Management Companies in Residential Properties in Kenya: An Overview

Concept of Management Companies

The term “Management Companies” can be used to describe companies that are used in managing housing units, such as apartments, located in multi-unit developments. They are common in situations where residential housing units comprise the entirety of the development, or a substantial component of it. The developments are usually constructed with the intention that the developer would retain the reversionary interest in the land, but upon registration of all subleases over the units, he/she will hand over management of the estate and ownership of the reversionary interest to an entity owned by the purchasers of the various units constructed (“Unit Holders”). Thus, when one purchases a unit in the development, they purchase also a share in the entity and enjoy two legal interests; as the owner of the individual unit, and as a part owner of the entity. It is that entity that takes over management of the estate and ownership of the reversionary interest that is called the Management Company.

Why Management Companies?

Save for developments done pursuant to the Sectional Properties Act, incorporating Management Companies in multi-unit developments is not a requirement of the law. Indeed, there are developments in which, upon a developer selling the units, they retain the role of maintaining the estate and retain ownership of the reversionary interest (duties ordinarily carried out by Management Companies). Management Companies are therefore largely a creation of industry practice. The idea behind their establishment is that where a group of persons individually own all the apartments in a multi-unit development, they ought also (at least after the multi-unit development has been fully completed by its developer) to be the members of a company which owns the common areas associated with their individual units, and which ultimately controls the extent, quality and cost of the shared services from which individual units benefit.

Several advantages flow from establishment of Management Companies, both for the developer and for the Unit Holders. For the Unit Holders, they are able to maintain an input into decision-making as regards their development and controlling the costs of having common services provided for their collective benefit. This they do by periodically electing the persons to serve as the management company’s directors. In addition, as an advantage to both to the developer and the Unit Holders, it is a convenient way of dealing with management of the estate once the units are sold out. Unless the multi-unit development is very small, it would normally be impractical for the common areas to be co-owned by all the unit-owners in their personal capacities, and for arrangements in relation to the provision of common services to be dealt with by contracts under which each of the owners was jointly and severally liable in their personal capacities.

Ownership and Control of Management Companies

The ownership and control of Management Companies varies depending on the phase of the development and the registration of the units. At the point of incorporation, the developer has only just begun to build the property and therefore they (directly or through their nominees) own and control the company. At this stage, the company is inactive, and the developer is responsible for all the operations of the residential property. During letting out of units in the development, the management company may be owned by the developer and Unit Holders whose units have already been registered. After registration of all sub-leases in the development and upon transfer of the reversionary interest in the underlying land to the management company, the developer finally hands over the ownership and control of all operations to the management company. From amongst them, the members appoint a board of directors who run the company and contract the services and persons needed such as a management agent.

Role of Management Companies

Generally, the duties of a management company include maintaining the common areas and associated facilities, contracting third parties to provide services or advice, procuring insurance to cover risks in the development determining the amounts of service charge payable by members and applying for renewal of the reversionary interest from the Government upon expiry of the term of the main lease from the government.

Where a Management Company fails, refuses or neglects to perform its duties or does so in a way that leaves Unit Holders aggrieved, the members of the company can seek appropriate means of redress available in the documents governing the subleases and in law. For instance, as shareholders, the Unit Holders have recourse to various remedies available under company law.


In sum, the benefits that accrue from use of Management Companies are numerous and perhaps this explains why developers have embraced them. It is however important for developers to seek appropriate legal advice on structuring of the Management Companies as circumstances vary from each development to the other. It is important for purchasers to understand the role of Management Companies, right from the point they sign agreements for sale, as these end up being the entities that determine the quality of services in the estate as well as other fundamental issues governing the estate.

Article by: Enock Mulongo and Pauline Njau

Please note that this publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. Readers are advised in all circumstances to seek particular advice on any issue dealt with herein.



Court Rules on Payment of CGT in Forced Sale of Land by Lenders

Just as we had predicted in our article ‘Payment of Capital Gains Tax in Bank Forced Sale Transactions in Kenya’, the High Court has recently held that KRA’s requirement for Capital Gains Tax (“CGT”) to be paid simultaneously with stamp duty on a sale of land by a Lender pursuant to its statutory power of sale is unreasonable, unfair and influenced by an error of law. For purposes of this article and for ease of understanding, we have used the terms ‘Lender’ and ‘Borrower’ instead of ‘Chargee’ and ‘Chargor’ respectively.

In Miscellaneous Civil Case Number 510 of 2017 (unreported), the Kenya Bankers Association (“KBA”) challenged the administrative action by KRA compelling Lenders to pay CGT on the sale of land pursuant to the Lenders’ statutory power of sale. It observed that the KRA’s i-Tax system does not permit the payment of stamp duty on a transfer unless an acknowledgment number for the payment of CGT on that sale is entered into the i-Tax system.

While agreeing with KRA that, to expect a Borrower to pay CGT in respect of a transaction which he has no control is unreasonable, the High Court held that it was equally unreasonable and unfair to demand a Lender to pay CGT upfront without first making a determination, based on the relevant factors, whether there is in actual fact a capital gain or loss. The Court was of the view that, although the Lender is a nominee of the Borrower for the purposes of payment of CGT (where, after the sale of the property the same is found to be lawfully due and payable), such a decision must be determined on a case to case basis. It stated that it was irrational to direct that CGT be paid in respect of all transactions entered into pursuant to the Lender’s exercise of its statutory power of sale before such a sale can be completed.

In addition, the Court held that, on the sale of land by a Lender in a forced sale, CGT is payable by the Borrower (owner of the land) upon registration of the transfer and not by the Lender or purchaser, unless there is a surplus from the proceeds of sale as to constitute the Lender a trustee for the Borrower.

Consequently, KRA was ordered to allow payment of stamp duty on instruments of transfer following sale of Land by Lenders pursuant to their statutory power of sale, without requiring the payment of CGT or an acknowledgement number for payment of CGT.


