East African Property Investment Summit

Posted on July 16th, 2019

Our Partners Pamella Ager and Nelly Gitau participated in the 6th annual East African Property Investment Summit, that took place on 10-11 April, 2019 at the Radisson Blu Hotel - Nairobi. Themed “Driving Affordability & Opportunity Through the Property Value Chain”, the conference offered a platform for the regions’ leading developers, investors and public sector stakeholders to exchange insights, debate, network and close deals through an intensive and collaborative two-day agenda.

Pamella and Nelly practice in the conveyancing and real estate practice group of the firm and have significant experience working on  some of the country’s most notable real estate projects. For more information about the event, click here

Kosgei Kipkirui

Head of Business Development

T: +254 709 250 000/735

E: gkosgei@oraro.co.ke

Unresolved: An Assessment of the National Land Commission

Posted on May 31st, 2019

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The land “problem” in Kenya dates back to the colonial times, with the alienation of land to European settlers stoking the fires of the struggle for independence. Subsequent allocation of the same land after independence to well positioned individuals and companies, did not solve the problem. Since independence, the legal and institutional framework relating to land has been fraught with tension, strife and copious litigation.

The Constitution of Kenya, 2010 provides for the formation of the National Land Commission (NLC) under Article 67 (1). Article 67 (2) stipulates the functions of the NLC. Further, Article 68 provides that the Parliament should revise and rationalise existing land laws and enact new ones. Pursuant to these provisions, the Land Act, 2012 (the Land Act), Land Registration Act, 2012 (the Land Registration Act) and the National Land Commission Act, 2012 (the NLC Act), were enacted. The NLC Act makes further provisions on the functions and powers of the NLC, including qualifications and procedures for appointment to the NLC. It also gives effect to the objects and principles of devolved government in land management and administration, and for connected purposes.

The establishment of the NLC was touted as a catalyst to Kenya’s land reforms that would have a domino effect of spurring economic growth. The key functions of the NLC include managing public land on behalf of the national and county governments, recommending a national land policy to the national government, advising the national government on a comprehensive program or the registration of title in land throughout Kenya and conducting research related to land and the use of natural resources, and make recommendations to appropriate authorities. The NLC also has the mandate to initiate investigations, on its own initiative or on a complaint, into present or historical land injustices and recommend appropriate redress, encourage the application of traditional dispute resolution mechanisms in land conflicts, assess tax on land and premiums on immovable property in any area designated by law and monitor and have oversight responsibilities over land use planning throughout the country.

The coming to an end of the tenure of the first commissioners of the NLC on 19th February 2019, invites the opportunity to assess and appraise the work of the NLC and to consider whether the NLC achieved its mandate as stipulated in the Constitution and the NLC Act. The establishment of the NLC brought with it rays of hope that the recurrent land issues in the country would be addressed with finality.

The recognition of the NLC as a constitutional commission exuded a new dawn in the arena of land management and administration policy, having been anchored in the supreme the law of the land. However, the following issues bedeviled the NLC no sooner had it commenced its operations.

Conflict over Roles

The jurisdictional conflict between the Ministry of Lands and Physical Planning (the Ministry) and the NLC erupted right from inception of the NLC. There was a vicious “turf war” between the Ministry and the NLC as to whose responsibility it was to undertake critical functions such as the extension and renewal of leases. This led the NLC to seek an advisory opinion from the Supreme Court concerning its roles vis-à-vis those of the Ministry.

By its advisory opinion In the Matter of the National Land Commission (2015) eKLR, the Supreme Court underscored the interdependence of the two institutions, in the sense that none was intended to work independently from the other. Rather, both were meant to work in consultation, to ensure that a system of checks and balances was enforced.

In analysing the NLC’s role under the Land Act, including functions such as the extension and renewal of leases over private land, conversion of land from public to private or vice versa, compulsory acquisition of land for a public purpose or undertaking land settlement programmes, the Supreme Court observed that “the foregoing provisions entrust the NLC with the responsibility of protecting and overseeing the public’s rights and interest, under the Constitution. However, the NLC’s mandate in that regard is not held exclusively and is not unqualified – provision is made for approval from the National Assembly and the consent of the National Government or relevant County Government. This provides a check-and-balance system, to ensure that the NLC operates within the prescribed limits.”

The Supreme Court noted that the NLC’s mandate entailed the processes leading to the issuance of title, whilst the Ministry’s role was the actual issuance of titles. On this point, the Court observed that “…The NLC has a mandate in respect of various processes leading to the registration of land, but neither the Constitution nor statute law confers upon it the power to register titles in land. The task of registering land title lies with the National Government, and the Ministry has the authority to issue land title on behalf of the said Government.” Notwithstanding the distinction of roles, the Court nevertheless reiterated the aspect of interdependence as follows:
“The Constitution’s mandate falls to the three State organs, in an operational context of check-and-balances: and the various Commissions act as oversight and watchdog mechanisms. Hence, each of the functions of the NLC and the Ministry stands to be checked by the one or the other, in order to avoid abuse of power in matters relating to land. The unchanging theme throughout the Constitution, is that the relationship between these two bodies is inter-dependent and based upon co-operation; it is not an agency relationship. As the Ministry conducts its functions, the NLC acts as a watchdog, to ensure compliance with the Constitution, and with legislation. Likewise, the NLC as an oversight body, maintains its functional, financial and operational independence, while still being overseen and checked by the public, by other independent offices, and by the three arms of Government.”

