People often say that they have an interest in land or that they wish to own, purchase or transfer an interest in land. But what are these interests?
It is important that people purchasing property understand the various interests under which land is held in Kenya. This has certain ramifications, including:

• The period for which land can be held by a particular owner
• Various terms and conditions under which land is held
• Due diligence to be conducted on acquisition of property
• Consent required in the transaction
• Various title and security documents appurtenant to the various interests in land

What is an interest in land?

Article 40 of the Constitution guarantees the right of every individual to acquire and own land in Kenya, either individually or in association with others. However, this right does not extend to property that is found to have been unlawfully acquired. The right is further subject to Article 65 of the Constitution.

In this regard, Kenyan citizens have the right to own land of any description in any part in Kenya.
Further, they cannot be deprived of their right over or interest in land, except under exceptional circumstances provided by the Constitution.

Interest in land can be either legal or beneficial. ‘Legal interest’ refers to formal ownership of an interest in or right over land. ‘Beneficial interest’ refers to the right to receive benefits resulting from the land (eg, sale proceeds or rental income). A beneficial interest can be held and transferred separately from the legal interest in land. It is important to confirm whether the interests are held legally or beneficially.

Rights and interests can be divided into two classes: freehold and leasehold.

Freehold interest

Black’s Law Dictionary defines ‘freehold interest’ as an estate in land held in fee simple, fee tail or for term of life. The word ‘fee’ means an estate of inheritance. It is an estate, which on the death of the owner, can descend to the heirs and the estate may continue forever. A fee simple generally descends to the heir and even to collaterals, while a fee tail descends only to lineal descendants and was originally designed to keep land in the family. On the other hand, an estate for a term of life is not an interest of inheritance and cannot continue forever.

In Kenya, freehold interest is recognised under the Registered Land Act (Cap 300, Laws of Kenya).
The title document is a title deed or land certificate and the concept of ‘freehold’ is referred to as absolute proprietorship. The Registration of Titles Act (Cap 281, Laws of Kenya) also recognises the concept. The title documents is typically a certificate of title or grant and the proprietor is often stated as holding the estate in fee simple. The Government Lands Act (Cap 280, Laws of Kenya) also confers freehold interests, usually in fee simple, and the title document is generally a conveyance.
These interests can descend to heirs and be transferred.

Leasehold interest

Unlike freehold interest, leasehold interest is granted for a fixed term. The terms can be 50 years, 99 years, 999 years or a period otherwise stated in the title document. Various types of leasehold interest exist. However, the common thread that runs through the terms is that a leasehold interest in land is an interest for exclusive possession and profit of land for a fixed period and usually in consideration of payment or rent (often nominal and referred to as a ‘peppercorn rent’). It is a contract for the grant of time in land. When purchasing such properties, it is important to consider the term of the lease and the various conditions under which a proprietor holds it.

On expiry of a leasehold term, the property reverts to the government. Proprietors of leasehold titles should ensure that they adhere to the conditions under which the land is held and apply for renewal.
The process of application for renewal should commence at least two to three years before the term expires.

The leasehold interest is recognised under the Registered Land Act (Cap 300, Laws of Kenya), wherein the title document is a certificate of lease. The Registration of Titles Act (Cap 281, Laws of Kenya) also recognises leasehold interests, where title documents can be either a grant or certificate of title, with terms and annual rent indicated. The Government Lands Act (Cap 280, Laws of Kenya) also confers leasehold interests.

Foreigners and interest acquired in land

While the Constitution grants all persons the right to own land in Kenya, Article 65 states that foreigners can hold land in Kenya only under a leasehold tenure. Such a leasehold tenure cannot exceed a 99-year term. However, on expiry of the leasehold term, lease renewal may be sought.

Any document which purports to confer on a foreigner an interest in land greater than a 99-year lease is regarded as conferring a 99-year lease and no more. This means that foreigners can purchase freehold land and leasehold land for more than 99 years. Even so, the implication of the Constitution’s provisions is that this is deemed as conferring a 99-year leasehold interest only on the foreigner.

It is important that persons purchasing land are aware of the type of interest that they are acquiring and the conditions under which the land is held. Some financiers will not accept titles for land with a leasehold term below a certain number of years as security. The issue of the various interests held in land can be ascertained by engaging qualified professionals in land transactions.

Can foreigners own property in Kenya?

Foreigners can own property in Kenya in their name. The Constitution (2010), the Lands Act (6/2012) and the Land Registration Act (3/2012), subject to certain limitations, grant the right to any person, either individually or in association with others, to acquire and own land in Kenya. This is important as many foreign investors have been duped into believing that they cannot own land in their own name in Kenya.