Considering that payment of stamp duty is done online, KRA should, following the High Court’s decision, change its i-Tax system to allow for payment of stamp duty without requiring an acknowledgement number for the payment of CGT, in respect of all transactions entered into pursuant to the Lender’s exercise of its statutory power of sale. We wait to see whether this will be done.

Article by: Patience Laki

Please note that this publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. Readers are advised in all circumstances to seek particular advice on any issue dealt with herein.


Alternative Public Procurement Methods in Kenya

Article by: <a title="The Associates" href="">George Kinyua</a>
Article by: George Kinyua

Public procurement law regulates the purchasing by public entities of goods, works or services. Its aim is to open up supply of goods and services in the public sector to competition, primarily to guarantee quality of supplies. In Kenya, this law is enacted in the Public Procurement and Asset Disposal Act, No. 33 of 2015 (“the Act”).

Under the Act, open (competitive) tendering is the preferred and default procurement method for public entities. However, situations may arise (typically owing to urgency, the type of goods or services sought to be procured or the supplier’s circumstances) which warrant the use of alternative procurement methods and procedures. In this article, we look at the most distinct of these methods, which, under the Act, include two-stage tendering, restricted tendering, direct procurement, electronic reverse auction, framework agreements, and specially permitted procurement procedures.

Two-stage tendering is used when, due to complexity of the goods or services sought to be procured and inadequate knowledge on the part of the entity, it is not feasible for the procuring entity to formulate detailed technical specifications for the goods or services. The procuring entity therefore invites tenderers to submit initial tenders containing proposals with technical specifications but without financial quotes. The entity evaluates the initial tenders and invites the tenderers whose tenders are retained to submit a second round of tenders with respect to a single set of technical specifications (generated by the procuring entity from tenders received in the first round) and with financial quotations. It is from this second round of tenders that the entity selects a supplier.

Restricted/limited tendering is tendering restricted to certain potential suppliers and may be used only where (i) the complexity or specialized nature of the goods or services requires that tendering be limited to pre-qualified suppliers, (ii) the time required to conduct open tendering would be disproportionate to the value obtained in the long run, or (iii) there are only a few known suppliers of the relevant goods or services.

Direct procurement occurs when the procuring entity issues a tender document directly to a particular supplier inviting the supplier to make a proposal to the procuring entity for negotiation. This method can only be used where (i) the goods or services are available only from a particular supplier and no reasonable alternative or substitute exists, (ii) there is urgent need for the goods or services due to an unforeseeable event beyond the control of the procuring entity which makes it impractical to use the other procurement methods, (iii) it is necessary to purchase from that supplier for reasons of standardization or because of the need for compatibility with existing goods, technology or services, (iv) the supplier is a public entity supplying on terms that are fair and comparable to those obtainable in the open market.

An electronic reverse auction (also known as e-action, procurement auction or e-sourcing) is a relatively new trend in public procurement. In a reverse auction, unlike a traditional (forward) auction that involves a single seller and many buyers, there is a single buyer (the procuring entity) and many suppliers. The buyer indicates its requirements and tenders compete on technical proposals and price quotations. An electronic reverse auction is a reverse action that is conducted through electronic media, either remotely or on site. For a procuring entity to utilize this method, the Act requires that it must possess a procurement portal and suitable software.

A framework agreement is an agreement between a procuring entity and various suppliers that sets out terms upon which the procuring entity will procure specified goods and services from the suppliers who are party to the agreement. During the term of the agreement, the procuring entity may make specific purchases through call-offs or inviting mini-competitive bids from among suppliers that have entered into the agreement in the respective category. Framework agreements are typically used when the required quantity of goods or services cannot be determined at the time of entering into the agreement. Under the Act, such an agreement must include at least 7 alternative vendors for each category of goods or services.

Specially permitted procurement, a concept introduced in the Act in 2017 following the IEBC Kiems procurement debacle, is not a specific procurement method but a rule under the Act empowering the National Treasury to allow any public body to use a specially permitted procedure (essentially allowing that body to not comply with the Act) where (i) exceptional requirements make it impossible, impracticable or uneconomical to comply with the Act, (ii) market conditions or behaviour do not allow the effective application of the Act, (iii) procurement of the goods or services is regulated or governed by harmonized international standards or practices, (iv) strategic partnership with the supplier is applied, or (v) credit financing procurement is applied. In addition, the Cabinet Secretary for the National Treasury is given power to determine the procedure to be followed in carrying out procurement using this method, which procedure will vary with prevailing circumstances.

Availability of the above and other alternative procurement methods enables suppliers and contractors seeking to do business with public sector players to engage with the latter while avoiding the tedious processes involved in open tendering and public private partnerships.

Please note that this publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. For particular expert advice on any matter dealt with above, please contact us.


Securities Lending and Borrowing: An Overview


Studies on the state of liquidity in Kenya, including a Services Volunteer Corps report on the same have recommended several measures to improve liquidity, volume and pace of trading within the Kenyan capital markets. Key among the recommendations has been the introduction of Securities Lending and Borrowing (SLB) as well as Short Selling. In line with this recommendation, the National Treasury published the Capital Markets (Securities Lending, Borrowing and Short Selling) Regulations, 2017 (“Regulations”) in November 2017,

The Regulations, define securities lending as the temporary transfer of securities from a lender to a borrower with the concurrent written agreement to return the securities either on demand or at a future date.  Full legal title to the securities is transferred from the lender to the borrower so that the securities can be used entirely as the borrower desires, including selling them onward to others. As consideration for the lending, the borrower pays the lender a fee over the duration of the loan.