Revocation of Titles

The NLC had been holding periodic sittings concerning the legality of titles at the end of which, it would revoke titles for properties considered to have been acquired illegally or irregularly. It would then proceed to publish lists of revoked titles in the Kenya Gazette and in newspapers of nationwide circulation. These revocations were challenged in the Environment and Land Court and several cases have thus addressed the point.

In Robert Mutiso Lelli and Cabin Crew Investments Limited v National Land Commission & 3 Others (2017) eKLR, whilst considering whether the NLC had jurisdiction to revoke titles to land even where it finds, after inquiry, that such title was irregularly acquired, the Court noted that there was no legal provision for the NLC to revoke titles even if upon inquiry it establishes that such titles were unlawfully or irregularly acquired. The power to revoke title was vested in the Registrar and not the NLC which could only recommend revocation.

Historical Land Injustices

Article 67 (2) (e) of the Constitution empowers the NLC to investigate historical land injustice and recommend the appropriate redress. The NLC Act replicates the same functions in section 5. Section 15 of the NLC Act defines historical land injustice as a grievance which meets the following criteria:

  • Was occasioned by a violation of right in land on the basis of any law, policy, declaration, administrative practice, treaty or agreement
  • Resulted in the displacement of persons from their habitual place of residence
  • Occurred between 15th June, 1895 when Kenya became a protectorate under the British East African Protectorate and 27th August, 2010 when the Constitution was promulgated
  • Has not been sufficiently resolved and subsists up to the period specified above
  • The act which the claim is based on should be verifiable as having resulted in the displacement of the claimant or another form of historical injustice
  • The claim cannot be addressed through the ordinary court system on the basis that it was illegal at the time the injustice occurred or is time barred
  • The claimant was either the proprietor or occupant of the land upon which the claim is based
  • The claimant did not at any time surrender or renounce his right to the land in question
  • The claim is brought within five (5) years from the commencement of the NLC Act i.e. 2nd May, 2012

Going by the last requirement, it is clear that the window period for lodging claims for historical injustices, expired on 1st May, 2017. This means that the NLC’s role as far as historical injustices are concerned has lapsed and it cannot receive new complaints after 1st May, 2017, but can only dispense with matters that were lodged before then. It is noteworthy that there was an opportune moment for extending the said deadline when the Land laws were revised in 2016. However, this provision was not addressed, meaning the deadline of 1st May, 2017 remains effective.

It is also interesting to note that The National Land Commission (Investigation of Historical Land Injustices) Regulations, which were meant to operationalise section 15 of the NLC Act, were gazetted on 6th October, 2017, some five (5) months after the deadline lapsed. Equally interesting is the fact that time is fast running out for the claims the NLC admitted before the deadline and is currently handling. Section 15 (11) of the NLC Act provides that the provisions of the entire section 15 will be repealed within ten (10) years. The NLC Act as previously noted, came into force on 2nd May, 2012. Therefore, the statutory timeframe on addressing historical land injustices will lapse on 1st May, 2022. This means that all the cases the NLC is handling should be concluded within the next three (3) or so years.

The Way Forward

The importance of the interdependent relationship between the NLC and the Ministry, as advised by the Supreme Court, cannot be overemphasised. If the spirit of the Constitution is to be upheld, the two (2) institutions should work in harmony and consult each other. As their roles and functions are interdependent, none can fully discharge its mandate in isolation of the other. Consultations will also be invaluable as a check and balance mechanism to ensure that the NLC does not exceed its mandate in future, as it did with the revocation of titles.

There is also need to revise the timelines on the investigation of land injustices, as the ten (10) year deadline may not be realistic, especially for sensitive matters that may have been protracted due to the plurality of claims. In the interest of substantive justice, there may be need to extend the NLC’s mandate in this regard, to ensure it has adequate time to determine such important matters. Perhaps it may also be necessary to extend the five (5) year window on the admission of claims, as there may be genuine cases where persons were prevented from lodging their claims before 1st May 2017.

Housing Fund Levy Set to Take Effect Next Month

Posted on April 16th, 2019

By Geoffrey Muchiri | Georgina Ogalo-Omondi

The Principal Secretary in the Ministry of Housing and Urban Development has today announced the coming to effect of the Housing Fund Levy (the levy) introduced, under the Finance Act, 2018.

The employer and the employee shall each be required to contribute 1.5% of the employee's monthly basic salary to a maximum of Kenya Shillings Five Thousand (KES 5000). Voluntary contributions will also be accepted to the scheme at a minimum of Kenya Shillings Two Hundred (KES 200) per month.

According to the notice, the levy shall fall within other payroll statutory deductions such as PAYE, NSSF and NHIF that are deducted by an employer every month. The first contribution shall be due by May 9th 2019.

The purpose of the levy is to finance the Affordable Housing Scheme under the Big 4 Agenda which will enable employees to purchase a home under the scheme, transfer the contributions to a pension scheme, transfer the contributions to another person under the scheme or, as cash to self, spouse, or a dependent child.

