bills;

·      4

To settle the outstanding service charge bills; and finally

·      5

To offset any outstanding rent charges.

iii.) Dispute Resolution Clause

A dispute resolution clause outlines the process to be followed in the event of a disagreement between the landlord and tenant. The clause provides alternative ways of resolving disputes aside from resorting to court processes, often characterized by exorbitant costs and prolonged timelines.
By offering avenues for dispute resolution, e.g., negotiation, mediation or arbitration, the clause fosters the preservation of the landlord- tenant relationship by departing from the confrontational nature of litigation.
The underlying rationale for the dispute resolution clause is to provide lucidity and predictability. By articulating a well- defined process, it obviates confusion and misunderstandings that may arise during court process.

iv.) Notice Clause

A proper notice clause is essential for protecting the landlord’s rights. The provision should clearly specify the requisite procedures and protocols for delivering notices. The law requires the landlord to adhere to specific notice requirements before making any amendments to the terms of the lease.
It is imperative that this clause be included in the lease which recognizes notice by newspaper. This enables the landlord to serve statutory notices in a national newspaper without first obtaining leave of court. Such inclusion will save time and litigation costs that may otherwise be incurred if the landlord were to obtain permission from the court before service.

v.) Severability Clause

The severability clause establishes that in the event a court invalidates a provision within the lease, the remaining terms of the lease remain enforceable. This provision ensures that the lease remains valid, notwithstanding any unenforceable provision. The landlord retains the benefit of the lease despite any attempt by the tenant to terminate the lease due to the invalidation of a single clause by a court. The severability clause permits cancellation of only unenforceable provisions while preserving the effectiveness of other enforceable clauses in the lease.

v.) Termination and Right of Re-Entry Clause

The Landlord and Tenant (Shops, Hotels & Catering Establishments) Act introduces the concept of a controlled tenant. A controlled tenancy is one that restrict the landlord’s ability to increase rent or terminate the lease without prior clearance from the Business Premises Rent Tribunal. To avoid  this, the Lease ought to satisfy the following requirements;

·      a

The term of lease must be more than 5 years;

·      b

The lease must not have a termination clause allowing the Tenant to terminate the lease before lapse of 5 years;

Commercial Leases typically do not have termination clauses. However, the re- entry clause allows the Landlord to terminate the lease by re- entering the rented premises before lapse of term in the following circumstances;

·      a

Non- payment of rent and other rent service even after receiving demand;

·      b

Non- performance or breach by the tenant of any covenants to the Lease;

·      c

Liquidation, placement under receivership or administration or voluntary arrangements with creditors of the tenant.

Conclusion

It is important to note that these clauses are not exhaustive and may vary depending on the specific circumstances of each Lease. Our legal team is well-equipped to provide personalized professional advice and assistance in drafting, reviewing and registering Lease Agreements that secures your rights and interests as a Landlord.

 

Review: Registration of Lease and The Effect of an Unregistered Lease and Unexecuted Lease under the Law

 

 

Registration of Leases

Section 43(2) of the Land Registration Act, 2012 provides that no instrument affecting any disposition of private land shall operate to sell or assign land, create, transfer or otherwise affect land, lease or charge until it has been registered in accordance with the laws relating to registration of instruments unless the disposition is exempt from registration. However, short-term leases (leases for a period of less than 2 years) are exempt from this requirement under Section 58 (3) of the Land Act, 2012.

The Effect of an Unregistered Lease and Unexecuted Lease under the Law

(a) Unregistered Leases

Section 36(2) of the Land Registration Act provides that any unregistered instruments in land shall be construed as contracts between the parties.

In Mega Garment Limited vs. Mistry Jadva Parbat & Co. (EPZ) Limited (2016) eKLR), the Court of Appeal held while relying in the time- honoured decision in Bachelor’s Bakery Ltd v Westlands Securities Ltd (1982) KLR 366 held that a lease does not require to be registered to be enforceable between the parties. An unregistered lease amounts to an agreement and is valid between the parties, however, it offers no protection against third parties to the agreement.

 (b) Unexecuted Leases

In Chon Jeuk Suk Kim & another v E. J. Austin & 2 others [2013] eKLR, the Court of Appeal held that:

“The legal character of the document under consideration in this appeal is from its form and contents an agreement for a lease. It is common ground that the formal lease was not executed. From the authorities, although the document does not conform legal or equitable estate to the appellants the covenants therein would be enforceable as between the parties if it is ultimately found to be an enforceable contract.”

In conclusion, the registration of leases is an important aspect of property law in Kenya. While short-term leases are exempted from registration, all other leases require registration to be valid and enforceable against third parties. Unregistered leases may still be enforceable as contracts between the parties involved, but they offer no protection against third parties. On the other hand, unexecuted leases can be enforced as agreements between parties if the essential elements of a contract are present, such as the payment of rent and acknowledgment of receipt by the lessor. It is essential to seek legal advice before entering into any lease agreement to ensure compliance with the law and the protection of one's interests.