The International Securities Lending Association (ISLA) categorizes participants in an Securities Lending and Borrowing transaction into three broad groups. The first group comprises Lenders who supply securities into the market mainly from the portfolios of beneficial owners, such as pension & mutual funds and insurance companies since they hold large, relatively stable asset portfolios. Other common lenders include collective investment schemes, sovereign wealth funds and high net worth individual investors whose interest is to grow the value of their portfolios over the medium to long term. The second group comprises borrowers who identify trading opportunities that will more than make up for the lending fee costs. Borrowers are typically regulated firms such as investment banks, market makers, broker dealers, arbitragers, directional short sellers and players in the derivatives and Exchange Traded Funds markets.  The last group comprises intermediaries/lending agents who undertake the securities lending activity on each of the parties’ behalves since securities lending is a secondary activity for many of the beneficial owners and underlying borrowers. The Regulations define a lending agent as a third party who is not a party to a securities lending agreement but who provides support services to securities lenders including the monitoring of loans, the negotiation of lending fees or rebate rates, and the management of collateral.


The key benefit of Securities Lending and Borrowing to the market is that it provides liquidity to the broader market, which has been wanting in the Kenyan market. Securities Lending and Borrowing also helps in supporting a number of trading strategies, timely settlement of transactions in the market and hence improvement of market efficiency.

According to ISLA, to the lenders, Securities Lending and Borrowing provides a low risk incremental income for long term investors, such as pension funds, collective investment schemes and insurance companies. These returns (both in the form of loan fee and any return from cash collateral reinvestment) help to reduce the costs of managing their investments & to provide pensions and long term savings to investors.  On the other hand, Borrowers may want to own securities for a certain period for a variety of reasons, chief among them being covering a short position (this is the net investment position in a security in which the security has been borrowed and sold but not yet replaced). Borrowers are able to use the borrowed securities to settle an outright sale. Borrowers also use Securities Lending and Borrowing in enhancing settlement efficiency, having the securities to support a trading strategy, or in merely fulfilling a settlement obligation at the Securities Exchange.


At the market level, financial experts warn that Securities Lending and Borrowing, if not strongly regulated, carry the risk of opening the danger of stock manipulation by investors keen to benefit from a price fall and aggressive speculation which was partly blamed for aggravating the 2008 global financial crisis.  The Capital Markets Authority has however assured the market that the Regulations, which borrow from international best practice, will check this risk through, inter alia, the requirement of collateral to cover the lender’s exposure.

For market participants, J.P Morgan in a recent publication  observe that the three primary risks in SLB are borrower /counterparty default risk, operational risk and cash collateral reinvestment risk. The main risk for a lender in SLB is the counterparty default. To mitigate the risk, Deloitte advises that the securities or cash held as collateral must be used to restore loaned securities to the portfolio.  Borrowers of securities are exposed to similar risks as the lender and the main risk for them is default by the Lender in returning the borrower’s collateral. In such event, the borrower can exercise their rights under the lending agreement and can seize the borrowed securities to cover amounts due. As such, the risks can be prevented by parties.


In sum, securities lending has potential to offer a countless benefits not only to the broader market in Kenya but also to long term investors and firms that may want to participate in SLBs. The enactment of the Regulations and subsequent commitment by NSE to upgrade their systems to allow the Security Lending and Borrowing framework to work by the second quarter of 2018 are notable milestones towards introduction of this product into the market. A future article will include an exposition of mechanics of the Regulations and the Securities Lending and Borrowing transaction.

Article by: C.G Mbugua


Payment of Capital Gains Tax in Bank Forced Sale Transactions in Kenya

The statutory power of sale (granted to lenders under Section 96 of the Land Act) allows a lender/charge (usually a bank) to, where the charger (borrower) is in default, sell charged property. This is referred to as a forced-sale. At the time of sale, the lender (who at that time becomes a seller) is required to obtain the best price reasonably possible in the circumstances.

Payment of Capital Gains Tax

Like any other transfer of property in Kenya, sale of charged property is subject to payment of capital gains tax (‘CGT’), unless the particular property or the transfer in question is exempted from taxation generally or Capital Gains Tax in particular.

The current rate of Capital Gains Tax is 5% and it is charged on the capital gain – the amount by which the sale value of the property exceeds the adjusted cost of acquisition of the property. Adjusted costs include the cost of purchasing and/or constructing the property, enhancing or preserving its value at the time of the transfer, incidental costs to the transferor of acquiring the property, and any post-acquisition costs of establishing, preserving or defending the title to, or a right over, the property.  The incidental costs used in computation are limited to those directly related to acquisition of the property by the borrower and its sale by the lender. Additionally, the adjusted cost is reduced by any amounts that have been previously allowed as deductions under section 15(2) of ITA. Banks are advised to obtain further advice from tax experts on the issue of computation.

Borrower’s non-cooperation

It is worth noting that most of the information that would assist the lender in computing the net gain for purposes of Capital Gains Tax is usually in the possession of the borrower.  While it is in the borrower’s interest to disclose information relating to adjusted cost (since it is an allowable deduction which would lower its tax liability) this being a forced sale the borrower’s co-operation is likely to nonetheless be at its minimum. From our enquiries at the KRA offices, we understand that where the borrower fails to cooperate, the bank is allowed to write to KRA requesting for their assistance in obtaining information. KRA will in turn get in touch with the relevant government agencies such as the Ministry of Lands to obtain relevant information.

However, to avoid delays and unnecessary costs, it is recommended that banks need to pre-empt the borrower’s potential non-cooperation by enhancing their KYC due diligence during loan approval to account for additional information needed in the event there is need for enforcement. We would be happy to advice further on this.

Information on the costs incidental to the sale can be provided by the auctioneer charged with the sale.

Where the value of acquisition is not ascertainable, the ITA (under Paragraph 9 of the 8th Schedule) provides that, the transfer value of the property shall be the market value of the property at the time of the acquisition or equal to the amount of consideration used in computing stamp duty payable at the point of acquisition, whichever is the lesser.

Who is liable to pay Capital Gains Tax in a forced sale?

Capital Gains Tax is payable on or before presenting an application for registration of the transfer at the Lands office. Parties to a transfer in a forced sale are the bank and a purchaser (who may, subject to certain conditions, be the bank itself).