We shall update you as this matter unfolds.


Should you require further information on this subject please contact Geoffrey Muchiri (Partner) or Georgina Ogalo-Omondi(Partner).

Does Your Development Require an Environmental Impact Assessment Licence?

Posted on September 12th, 2018

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Kenya has experienced a boom in development projects in the last couple of years with resulting transformation of whole neighbourhoods as the demand for land outstrips the prescribed zones. This rapid growth is due to growth in population leading to a soaring demand for housing in most parts of the country and a huge deficit in infrastructure such as rail, roads and ports. There are many considerations that prospective developers must deliberate on including the availability of raw materials, funding and compliance with laws such  as the Physical Planning Act, Cap 286 Laws of Kenya and the Environment Management Coordination Act, Cap 387 Laws of Kenya (EMCA) as well as various provisions of the Constitution.

The impact of a proposed development on the environment is critical and the regulatory body charged with approving the environmental aspects of projects and issuing the relevant environmental licences is the National Environment Management Authority (NEMA). The requirements of EMCA  with  respect to development projects reflect a worldwide appreciation of  the adverse effects of unbridled development that now find a Constitutional anchor in the right to a clean and healthy environment and  public  participation  as  well   as the obligations of the Courts under Article 70 of the Constitution. These concerns are aptly captured by the phrases sustainable development and the pre-cautionary principle. With such enhanced rights and greater awareness, developers increasingly experience spirited resistance from residents and environmental activists.

At the heart  of  numerous  cases  filed in the National  Environment  Tribunal is the challenge by objectors of proposed developments with respect to developers’ failure to conduct a proper Environmental Impact Assessment (EIA) as well as irregularities in the grant of EIA Licences.

When is an EIA report necessary?

An EIA is a systematic examination conducted to determine whether or not a programme, activity or  project will have any adverse impact on the environment.  The  requirement  of  an EIA licence is prescribed in Section 58 of EMCA. It provides that any person, being a proponent  of  a  project, shall before financing, commencing, proceeding with, carrying out, executing or conducting any undertaking specified in the Second Schedule of the Act, submit a project report to the Authority in the prescribed form. The proponent of the project is to undertake the EIA study at its own expense.

Section 1 of the Second Schedule sets out general projects that require EIA to include any activity out of character with its surrounding, any structure of a scale not in keeping with its surrounding and major changes in land use. Section 2 provides a more specific and comprehensive list of projects such as urban development, transportation, dams and rivers, mining, forestry and agriculture.

In the recent case of Registered Trustees of Jamie Masjid Ahl-Sunnait- Wal-Jamait Nairobi v Nairobi City County & 2 others [2015] eKLR the Plaintiff owner of a mosque sought to challenge the ongoing development of a public toilet facility by the 1st Defendant who owned the adjoining land. The Plaintiff contended that the intended project required a proper EIA and that the project being commercial in nature would result in a major change in land use. It was the 1st and 2nd Defendant’s argument that the project did not fall under the projects prescribed in the Second Schedule of the Act.

The question faced by the Court was if a project does not fall within those listed in Section 2 of the Second Schedule, then who ought to determine if it falls within the general provisions of Section 1?

The Court stated that section 58 (1) of the EMCA suggests that the proponent of the project is the one to determine whether the project falls under the Second Schedule. The Court went on to state that the criteria for determination would be to first ascertain if the project falls and is specified under any of the sections of the Second Schedule. If it does not then a determination has to be made if it falls within section 1 of the Second Schedule. The Court recognized that this is not a simple task. The second criteria  would  be  to  appreciate  and understand that an EIA is intended to help protect the environment. Third, would also be to appreciate and understand that the “EIA process is indeed to be an aid to an efficient and inclusive decision making in special cases, not an obstacle race”.

The relevant matters that the developer ought to take into account in screening the project for the necessity of an EIA include but are not limited to:-

  1. the characteristics of the intended development;
  2. the location of the intended development and characteristics of potential impact;
  3. the size of the development as well as cumulation with other neighboring developments;
  4. the probability of any environmental impact; and
  5. the duration and reversibility of such

The Court in the above case conclusively held that it was not enough to read through the second schedule to the EMCA and state that the intended project does not fall under the  said schedule. The above listed matters must be exhaustively considered by the proponent and only upon thorough analysis of these matters shall a proponent  rightfully  conclude  that an EIA report is not required. To this end, the Court granted the injunction prohibiting further works on the ground that there was no indication of the criteria used by the 1st and 2nd Defendants in determining whether or not an EIA was necessary.

Therefore, it is important that proponents adhere to such guidelines in the interest of progressive, timely and sustainable development. The lesson of Registered Trustees of Jamie Masjid Ahl-Sunnait- Wal-Jamait Nairobi v Nairobi City County & 2 others [2015] eKLR is that in a sense developers should adopt for their developments the precautionary principle in favour of conducting an EIA and obtaining a licence.

Section 23 of the Registration of Titles Act – Did it Really Protect the Bona Fide Purchaser?