In Hartmann v Mbogo (Civil Case 222/2007), Grounstra v Wanje (Civil Case 284/2007) and many similar cases involving coastal properties, foreigner investors have entered into agreements and
arrangements with locals with a view to the locals purchasing properties on their behalf. This is usually based on the alleged representation that a foreigner cannot own land in their own name. Such unnecessary partnerships between locals and foreigners often turn sour and should be avoided.

Before a foreigner purchases property, proper research should be undertaken and qualified professionals should be engaged.

Limitation of property ownership

The limitations of property ownership in Kenya by foreigners can be found in the Constitution and the Land Control Act (Cap 302).

As per Article 65(1) of the Constitution, a “person who is not a citizen may hold land on basis of leasehold tenure only, and any such lease, however granted, shall not exceed ninety nine years”. However, on expiry of the leasehold term a renewal of the lease may be sought. Article 65 further provides that any document which purports to confer on a foreign investor an interest in land with a lease of more than 99 years is deemed and regarded as conferring on that foreigner a 99-year lease and no more. This means that foreign investors can purchase leasehold properties for more than99 years. However, the constitution implies that it will be deemed as conferring only a 99-year leasehold interest on the foreigner.

A company, as per the Constitution and for purposes of property ownership, is regarded as a Kenyan company only if it is wholly owned by one or more Kenyan citizens. Therefore, a company with foreign shareholders is regarded as a foreign company and cannot own freehold land. Moreover, a trust cannot be formed to obviate this requirement. The Constitution was promulgated on August 28 2010. Under Article 8(1) in the Sixth Schedule to the Constitution, any freehold interest in land in Kenya held by a person who is not a Kenyan citizen shall revert to the Republic of Kenya to be held on behalf of the people of Kenya, and the state will grant a peppercorn rent for 99 years to that individual. This means that from the effective date, any freehold land or absolute proprietorship held by a foreigner is truncated to a 99-year lease with a peppercorn rent. The government has been forced to call for these Real Estate – Kenya Author Mwangi Karume titles and issue foreigners with leasehold titles with a commencement date of August 28 2010.

Agricultural land

Under the Land Control Act transactions affecting agricultural land and other land which may be gazetted by the minister of lands are defined as ‘controlled transactions’. Controlled transactions are void in law for all purposes unless the land control board for the land control area or division in which the land is situated has given its consent in respect of the transaction.

As per the act, the land control board cannot grant consent to a transaction in which the land is to be disposed of by way of sale, transfer, lease or exchange or partition to a person who is not:

• a Kenyan citizen;
• a private company or cooperative society, all of whose members are Kenyan citizens;
• a group representative incorporated under the Land (Group Representatives) Act; or
• a state corporation as per the State Corporation Act.

The effect of this is that foreign investors and private companies owned by foreigners cannot hold agricultural land in Kenya. However, through a notice in the Kenya Gazette, the president may exempt any person from all or any of the act’s provisions. Therefore, foreign investors wishing to acquire agricultural land may apply for such exemption. Further, public companies in which foreigners are members may acquire agricultural land.

Dummy companies and nominees

One of the ways in which foreign investors attempt to circumvent limitations to property ownership is by incorporation of companies whose shareholders are indicated as local in the Companies Registry. The Kenyan shareholders then enter into a declaration of trust with the foreign investors.

The declaration of trust will usually state that local shareholders are the legal but not beneficial owners of the shares in the company. Another approach is to use nominees to enter into property transactions and own property on behalf of foreign investors.

These approaches are void and unenforceable as they go against the Constitution and the law. The Constitution provides that any property held in trust shall be regarded as being held by a Kenyan citizen only if all of the beneficial interests of the trust are held by persons who are Kenyan citizens.
The use of dummy companies and nominees therefore puts investments at risk.

Property ownership, whether solely or in concert with others, is a dream held by many. Such aspirations are a nick and notch higher today than probably at any other time in the past, thanks to the ever increasing value of Real Estate in Kenya.

However, not everybody has the luxury of simply approaching a Real Estate agent and purchasing property or undertaking property development without the financial hassles or the myriad laws and regulations that stand in the way of property acquisition and development.

Accordingly, persons aspiring to make successful Real Estate investments may consider entering into a Joint Venture (JV) to acquire property. Entering into a JV may be the second best option to purchasing property as a sole proprietor. However, as noted from Justice Warsame’s comments in Santack Enterprises Limited v. Kenya Building Society Limited as reproduced above, JVs are not without problems. Proper advice, legal and otherwise ought to be sought and due diligence carried out prior to entering into a JV.

What is a JV?

A JV is an entity formed between two or more parties to undertake economic activity. In the Real Estate realm, JVs are a conduit for providing equity funding for property projects. Parties to a JV are usually referred to as Co-venturers or Venture Partners.