Paragraph 5 of the 8th Schedule to the Income Tax Act (‘ITA’) provides that where a person sells property for the purpose of enforcing or giving effect to a charge or other security on the property, that person’s dealings shall be treated as if they were the acts of the owner of the property, for purposes of Capital Gains Tax. The bank therefore bears the responsibility to pay CGT.

Besides, KRA requires that, from an administration perspective, stamp duty must be paid either at the same time with or before Capital Gains Tax. This means that, since the Lands registry will not register a transfer before stamp duty has been paid before, the bank will need to source for funds to pay Capital Gains Tax.

This is problematic, given that the bank does not make a gain from the sale, since the bank must recover only those amounts that are actually owed by the borrower and pass any surplus to the borrower.

KRA recently acknowledged in our enquiry that administration of Capital Gains Tax in a forced sale is still a grey area and that they are still looking into the matter with a view to giving guidance on the same. Further, we understand that there is currently an ongoing court case regarding this. Notably, the court has previously ruled that the requirement by KRA that Captal Gains Tax should be paid either simultaneously with or before stamp duty is in breach of the ITA. We therefore foresee that the court will, in the current case, uphold its previous ruling and provide some relief to banks by ordering that Capital Gains Tax should be paid upon successful registration of the transfer instrument and by the person making the gain (if any), namely the borrower.

Article by: Patience Laki and Judy Marindany.


Please note that this publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. Readers are advised in all circumstances to seek particular advice on any issue dealt with herein.


Ownership of Properties to Infinity: New Regulations on Extension of Leases in Kenya

 By a Gazette Notice No. 5734 the Cabinet Secretary for Lands and Physical Planning issued  guidelines for extension and renewal of leases (the “Guidelines”).
Five months earlier, Gazette Notice No. 1812 of 27th February 2017 had appointed a ten-  member task force to investigate the processing, renewal and extension of leases in Kenya since  2010.
The foregoing actions target the complaints on the process of extension and renewal of leases as well as delays and loss of land through irregular allocations of expired leases. The legislature therefore has seen the need to come up with clear policy guidelines on extension and renewal of leases because the issue has far reaching implications on so many a local and foreign investor.

Lease Renewal under the Land Amendment Act 2016: Loopholes sealed

Under Section 13 of the Land Act as amended by the Land Amendment Act, 2016, a Kenyan citizen holding a lease from the National or County Government over land enjoys pre-emptive rights.
This ensures that the owner of the leasehold interest gets the first right to allocation of the land in question provided that the land is not required by the National or County Government for public purposes.
It is pertinent to note that pre-emptive rights only apply to Kenyan citizens. However, this does not preclude non-citizens from applying for extension or renewal of leases held by the same provided that one is in compliance with requirements under the Guidelines.

The policy, legal and institutional framework on processing, extension and renewal of leases;

Prior to the Guidelines, the process for applying for extension and renewal of leases was initiated by the registered owner. The present guidelines however seek to streamline the process by introducing and amending procedures as follows: –

• The National Land Commission (“the Commission”) Presumptive rights: Notice on expiry

The Commission will now trigger renewal on their own motion by writing to registered owners. The guidelines require the Commission to notify the registered owner by registered mail of the imminent expiry of the lease, five years prior. The notice should inform the registered owner of his/her pre-emptive rights of extension of the lease

• Advertisement and verification.

The Guidelines now require the Commission to advertise the notice of expiry of lease in two newspapers should the registered owner fail to respond to the initial notice; this is a slight departure from Section 13 of the Land Act as amended which provides for advertisement of the notice in one newspaper only.
The Commission shall undertake a physical verification of the land with a view to establish the status of the land; and secondly, to advise the registered owner on the need to apply for extension before the expiration of the term and the consequences of not doing so which include forfeiture of the preemptive right over the land and the automatic reversion the land in question to the National or County Government.

• The Application

Application for extension or renewal is made by the registered owner or appointed administrator before expiry of the Lease.
Where the term of the lease has expired without prior notice to the registered owner, the same will have to apply for renewal of the lease.
The application for extension or renewal shall be made to the Commission either by delivery of the same to their offices or in case of renewal, through the Commissions email address.
The Commission shall within seven days from receipt of the application, forward the same to the Cabinet Secretary for lands if the land is vested in the National Government or the County Executive Committee Members for lands if the land is vested in the County Government.
In order to obtain approval for extension, Kenyan citizens are required to produce land rent and rates clearance certificates, information on prospective encumbrances on the land, proof of compliance with the terms of the lease and in the case of a company, search results from the Company Registry.
Large scale investors must also satisfy the Commission of the economic benefit and the national development impact of the extension or renewal sought. However, the Guidelines do not define who constitutes a large-scale investor.

• The Process

The application process has been systemized with regard to extension of leases. The Application once receive by the Commission Officer, will be entered into a serialized register. In order to be entered in the register, the Guidelines require the application
–  a Copy of the ID/Passport;
–  an official search obtained one month prior,
–  Passport size photograph,
–  Certificate of incorporation in case of a Company; and
–  Letters of administration and confirmation of grant where applicable.
The accompanying documents required for renewal are similar to those listed above save for the additional requirement for the original lease.

• Approvals

The National and County Government shall consult with the relevant County Executive Committee Member, County Government Surveyor, Physical Planner and the Land Administration Officer of the Commission prior to approving the application for extension.
This also applies in the renewal of lease in which case the consultations should not be mere representations by the experts but also recommendations and any objections by them should be supported by reasons.
Once approval of extension or renewal of the lease is granted, there shall be revaluation to determine the payable land rent and other requisite fees, re-survey and geo-referencing and surrender the existing title. In the case of renewal, there is an additional requirement for a new letter of allotment for the parcel before the new leases is issued.

• Notification of rejection of the application

The Government is to notify the registered owner of its intention not to extend the lease three years before the lease expires and copy to the Commission.

Notice of rejection of an application is to be supported by reasons of either compulsory acquisition or non- compliance and issued within ninety days from the date of the application. At this point, all developments on the land are prohibited, previous developments are itemized and the registered owner is entitled to compensation on account of previous developments if the land is required for public purpose.