Posted on September 12th, 2018

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The Registration of Titles Act(Cap. 281) now stands repealed. Nonetheless, disputes in respect of land registered under the repealed Act, particularly those centered on the protection proffered by section 23 of the Act to bona fide purchasers for value without notice, will continue to rage on as we slowly transit into a new era of land laws.

The Registration  of  Titles Act was a product of the Torrens system of registration – a system which places emphasis on the accuracy of the land register and insists that the register must mirror all currently active registrable interests affecting a particular parcel of land.

The Government, as the keeper of the master record of all land and its respective owners, guarantees the indefeasibility of all rights and interests shown in the land register against the entire world; and in case of loss arising from an error in registration, the person affected is guaranteed Government compensation.

The statutory presumption of indefeasibility and conclusiveness of title under the Torrens system is rebuttable only by proof of fraud or misrepresentation, in which the buyer is involved. The object of the Torrens system was summarized in the Privy Council decision in Gibbs v Messer as follows:

“The main object of the Act and the legislative scheme for the attainment of that object are equally plain. The object is to save a person dealing with registered proprietors from the trouble and expense of going behind the register, in order to investigate the history of their author’s title and to satisfy themselves of its validity. That end is accomplished by providing that everyone who purchases, in bona fide and for value, from a registered proprietor and enters his deed of transfer or mortgage on the register, shall thereby acquire an indefeasible right, notwithstanding the infirmity of his author’s title.”

Back home in Kenya, the indefeasibility of title has received lip service from the Kenyan Courts including our own Court of Appeal. A case in point is the Appellate Court’s decision in Dr. Joseph Arap Ngok v Justice Moijo ole Keiwua, where the Court pronounced itself as follows:-

“Section 23 (1) of the Act gives an absolute and indefeasible title to the owner of the property. The title of such an owner  can  only  be  subject to challenge on grounds of fraud or misrepresentation to which the owner is proved to be a party; such is the sanctity of title bestowed upon the title holder under the Act.  It  is  our law and law takes  precedence  over all other alleged equitable rights of title. In fact, the Act is meant to give sanctity of title, otherwise the whole process of registration of title and the entire system in relation to ownership of property in Kenya, would be placed in  jeopardy.”

It would therefore appear that a plain reading of section 23 suggests that a bona fide purchaser is assured of protection, notwithstanding that previous dealings might be shown to have been mired in fraud. However, following a recent decision of the Court of Appeal in the case of Arthi Highway Developers Ltd v West End Butchery Ltd & Others, it seems that the protection offered by section 23 is not quite as indubitable as first thought. In this decision, the Court struck down as invalid titles transferred to bona fide purchasers, after having found that there was fraud in the initial transfer from the first owner. In applying the nemo dat quod non habet (no one gives who possesses not) principle (which principle has no application to immovable properties), the Court found that the fraudsters did not obtain good title to pass on to the bona fide purchasers.

Yet the Court of Appeal’s decision in the Arthi Highway Developers case is at glaring odds with an earlier decision by the same Court in Permanent Markets Society & Others v Salima Enterprises & Others, where it was held that even where it is shown that previous registrations were obtained illegally, the title of the last bona fide purchaser for value was indefeasible under section 23.

In view of the conflicting decisions emanating from the Court of Appeal as to the extent of protection offered by section 23 of the Registration of Titles Act, all eyes now turn to the Supreme Court to pronounce itself on the matter and hopefully lay to rest the spectre of section 23.

This follows the Supreme Court’s granting of leave to appeal to the said Court (the Court of Appeal having refused to grant leave to appeal on the basis that there was no controversy as to the application of section 23) in the case of Charles Karathe Kiarie & Others v The Administrators of the Estate of John  Wallace  Mathare  (Deceased) & Others. We shall keep our  clients and readers updated on the Supreme Court’s decision in the matter.

Building a Strong “National” Foundation: Local Content in Kenya’s Construction Industry

Posted on September 12th, 2018

By Walter Amoko | Cindy Oraro

Co-authored by Loise Machira.

Background to the legislation

The construction industry in Kenya is regulated by the National Construction Authority Act (No. 14 of 2011) (the Act). Though the Act does not expressly make reference to the term “local content” it does have provisions that provide for both local and foreign contractors.

Categories of registration of contractors

National Construction Authority Regulations of 2011 (the Construction Regulations) provides for different categories of registration. Registration of contractors under NCA-1 category is open to both local and foreign contractors. On the other hand, any registrations that fall between NCA-2 to NCA-8 are restricted to local contractors only. This provision has the effect of restricting the type of work that a foreign contractor may undertake.

Registration of foreign contractors

The Construction Regulations define a “foreign contractor” as:

  • a firm incorporated outside Kenya; or
  • a firm incorporated in Kenya in which 51% of the shares are held by a non-Kenyan.

A foreign firm is required to make an application to the National Construction Authority before undertaking work under category NCA-1. The application must be accompanied by an undertaking in writing that the foreign contractor shall:

  • subcontract or enter into a joint venture with a local person or firm for not less than 30% of the value of the contract work for which temporary registration is sought; and
  • transfer technical skills not available locally to a local person or firm in such manner as the National Construction Authority may determine from time to time;

The National Construction Authority may register such joint ventures that a foreign contractor enters into with a local firm or person.  The Construction Regulations further require that the employees of such a joint venture be competitively recruited from the local labour market. Recruitment or employment of foreign technical or skilled workers on such contract shall only be done with the approval of the National Construction Authority where such skills are not available locally. It is important to note though that contractors may be exempted from this provision by the National Construction Authority.