JVs apply to an array of Real Estate transactions. These range from mega-deals involving commercial properties, institutions, public trading companies, cross-border dealings to smaller transactions between local developers and property owners. A norm in JV transactions is that they involve intercourse between providers of capital and providers of Real Estate or Real Estate services.

At the onset of a successful JV, Co-venturers ought to ensure that all the pertinent issues, including the following are clear in their minds:-

1. The scope of the JV: Co-venturers must be able to, at the least, delineate the activities and objectives the JV intends to carry out and those which it ought to refrain from doing. Three business concerns ought to be addressed in this regard:
   • The JV structure ought to provide Co-venturers with appropriate risk adjusted returns if the business deal is successful;
   • The JV structure ought to provide a mechanism for restructuring and salvaging the deal if things do not go as planned;
   • Ensure that technical legal, tax and accounting matters do not have unexpected adverse effects on the deal.
2. Existing and potential future conflicts between the Co-venturers need to be appreciated and addressed appropriately. This would facilitate agreement on such matters as non-compete issues and confidentiality obligations;
3. Issues of technology and intellectual property either to be transferred to the JV or to be granted by the Co-venturers;
4. Inter-corporate or individual arrangements that either will be required for the JV to operate or that are required to make the investment in the JV carry on the Business deal as envisaged by the co-venturers;;
5. Due-diligence to be completed before the JV is effective so as to minimize or eliminate exposure to the co-venturers.

What Form Does the JV take?

Once Co-venturers decide to enter into a JV, there must be a formal agreement to govern the relationship between the Co-venturers and the JV entity itself. The formal Agreement entered into is called a Joint Venture Agreement (JVA). It is the JVA that brings into existence the JV entity. The JVA further sets out the formal structure in which the JV will take. The structure of the JV may be in the following forms:-

i) A company or group of companies, jointly owned by the Co-venturers;
ii) A partnership by the Co-venturers; and
iii) A contractual relationship usually governed by contract (the JVA) under which the Co-venturers would retain their assets and agree as to their separate rights and obligations.

Multiple issues come into play when deciding which JV vehicle to use. Some of these issues include legal and regulatory, tax, labour and employment, antitrust, benefits, consents and clearances to be obtained, exit strategies, banking and finance concerns, amongst others. Proper advice should be sought from competent and qualified professionals in the various fields to ensure that Co-venturers’ interests are protected.

How are the Interests of the Co-venturers in a JV to be protected?

As noted, the JVA brings into existence the JV. The JVA is key in setting out the relationship between the Co-venturers. The JVA sets out the rights, liabilities, duties and obligations of each party in the JV. It is the JVA and its ancillary documents, comprehensively and properly drawn, that enshrine clauses geared towards protection of the Co-venturers’ and other parties’ interests.
The JVA simply put, defines the ownership rights and obligations of each party to the contract. Hence, it would suffice to form and negotiate a JVA under which all parties to it are equally and effectively addressed.

In this regard, the JVA will clearly state the Parties to the JVA. It will also delve into the issues of governance and management of the JV including the management board, meetings of Co-venturers, managers’/directors’ and officers’ liability and insurance, audit process, reporting and access of information, actions requiring various consents, business plans and budget control and approval.

The JVA also addresses the business to be undertaken by the JV. In this regard, the Co-venturers will ensure the following are addressed: the core business to be undertaken by the JV, distribution of profits or losses and the formula thereof, capitalization of profits, financing of the JV by Co-venturers, Third party financing e.g. from banks, support services to be provided, intellectual property or technology to be transferred, non-compete and non-solicitation clauses, share transfer restrictions, pricing and valuations.

The JVA should also be clear on what happens if a party is in default or breaches the terms of the JVA. There should be a clear closing process so as to ensure that the rights and obligations under the JVA can be enforced. Other clauses would address: trigger events for termination and dissolution of the JVA, dispute resolution mechanisms and applicable laws and post termination covenants amongst other terms. It is therefore important to seek legal advice on these and related matters to ensure that one’s interests are protected.

Real Estate Joint Ventures may be structured in different forms. From experience, it is evident that a carefully structured legal framework definitely aids the Co-venturers work together on the basis of mutual trust, minimizes risk and exposure, and most importantly it plays a crucial role in the success of the Joint Venture. Clear provisions governing the potential risks and conflict also promotes effective and timely decision making, reduces uncertainty and helps prevent protracted delays in the functionality of the Joint Venture.

Welcome to our second newsletter of the year 2019. In this quarter, we identify the importance of fatherhood and the joy it brings to the male figures of our homes.

As we get well into the year and start preparing our quarterly reports, we invite you to our quarterly briefing here at NR & Co. Our legislative updates this quarter will give much insight into the new laws on energy, petroleum and urban planning.