• Appeals

Appeals from the decision of the National or County Government lie in the Appeals Committee which is established by the Commission. The Appeals shall be held in the respective Counties in the Office of the Executive Committee member in charge of Land in that County.

The points of departure

The current Guidelines are not free from the shortfalls accompanying their provisions and implementation: –

  • • The preceding conditions

The foregoing guidelines have come at a time when litigation shaded the recent Land Amendment Act of 2016 where some sections of the Act were suspended by an order of the Environmental and Land Court (ELC) in Malindi pending the hearing of Petition Number 19 of 2016. One of the amendments that was suspended by the orders pertains to Section 13 of the Land Act from which the Regulations emanate. Despite the suspension of its application, the provisions in the Section 13 have been reiterated in the new Guidelines.

  • • Shortfall in Scope of Application

The guidelines have failed to address the issuance of leases for properties undergoing subdivision, amalgamation and change of user. Application for the said procedures is similar to the one for extension of lease. It was therefore expected that the Guidelines that seeks to streamline the law on renewal and extension of leases would make provisions for subdivision, amalgamations and change of user as well. The inclusion of these procedures is also more critical in light of the suspension of issuance of titles for subdivisions.


The new procedures and process for obtaining extension and renewal of leases is laudable for ensuring transparency. The Guidelines have attempted to provide for specific timelines for processing applications to ensure applicants do not suffer from unnecessary delays. Further, they have put in place steps to be taken by the Commission in alerting the land owners to ensure they do not unjustifiably lose their land through government re-allocation which is a positive step towards ensuring the protection of the right to property enshrined in our Constitution.


Article by: June Njoroge Ngwele Assisted by Pauline Kenyatta

Real Estate Investment Trusts (REITS) Frequently Asked Questions

Property as an asset class is highly sought after by astute investors. This is particularly so when it has the liquidity features of a listed instrument as is the case with REITS. At the same time, REITS could well be the solution real estate developers require to actualize their corporate objectives of setting up more developments.

In this write-up, we at Mboya Wangong’u & Waiyaki Advocates, who have been actively involved in legal REITS legal advisory work, seek to respond to Frequently Asked Questions about REITS.

1. What is a REIT?
A Real Estate Investment Trust (REIT) is a structure through which investors pool resources to invest in real estate securities which securities often (but not always) trade on securities exchanges. A REIT’s income is typically derived from renting, leasing or selling real estate and is distributed periodically to the securities holders.
REITS typically enjoy tax advantages.
2. Are there different types of REITS?
Under Kenyan Law there are two main types or REITS namely Development & Construction REITs (“D-REITs”) and Income REITS (“I-REITs”). D-REITs invest in property development and construction and derive a majority of their revenues from the sale of developed properties while I-REITs make long-term investments in income generating real estate and derive a majority of their revenues from rental income.
There are also Islamic REITS, which are sharia compliant forms of the D-REITS and I-REITS described above.
3. Are there any local REITS?
Currently there is only one REIT listed in Kenya, the Stanlib Fahari I-REIT, listed at the NSE in November 2015. We do not currently have a D-REIT. The market is poised for growth.

4. How can I participate in a REIT?
There are several key players in a REIT. Other than being an investor and security holder, professionals have a variety of roles they can take up in REITs including taking part as Promoters, Trustees, REIT Managers, Structural Engineers (in I-REITs), Transaction Advisors, Compliance officers, Valuers, Auditors, Property Managers, Project Manager Certifiers and Note Registrars.

5. What are the benefits of investing in REITS?
REITs provide easier access to property investment especially for investors who lack the capital base to invest alone in high cost real estate projects. Further, they improve liquidity in real estate investments through a readily tradable financial instrument. Investing in REITS allows for a diversification of investments across a range of property assets. Overall REITS provide a regular and stable income stream for security holders. Notably, there are several tax benefits and exemptions that apply to income derived from REITs.

6. Who can invest in a REIT?
Any person can invest in securities of an unrestricted I-REIT. However, only professional investors can invest in a restricted I-REIT or a D-REIT. Professional investors include: • any person licensed under the Capital Markets Act; • an authorized scheme or collective investment scheme; • a bank or subsidiary of a bank, insurance company, cooperative, statutory fund, pension or retirement fund; or a person including a company, partnership, association or a trustee on behalf of a trust which, either alone, or with any associates on a joint account subscribes for REIT securities with an issue price equal to at least five million shillings.

7. Are there any tax incentives for REITs transactions?
Yes. There are exemptions from income tax provided the REITs distribute 80% of their net income. There is exemption from stamp duty on initial transfer of property into a listed REITs scheme. Trading in listing securities is exempt from stamp duty.

8. How can a REIT scheme be terminated?
• By revocation of authorization by CMA;

• Through expiry of the term of the trust;

• Through termination upon application by the Trustee to CMA;

• Trustee, REIT Manager or any REIT securities holder may apply to Court for an order to wind up the operations of the authorized REIT scheme.

9. Why should I have REITs in my portfolio?

Adding REITs to your portfolio provides diversification. REITs offer a reliable and predictable income source.

10. Can I utilize a REIT to raise development capital?
Yes. Property developers are able to raise funds at the capital markets by selling REIT units to investors.

11. Are REITs regulated?
Yes. REITs are closely regulated by the CMA. They are managed by skilled, experienced and regulated managers. Besides, the property portfolio is also managed by a professional property manager. Interests of REIT Unitholders are looked after by the REIT Trustee.

12. Are dividends/distributions paid to investors taxed?
Yes. A 5% withholding tax on dividends is payable by local recipients of dividends, except, of course, where the recipient is itself tax exempt.

13. Does a REIT have to make a dividend pay-out?
Yes. I-REITS are required to distribute annually a minimum of 80% of the net after tax income from sources other than from realized capital gains on the disposal of real estate assets.