Conclusion

Although the Act does not make express reference to “local content”, restrictions contained in the Act regarding local and foreign contractors could be argued to be an adaptation of local content policies because they give local contractors an opportunity to maximize on specific projects.

Related Insights

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On the rise: How REITs are changing the real estate landscape

A tale of two countries: A comparative look at Trusts in Mauritius and New Zealand

Section 23 of the Registration of Titles Act – Did it really protect the bona fide purchaser?

Does your development require an environmental impact assessment licence?

Landlords, Beware: The New Residential Rental Income Tax Provisions in the Finance Act, 2015

Posted on August 13th, 2018

By Lena Onchwari

Groundbreaking in many ways the Finance Act, 2015 (the Act) has had an impact on several sectors of the Kenyan economy. For instance, the statute has introduced a new tax known as “residential rental income tax” by inserting a new Section 6A in the Income Tax Act (Cap 470).

Residential rental income tax is now payable by any resident person (either individual or company) from income which is accrued in or derived from Kenya for the use or occupation of residential property, which does not exceed KES 10 million in a year. Landlords who wish to remain in the pre-existing tax regime (before the introduction of the residential rental income tax) can elect in writing to the Commissioner General of Kenya Revenue Authority(KRA), to be taxed under the normal tax rates.

The new residential rental income tax will be payable at the rate of 10% on gross rent received with effect from 1st January, 2016 and applies to rental income received from January, 2016. It is for this reason that KRA has given a deadline of the end of March 2016, requiring landlords to pay the residential rental income tax due on the rental income received from January, 2016, failure to which KRA will issue an estimated residential rental income tax assessment from the property information available and take various enforcement measures provided in the law.

Tax Amnesty

The Finance Act, 2015 also inserted a new Section 123C. This new section effectively gives landlords a 100% amnesty on principal taxes, penalties and interest for the year 2013 and prior periods. In addition, landlords will get an amnesty on penalties and interest for the years 2014 and 2015. However, in order to be entitled to this amnesty, landlords have to file returns and pay taxes for the years 2014 and 2015 on or before 30th June 2016.

Related Practice areas

Tax

Delving Deeper: A Closer Look at Local Content in Kenya’s Growing Mining Sector

Posted on August 13th, 2018

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Background to the legislation

Kenya intends to overhaul its mining laws currently contained in the Mining Act (Cap 306 of the Laws of Kenya) by passing the Mining Bill, 2014 that is currently being debated in Parliament. The Mining Bill, if passed in its current form, will introduce a range of new provisions among them being those on local content.

Principal objectives of local content regulations in the mining sector

Currently, the Mining Act does not make provision for local content. The rationale behind local content in the proposed Mining Bill lies in the need to develop the economy of a host nation and its surrounding region through mining activities.

(a) Local Equity Participation
The Mining Bill states that where a company whose planned capital expenditure is over the prescribed limit it shall, within 4 years after obtaining a mining licence, offload at least 20% of its equity at a local stock exchange. It should be noted, however, the Cabinet Secretary may extend the required period if he deems it fit after consulting with the National Treasury.

(b) Preference for Local Product
The Mining Bill requires for mineral right holders who are in the conduct of prospecting, mining, processing, refining and treatment operations, or any other dealings in minerals, to give preference to the maximum extent possible to:

  • materials and products made in Kenya;
  • services offered by Kenyan citizens; and
  • companies or businesses owned by Kenyan citizens.

(c) Employment
As a general requirement, mineral right holders will be under an obligation to give preference to Kenyan citizens when it comes to employment. The Mining Bill provides that before one is granted mineral rights in Kenya, one will be required submit for approval to the Cabinet Secretary responsible for mining a detailed programme for the recruitment and training of citizens of Kenya. This is aimed at ensuring skills transfer to and capacity building for the citizens.

The Cabinet Secretary will be required to make regulations to provide for:

  • the replacement of expatriates;
  • the number of years such expatriates shall serve;
  • the number of expatriates per capital investment; and
  • the collaboration and linkage with universities and research institutions to train citizens.

It is important to note that the Bill has categorized mining activities into large scale operations and small scale operations. Mineral rights for small scale operations will only be granted or be entitled to Kenyan citizens or a body corporate wholly owned by Kenyan citizens. On the other hand, when it comes to large scale operations, a holder of a mineral right will be required to:

  • only engage non-citizen technical experts in accordance with such local standards for registration as may be prescribed in the relevant law;
  • work at replacing technical non-citizen employees with Kenyans, within such reasonable period as may be prescribed by the Cabinet Secretary in charge of mining;
  • provide a linkage with the universities for purposes of research and environmental management;
  • where applicable and necessary facilitate and carry out social responsibility to the local communities; and implement a community development agreement

It is important therefore that interested parties confirm from the outset whether their mining activities would fall under large scale of small scale operations in order to be in a position to ensure compliance as the requirements for approvals in each of these operations are different.