14. What are the limitations on investment amounts?
REIT securities offered as a restricted offer must be in minimum subscription/offer parcels of Kshs. 5,000,000. Further, a REIT must have a minimum of 7 investors.
D-REITS must have a minimum net asset value of KShs 100,000,000/= while I-REITS must have a minimum net asset value of KShs 300,000,000/=

15. Must all the REIT units issued and listed be publicly traded?
Yes, if listed, all the units should be listed. Further the law requires that at least 25% of the units be held by persons not associated with the Promoter.

16. Can a REIT invest its surplus funds in any other revenue-generating project?
Yes. However, an I-REIT must after its second anniversary, earn at least 70% of its income from rent, licence fees or access or usage rights or similar income generated by eligible investments in income producing real estate, and should have invested at least 75% of its total asset value in eligible real estate.

17. May a REIT borrow funds?
Yes. However, the trustee must ensure that any borrowing or provision of security is not prejudicial to the interests of the REIT unit holders. Besides, the total borrowings by a REIT or by any investee entity should not exceed, in aggregate, 35% and 60% of the total asset value with regard to I-REITS and D-REITS respectively.

18. Can I be a Promoter, even in my individual capacity?
Yes, the law allows for any person with initial cost coverage to set up a REIT for an intended purpose. It may, however, be better to incorporate a company for this purpose.

19. Do REITs only apply to Housing/Residential projects?
REITs are a flexible way to develop and create income or realize capital gain and they are not restricted to one type of real estate use. In other jurisdictions, such as the United States of America, it has applied to schools, hospitals, hotels and commercial properties like factories.

20. What benefit is there for me as a Promoter?
The value derived from the REIT may be two-fold. First, the Promoter can become an investor in the REIT by investing his land or asset into the REIT. Second, the Promoter may charge a fee for the role. The promoter may also take another role such as REIT Manager.

21. I have come across an opportunity to make more money in my project, can I convert my D-REIT into an I-REIT?
Yes, the law allows for conversion of a REIT from D-REIT to I-REIT.

22. Do I really have to list my REIT in the Securities Exchange?
It is not mandatory to list a REIT in the Securities Exchange, but an unrestricted I-REIT must be listed.

Asset-backed Securities – Why Your Source of Capital Could Be Right in Front of You


What comes to mind when considering potential sources of security to finance a business? More likely than not, the type of assets that pops as collateral for secured financing is the first item on the balance sheet: land and buildings.

Yet businesses are constantly looking for alternative ways of raising capital. Large companies, for instance, rely on their reputation, financial stability and creditworthiness to issue securitized debt such as corporate bonds. However, there are other emerging avenues which involve using assets found further down the balance sheet: plant and machinery, equipment, motor vehicles and trade receivables.

Asset-backed securities are one such avenue.

  1. What are asset-backed securities and how do they work?

Asset-Backed Securities (ABS) are bonds secured by a pool of underlying assets.

Like other secured debt, ABS involve the establishment of a form of security over assets. However, unlike other secured debt, ABS are structured in a way that the pool of assets is de-linked from the company seeking to raise capital such that the financing is wholly based on the quality of the assets and a decline or fall in financial credibility of the company does not affect the rights of investors in the securities.

Suppose company XYZ Limited has various assets: land and buildings, plant and machinery receivables, lease equipment receivables, motor vehicles receivables, credit card receivables and trade receivables. To raise capital through an ABS, a special purpose vehicle, say QRS, would be set up for the purpose of acquiring specific assets with a predictable cash flow. QRS would finance the acquisition of those assets by issuing securities (the asset backed securities) to investors and these securities would be serviced from the cash flows of those assets.

  1. What types of assets are used and which industries may use them?

The types of assets that have been used for ABS financing are varied. The running thread for these assets is that they must be income-generating. For instance, in the US, royalties, student loans and home ownership loans are applicable. In Kenya, the types of assets envisaged are consumer and commercial receivables such as plant and machinery receivables, lease equipment receivables, motor vehicles receivables and credit card receivables. For example: equipment leasing companies in the construction and manufacturing industries may use their industrial equipment; financial institutions may use their loan and advances income and credit card receivables; insurance companies may use their premium receivables; oil and gas companies may use their inventories and trade receivables; and any of these companies may use their lease rental investment properties if any.

  1. Have ABS been used in other countries and how much did they raise?

While ABS is novel in Kenya, it has been used successfully in other countries for a number of decades.

In the US in early 1985, the Sperry Lease Finance Corporation, a special-purpose organization set up by Sperry Corporation (now Unisys), sold to institutional investors USD192.4 million in fixed- rate notes collateralized by computer leases. This enabled Sperry to revamp its efforts to lease new equipment. In 2016, a total of USD 76.4 Billion was raised in the US through ABS. In the UK, ABS have been reported to be a favourable financing option in light of the volatility of the financial markets in UK following its decision to leave the European Union. This is because in ABS financing, even if the borrower is experiencing a decline, the ABS structures remain unaffected as they are de-linked from the borrower. Across the world in Australia, the total amount of liability from domestically issued ABS financing for the year 2016 stood at USD 775 million (1.02 billion Australian Dollars).

Closer home, there are examples of past and recent use of asset-backed securities financing.

South Africa is illustrative. Its first ABS financing was in 1991: a USD 4.5 million (SA Rand 60million) issue by Safsin Bank over installment rental loans. Since then the ABS financing route has grown in leaps and bounds, covering assets such as aircraft, trade receivables, lease receivables, credit card future cash flows and autoloans. Interestingly, part of this growth was accelerated by a change in banking regulations in 2001 which triggered companies to seek alternative capital raising options. In June last year, a South African asset rental company, MW Asset Rentals (RF) Ltd sponsored a USD 187.5 million (SA Rand 2.5 billion) Lease Receivables Backed Note Programme. It was able to raise USD 77 million (SA Rand 1.03 billion) backed by an asset exposure of USD 48 million (South Africa Rand 640 million).


A bird in hand is worth two in the bush. Asset backed securities offer an opportunity for businesses to use the receivables they have to obtain financing to generate more receivables. It is fast emerging as a tried and tested means of using what you have to get what you do not have.

For the investor, ABS are an additional investment opportunity other than government securities, equity and corporate debt. For the company raising capital, ABS are an avenue for using the assets it uses in its business to raise capital in addition to the traditional capital raising avenues. ABS are also attractive to investors in debt securities as they are credit-enhanced due to the strict parameters applied to insulate the assets from insolvency exposure to the borrower.

In Part II of this Article we will take a more localized look at ABS in Kenya including the legal framework, structure contemplated and the tax and legal status complexities and pitfalls of ABS financing.

CG Mbugua

Partner, Mboya Wangong’u & Waiyaki

The Law on Capital Gains Tax

By an amendment introduced to the Income Tax Act by the Finance Act of 2014 Capital Gains Tax (CGT) was re-introduced in Kenya. The tax, which had been suspended in 1985, is chargeable on the whole of the gain or profit made on the transfer of property situated in Kenya – it’s the gain made that’s taxed, not the entire transfer value. The burden of declaring and paying the tax liability is on the beneficiary of the gain who, in the case of a transfer of property, is the transferor.

Administration of CGT is currently governed by the Income Tax Act and the Tax Procedures Act.

Computation of Capital Gains Tax

The rate of CGT is 5% of the net gain made on a transfer.  The net gain is computed by deducting the adjusted cost of acquisition of the property from the transfer value.

The transfer value is the consideration for transfer of the property, that is, sales proceeds less incidental costs (such as legal fees, valuation fees, stamp duty payments and advertisement costs). The adjusted cost is the cost of acquisition or construction of the property and includes the legal and valuation costs incurred.  

It is worth noting that Capital Gains Tax is a final tax and cannot be offset against other taxes payable by the transferor.

Exemptions and exclusions

The law exempts certain transactions from payment of Capital Gains Tax. These exempted transactions include:

  • gains from property transferred by an individual where the transfer value is not more than Kshs. 3,000,000;
  • gains from transfer of agricultural property having an area of less than 50 acres;
  • income that is chargeable to tax under any other provisions of Income Tax Act;
  • gains accruing to a company on a transfer of machinery;
  • transfer of property in exchange for other property that takes place pursuant to a restructuring of a  corporate identity involving one or more companies found by the cabinet secretary in his discretion to be in the public interest; and
  • and gains derived from transfer of a private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned.

In addition to exempted transactions, there are transactions that are referred to as excluded transactions, that is, transactions that are not considered transfers of property for purposes of imposition of Capital Gain Tax. They include:

  • transfer of property for purposes of securing a debt or loan;
  • transmission of property to heirs upon the death of a property owner;
  • transfer by a personal representative in the course of the administration of the estate of a deceased property owner;
  • vesting of a company’s property in the liquidator of that company by a court order;
  • transfer by a trustee of property to a beneficiary on his becoming absolutely entitled thereto;
  • transfer of assets between spouses or former spouses; transfer to immediate family as part of a divorce or separation agreement; and
  • transfer of property to a wholly family-owned company.

The import of these exemptions and exclusions is that CGD is not payable on gains or profits made on the specified transactions. Nevertheless, the transferor of property must get approval from the Kenya Revenue Authority (KRA) to avoid paying CGT on these transactions. To obtain such approval, th transferor should make an application to the collector.

When is one required to pay Capital Gain Tax?

Paragraph 11A of the Eighth Schedule of the Income Tax Act (‘paragraph 11A’) provides that the due date for Capital Gains Tax is on or before the date of applying for the transfer of property at the Lands Office. Pursuant to this provision, KRA issued a public notice to the effect that, with effect from 1st October 2016, Capital Gains Tax would be required to be paid simultaneously with stamp duty on transfer of property.

The Law Society of Kenya (LSK) filed a constitutional petition (No. 39 of 2017) to challenge that requirement by KRA. The court eventually ruled that paragraph 11A is unconstitutional inasmuch as it limits the right to freely transfer property. We wait to see whether KRA will update its website and systems to allow payment of stamp duty independent of Capital Gains Tax.

Notably, a taxpayer to whom the tax applies may apply in writing to the Commissioner under section 33 of the Tax Procedures Act for extension of time to pay tax. If the Commissioner is satisfied that there is reasonable cause, he may allow an extension of time for payment of the tax or require the taxpayer to pay the tax in such instalments as the Commissioner may determine.

Consequences of non-payment and late payment of Capital Gains Tax

Non-payment of Capital Gains Tax is a criminal offence under section 107 of the Income Tax Act. In addition, KRA may recover the outstanding amount by suing the taxpayer under Section 39 of the Tax Procedures Act.

Late payment of Capital Gains Tax, on the other hand, attracts penalty interest at a rate of 1% per month or part of a month on the amount of tax remaining unpaid. The interest period commences on the date the tax was due and ends on the date the tax is paid. (section 38 of the Tax Procedures Act)


By the Real Estate team – Mboya Wangongu & Waiyaki

A Review of Statutory Changes Introduced by the Finance Act of 2016

Article by: Hillary Kariuki
Article by: Hillary Kariuki


In September 2016, the President of Kenya signed into law the Finance Act for the year 2016. Enacted annually, the Finance Act is the headline fiscal legislation by the Kenyan Parliament, containing multiple provisions as to taxation and other aspects of commercial and financial law.

The Finance Act 2016 (hereinafter ‘the Act’) is meant to, among other things, implement some of the proposals made by the Cabinet Secretary for the National Treasury in his budget statement of 8th June 2016. The following is a highlight of the main amendments to the Income Tax Act, the Excise Duty Act 2015, Value Added Tax 2013, the Tax Procedures Act 2015 and several other statutes.

Companies Act, 2015

Section 82 of the Act amends section 975 of the Companies Act 2015 thus:

‘Section 975 of the Companies Act is amended in subsection (2) by deleting paragraph (b).’