On the Rise: How REITs are Changing the Real Estate Landscape

Posted on June 26th, 2018

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Introduction

Real Estate Investment Trusts or REITs as they are commonly referred to, have become the new frontier in the investment sector in Kenya. This is despite the fact that they have always been available as an investment option but for one reason or another, REITs have become more popular and increasingly attractive, even to the average investor who had always seen REITs as a niche investment for a select few. For most people, the possibility of owning property as expansive as Garden City Mall in Nairobi for instance, was next to impossible. This has been bolstered by a growing real estate market and advancement of earning power and net worth of individuals in Kenya. These changes, coupled with the access to information and the increasing interest in other forms of investment have resulted in the attractive allure of REITs today.

What is a REIT?

REITs are regulated investment vehicles that enable collective investment in real estate. Investors pool their funds and invest in a trust that is divided into units with the intention of earning profits or income from real estate, as beneficiaries of the

trust. A REIT is an entity that owns and typically operates income-producing real estate or related assets which may include among others, office buildings, shopping malls, apartments, hotels, resorts and warehouses.

A REIT is a vehicle through which investors earn a share of the income produced through commercial real estate ownership without actually having to go out and acquire commercial real estate. REITs also allow the investor the opportunity to have its properties managed by a professional real estate team that knows the industry, understands the business and can take advantage of opportunities. Most importantly REITs are excellent for the investor who wants to avoid capital risk as much as possible while enjoying a decent dividend or interest yield.

The Legal Framework governing REITs in Kenya

REITs are regulated by the Capital Markets Authority (CMA) under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013.
The high interest rates associated with real estate development and the undersupply of housing especially for the lower segment of the market have proven to be a challenge towards the further advancement of this sector. To remedy this, the Government seeks to encourage investment in real estate through REITs.

How do REITs Operate?

The Trustee acquires the Property and holds it on behalf of the beneficiaries (the Investors). The Trustee is responsible for the appointment and supervision of the Manager. It is also the Trustee’s responsibility to ensure that the assets of the scheme are invested in accordance with the Trust Deed and the Offering Memorandum and ensures that distributions from the assets of the REIT are made in accordance to the Offering Memorandum.

The Scheme is managed by a Professional Manager who is answerable to the Trustee. The Manager’s duty is to oversee the investment of the assets of the scheme and maintain proper accounting records and other records of the scheme. The Manager also collects rent and other income on behalf of the Trustee. The income is distributed to the Investors at the rate agreed upon in the Memorandum or at any other rate as may be agreed between the Trustee, the Manager and the Investors.

Prior to issuance of the Memorandum by the Trustee, the Scheme as well as the Offering Memorandum should be approved by the CMA. On invitation by the Trustee, the Investors pump capital in form of units with a view of having a return on investment within a specified duration.

Types of REITs

There are three types of REITs namely: Income REITs (also referred to as I-REITs), Development REITs (also referred to as D-REITs) and Islamic REITs.

I-REIT is a form of REIT in which investors pool their resources for purposes of acquiring long-term income-generating real estate including housing, commercial and other real estate. Investors gain through capital appreciation and rental income, with the latter being distributed to unitholders at the agreed duration.

D-REIT is a type of REIT in which resources are pooled together for purposes of acquiring eligible real estate for development and construction projects which may include among others housing or commercial projects. It should be noted that a D-REIT can be converted to an I-REIT once the development is complete where the investors in a D-REIT can choose to sell, reinvest or lease their shares or convert their shares into an I-REIT. An offer or issue in a D-REIT may only be made as a restricted offer to professional investors.

An Islamic REIT is a unique type of REIT that invests primarily in income-producing, Shari’ah-compliant real estate. A fund manager is required to conduct a compliance test before investing in real estate to ensure it is Shari’ah compliant and that non-permissible activities are not conducted in the estate and if so, then on a minimal basis.

Benefits to Investors

Investing in REITs offers the following benefits to investors:-

a) REITs offer investors especially the middle income class, easier access and ownership in the growing real estate sector in a manner which is not as capital intensive as a direct purchase of property.

b) More often than not, the value of the property appreciates thus minimizing the risk of capital loss.

c) Unlike direct investments in property which are generally illiquid, investments in I-REITs may easily be converted into liquid cash by selling the units in the market or offering them for redemption in the case of open-ended funds.

d) Investors in REITs have the advantage of investing in a variety of real estate e.g shopping malls, residential projects industrial projects e.t.c.

e) REITs provide investors with access to professionals such as property managers and fund managers who understand the industry and the business and can take advantage of opportunities.

f) REITs offer predictable income streams because of long-term lease agreements with tenants thus rental income and management expenses are predictable in both long and short time frames.

g) REITs are considered to be efficient from a tax perspective. This is discussed in detail below.

Taxation of REITs

One of the key advantages of investing in a REIT is the tax regime that governs REITs both from the REIT’s perspective and also from the investors’ perspective. The Kenyan government in an effort to encourage investments in real estate has put in place a tax regime that favours REITs. A REIT is generally exempt from taxation if it complies with REIT Regulations and remains registered with the Capital Markets Authority and the Commissioner of Taxes.