The impact of this is that section 975(2) (b) of the Companies Act 2015, which required that for a foreign company to be registered, at least 30% of the shareholding should be held by a Kenyan citizen by birth, has now been scrapped.

The Income Tax Act (ITA)

Previously, personal relief was Kshs 13,944 pa (Kshs 1,162 pm). Section 17 of the Act has amended Head A (Item 1) of the Third Schedule to ITA hence increasing the personal relief to Kshs 15,360 pa (Kshs 1,280 pm).

The Act has also amended Head B (Item 1 and Item 1(A)) of the Third Schedule to ITA to expand the tax brackets. The new tax brackets are as follows:

Tax bracket                                     Rate in each shilling

On the first Shs.134, 164                             10%

On the next Shs.126, 403                             15%

On the next Shs.126, 403                             20%

On the next Shs.126, 403                             25%

On all income over Shs.513, 373                 30%

Income from employment paid in the form of bonuses, overtime and retirement benefits is exempted from tax. However, this exemption only applies to employees whose taxable employment income before bonus and overtime allowances does not exceed the lowest tax band, that is, Kshs. 134, 164 pa.

Besides, corporation tax rate has been reduced from 30% to 15% on every company that constructs at least 400 housing units per year. This is, however, subject to approval by the Cabinet Secretary responsible for housing.

Section 6 of the Act has amended section 15 of the ITA to make expenses incurred in sponsoring sports activities by both individuals and corporates tax deductible. However, such deduction requires prior approval by the sports Cabinet Secretary.

Section 8 of the Act amends section 34(2) by deleting paragraph I of the ITA  which abolishes tax charged on lottery winnings that was payable by lottery winners.

Finally, transfer of assets between spouses, former spouses as part of a divorce settlement or a bona fide separation agreement, to immediate family, to immediate family as part of a divorce or bona fide separation agreement or to a company where spouses or a spouse and immediate family hold 100% shareholding is exempted from capital gains tax.

Value Added Tax Act No. 35 of 2013

The following items are now exempted from VAT:

  • Any service charge paid in lieu of tips.
  • Goods and services imported or purchased locally for use by the local film producers and local filming agents upon recommendation by the Kenya Film Commission subject to approval by the Cabinet Secretary to the National Treasury.
  • Goods for use in the assembly manufacture or repair of clean cooking stoves approved by the Cabinet Secretary upon recommendation by the Cabinet Secretary for the time being responsible for matters relating to energy.
  • Items used in the manufacture of sanitary towels.
  • Taxable goods for the direct and exclusive use for construction of specialized hospitals with accommodation facilities upon the recommendation by the Cabinet Secretary responsible for health; and
  • Entry fees into the national parks and national reserves, services of tour operators, excluding in-house supplies.

Further, fuel VAT exemption has been extended by a further 2 years from 1st September 2016 and liquefied petroleum gas has been moved from the exempted items list to zero rated items.

Tax Procedures Act (TPA)

The TPA has been amended to include a requirement that where a non-resident person with no fixed place of business in Kenya is required to register under a tax law, the non- resident person shall appoint a tax representative in Kenya in writing. This means that foreigners will not be able to obtain tax PIN certificates without making such an appointment.

The Act further requires that overpaid tax is to be refunded within a period of two years from the date of application, failure to which the amount due shall attract an interest of 1% per month or part thereof of such unpaid amount after the period of two years.

Besides, any tax refunded to a tax payer in error shall attract an interest of 1% if payment is not made within 30 days of the date of service demand by the commissioner. Interest chargeable shall however not exceed 100% of the taxes originally due.

Betting, Lotteries and Gaming Act

This act has been amended to introduce the following three taxes:

  • Betting Tax

Section 80 of the Act has amended section 29 to introduce a betting tax chargeable at the rate of 7.5% out of the gaming revenue. Gaming revenue here means gross turnover less the amount paid out to customers as winnings.

  • Gaming Tax

This is chargeable at the rate of 12% of the gaming revenue. The tax shall be paid to the Collector by a person carrying on a gaming business on the 20th day of the month following the month of collection.

  • Lottery Tax

Section 82 the Act has amended section 44 to introduce this tax chargeable at the rate of 5% of the lottery turn over. The tax is to be paid to the Collector by a person authorized to promote the lottery on the 20th day of the month following the month of collection.

  • Prize Competition Tax

Chargeable on the cost of entry to a competition which is premium rated at the rate of 15% of the total gross turnover.  The tax is to be paid to the Collector on the 20th day of the month following the month of collection

Tax Appeals Tribunal Act

Section 64 of the 2016 Act amends the Tax Appeals Tribunal Act to allow advocates to represent appellants before the Tax Appeals Tribunal.

The Retirement Benefits Act

Section 49 of the Act has amended section 29 of the Retirement Benefits Act to allow for issuance of perpetual licences. The section now reads as follows:

‘A certificate of registration issued to a manager, custodian or administrator shall be valid from the date of issue and shall, unless suspended or revoked, remain valid. An annual fee should be paid to the authority as prescribed. Current audited financial statements, a list of the directors and top management, any changes in clientele and such further information as the Authority may request should be submitted to the Authority by the 30th  September of every year.’

The Capital Markets Act Cap

Section 49 of the Act has amended section 12 to this Act, to add into the authority the power to carry the operations and supervision of online forex trading activities and online forex brokers. By dint of amendments to section 2, “online forex broker” means a body corporate duly licensed by the Authority to engage in the business of online trading in foreign exchange as an agent of investors in return for a commission and on its own account.

The Banking Act

Section 31(3) (b) of the Banking Act has been amended to include among institutions that are affected by credit information sharing regulations Sacco Societies, Co-operative Societies, Public Utility Companies and any other institution mandated to share credit information under any written law.

Consumer Protection Act

Section 62 of this act has been amended at clause 5 to exempt its application to a credit agreement where the lender is either a bilateral or multilateral foreign financial institutions