However, REITs are not exempt from withholding tax on interest income and dividends. These are taxed at the rates shown in the table below:

Type of income     Resident(%)  Non-resident(%)   Exempt(%)
Dividends                  5                        10                            0
Interest                     15                        15                            0

When a REIT distributes its income to its unitholders, the same will be deemed to have already been taxed. The unitholders will therefore not be required to account for further taxation. This is also the case with payments for redemption or sale of units received by investors.

In the event that a unitholder transfers its share in a REIT or redeems its units from the REIT, they will be obliged to account for capital gains tax on the gain made. However it will be exempt from Stamp Duty.

Shortcomings of investing in REITs

a) Economic and political situations that could lead to depreciation in the value of the property. However, gauging from the trend in the Kenyan property market in the past few years, the values of properties have been escalating.

b) Decrease of rental income as a result of termination of lease agreements or non-renewal of lease agreements and failure to secure replacement tenants in good time.

c) For close-ended REITs, the Investor is not able to access their investment before the end of the investment period. In a close-ended REITs, the Investor cannot seek to redeem his investment before expiry of the investment period unless there is an arrangement with the Trustee’s consent for the sale of the Investor’s units.

The trend of REITs in Kenya

RElTs in developed capital markets have been in existence in their present format since the 1960s, but they were actually introduced in the 1800s. The US has the most advanced REIT in the world. In Africa, growth in this market has been limited by the absence of enabling legislation. With the opening of the Stanlib Fahari I-REIT public offer, Kenya became the fourth African country to launch REITs. South Africa has traded in REITs for the last 10 years, while Ghana has had access to REITs since 1994 and Nigeria 2007.

A Tale of Two Countries: A Comparative Look at Trusts in Mauritius and New Zealand

Posted on June 26th, 2018

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Introduction

Trusts have been in existence since the 12th Century from the time of the crusades under the jurisdiction of the King of England. English land owners went to the battlefield, leaving ownership of their lands to the crusaders who would manage the land in their absence. However, the Trust system faced one major challenge; on their return, the crusaders refused to hand over the land to the owners. Unfortunately, as far as the King’s Courts were concerned, the land belonged to the Trustee, who was under no obligation to return it, i.e. the crusader had no legal claim.

What is a Trust?

A Trust is an equitable relationship arising when property is held by a Trustee for the benefit of a third person, a beneficiary, and subject to obligations owed in favor of the beneficiary. As such, a Trust can be described as an entity created for purposes of ensuring that a property interest is held by one person; a Trustee, at the request of another; a settlor, for the benefit of a beneficiary.

A Trustee therefore holds the property subject to personal obligations to manage and apply it in accordance with the terms of the Trust deed for the benefit of the beneficiaries or in the manner prescribed. In a Trust, it is not easy for a Trustee to use the settlor’s property for personal gains. A Trustee who deals with the Trust property inconsistently with the terms of the Trust is personally liable to the beneficiaries for breach of trust and in the absence of any defences; the Trustee will be required to compensate the beneficiaries for the loss.

Trusts can be designed in a way that the benefits of the Trust belong to the settlor in their lifetime ensuring early set off of the management of the Trust.

Family Trusts

A Family Trust is a relationship between the settlor, who creates the Trust and decides what goes into the trust deed (the trustees, who hold title to the Trust assets in their own names and deal with them as instructed in the trust deed) and the beneficiaries, who receive the benefits from the Trust. The income and assets owned by a Family Trust are not owned outright by either the trustees or the beneficiaries. Trust assets only become the property of the beneficiaries when trustees transfer the assets from the Trust to the beneficiaries personally.

Unlike a will, a Family Trust provides continuity of the estate of a deceased person by ensuring that the estate devolves to future generations and more importantly through capable and reliable people. The concept of a Trust is one that involves an owner of a specific property being able to govern how the same property should be used or administered over.

Establishment of a Trust

A Trust is established by way of a Trust deed. The Trust deed, amongst other things, contains the objects of the Trust, the name of the Trust, the properties held under the trust, the power of the trustees, meetings of the Trustees and the Trust’s administration. The Trust deed has to be signed by all the trustees, should be stamped and then registered at the Lands Office under the Registration of Documents Act (Chapter 285 of the Laws of Kenya). Once registered as indicated above, the Trust is duly established as an unincorporated Trust which does not have a legal personality of its own. Thus, the Trust can only own property, enter into contracts or do any other thing in the names of its trustees but not in its own name.

As noted above, an unincorporated Trust does not have a separate legal existence of its own separate from its trustees. Therefore, in order for the Trust to be able to have a separate legal status and be able to own property, enter into contracts and do any other thing in its own name, it has to be incorporated.

The law providing for the incorporation of certain Trusts and related matters is set out in the Trustees (Perpetual Succession) Act, (Chapter 164 of the Laws of Kenya). Section 3 (1) of the Act provides that the trustees who have been appointed by anybody or association established for any religious, educational, literary, scientific, social, athletic or charitable purpose or who have constituted themselves for any such purpose may apply in the manner provided for in the Act, for a certificate of incorporation of the trustees as a corporate body.

Section 5 of the Act provides that for the Trust to attain its own legal personality, an application has to be made to the Cabinet Secretary in charge of matters relating to lands. This application shall be in writing, signed by the person or persons making it, and shall contain the prescribed particulars. This application must be accompanied by the registered Trust deed and the evidence of a parcel of land that is owned or to be owned by the Trust.

A Trust as a tool of Tax Planning

It is noteworthy that Trusts are not only instrumental towards estate planning but can also be used as a tool for tax planning. This is particularly so where the beneficiaries of the estate are resident in different jurisdictions and also where the properties of the estate are situated in different jurisdictions, which may trigger high tax obligations on the estate. In this regard, offshore Trusts have gained popularity as an avenue not only for estate and tax planning but also for purposes of protecting assets from creditors, to postpone the time of vesting of property, to pass on to Trustees the decision of who receives the Trust income or the Trust capital and to enable the settler to choose professional persons to administer and pass on assets according to his wishes, among others.

As such, it is advisable for an estate to consider establishing a Trust in a favorable jurisdiction to mitigate against high tax implications. The question therefore is what are the benefits of establishing a Trust and should one consider a local or an offshore Trust? In Kenya for instance, Trusts are considered to be corporate bodies and therefore they will be taxed at a considerably high rate. As already stated above, an estate may have properties in different jurisdictions; furthermore the beneficiaries of the Trust may be resident in different countries. This may have high tax implications and may also result in double taxation especially considering Kenya’s current double tax treaty network. Therefore, it may be prudent for estates to consider establishing Trusts in other countries, which will not only benefit them from a tax perspective but will also help facilitate estate planning.

While deciding on a suitable location, it is important to consider the regulatory framework and the taxation regime in the respective jurisdiction. In this regard, Mauritius is considered a favourable location for offshore Trusts on the basis of its tax regime, regulatory framework and its proximity to Kenya. New Zealand has also of late become a strong contender in the race towards being the most favourable offshore Trust jurisdiction.

Should we go the Mauritius Way?

Mauritius has integrated its laws on Trusts under the Trust Act of 2001. This law applies to both residents and non-residents of Mauritius and incorporates the latest trends in international Trusts legislations.

Non-residents can set up different types of Trusts in Mauritius. These can either be Trusts with interest in possession, charitable Trusts, purpose Trusts, accumulation and maintenance Trusts, bare Trusts, protective Trusts, discretionary Trusts, employee benefit Trusts and Trusts for the disabled, among others. Discretionary Trusts have proven to be very popular with non-residents due to the optimum flexibility they offer in the organization of the Trust property and for the distribution of income to beneficiaries. A Discretionary Trust is basically a settlement where both capital and income may be paid or applied, at the sole discretion of the Trustee(s), to any one or more of a class of beneficiaries, as the Trustee(s) deem(s) fit.

Mauritius-resident Trusts are taxed at the rate of 15% on their chargeable income (gross income less expenses but before any distribution). They are also eligible for an 80% presumed foreign tax credit on foreign source income and entitled to tax treaty benefits, under the various double taxation agreements between Mauritius and some 33 countries.

An offshore Trust of which the settlor is a non-resident and of which all the beneficiaries are also non-residents, is exempt from income tax in Mauritius, where it has deposited a declaration of non-residence with the local tax authority. Furthermore, non-resident beneficiaries of a Trust are exempt from tax in respect of income under the terms of the Trust, as well as from value added tax, whereas resident beneficiaries having received such income will be taxed at a flat rate of 15%.

Or is New Zealand a better option?

New Zealand is a jurisdiction that has in the recent past gained popularity as a location for offshore Trusts. This is not only because of the favorable tax and regulatory framework that it has in place in relation to Trusts but unlike other traditional tax haven jurisdictions (like Mauritius), New Zealand is a reputable member country of the Organization for Economic Co-operation and Development (OECD) with a highly regarded legal, political and economic environment.

In New Zealand, Trusts are exempt from assessment in respect of tax on income and capital gains arising outside of New Zealand, in the event that the settlor of the Trust is non-resident. Accordingly, the Trustee may make distributions out of a Trust fund established in New Zealand without any withholding or deduction for New Zealand income or capital gains tax.

New Zealand’s tax regime does not have inheritance, wealth or capital gains tax regimes. This means that any creation or transfer of assets to a Trust by a non-resident of New Zealand will not be taxed. Furthermore, the same transaction will not be subject to indirect taxes including gift duty, stamp duty, value added tax as they are not applicable to New Zealand Trusts.

From a compliance perspective, foreign Trusts established in New Zealand are not obliged to file income tax returns with the New Zealand Inland Revenue Department, in so far as they do not have New Zealand sourced income, nor distribution made to a New Zealand resident beneficiary. Moreover, New Zealand has very limited disclosure obligations in relation to the settlor and the beneficiaries. It is also noteworthy that New Zealand, like Mauritius has an extensive network of double taxation agreements in force with its main trading and investment partners.

Conclusion

It is never too late for taxpayers with expansive estates to organize their affairs in a way that not only enables easy and more efficient management of their affairs but also allows them to take advantage of tax planning opportunities that may alleviate the tax burden on both the estate and its beneficiaries. It is therefore a viable option to consider establishing a Trust, and where appropriate consider establishing offshore Trusts in a favourable jurisdiction

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