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Lease in Kenya- Everything you should know

Since COVID-19 pandemic, a lot of businesses have opted for lease in Kenya as a restructure and re-strategy technique. This has become very necessary for the survival of many businesses today. For businesses that are on long-term commercial contracts for premises, there is a need to begin early strategic procedures for the termination of the commercial leases. Or set a moving plan to still manage the lease agreement and have the business ongoing. A lot of provisions have been made in the law for lease agreement and termination.

However, our dialogue in this article will center more on the financial perspective of the term lease, with the sole aim of studying and analyzing the termination of lease contracts regarding the law in Kenya.

What is a lease?

Lease can be defined from two main perspectives. These points of view are real property perspective and finance perspective. However, the cases might be different, but the basic guidelines set out in this article apply to all cases. Clients intending to embark on a lease agreement are encouraged to seek professional legal advice.

From a financial point of view, they know a lease as a contract or alliance between two parties which enables one party (the lessee) to take possession of the other party’s (lessor) for some kind of consideration and payment to the lessor. Most lease agreements involve sub-lease unless stated otherwise in the contract. Primary target of lease financing involves the ability of the lessee to realize funds from the use of the leased properties in servicing the lease payment.

Lease in Kenya

Financial leasing involving fixed assets has become an alternative technique for businesses in Kenya to get such assets instead of spending a lot trying to gain them. The process involves a lessee who wants to use the assets and (lessor usually a bank) who owns the property. The lessor gets his benefits through rental payment, re-lease of the property and sale of the property.  

3 requirements for a valid lease?

The essential elements of a lease are:

  1. Parties involved: the parties involved are lessor and the lessee.
  2. The subject of the lease: fixed asset or immovable asset
  3. Duration of lease: The lease is given the right to enjoy the property for a as stated in the contract.

2 advantages of Leasing

  1. It provides the platform for business and nations to enjoy the right of using certain assets that they are incapable of purchasing.
  2. It all allows Kenya and other developing nations to have access to the international legal stage on lease agreement dispute settlement systems.

How do I start my lease agreement?

How to create a lease agreement in a simple and unique way. To create a lease agreement, follow the procedure:

  1. Get every information on the party involved.
  2. Provide details about your property.
  3. Analyze all the properties, functionalities and services.
  4. Note the terms of your lease.
  5. Decide the monthly rent amount and due date.
  6. Calculate other additional fees.
  7. Determine your payment method.
  8. Know your rights and obligations

How Do I Place a Caveat on a Property in Kenya

Caveat is a term  which means something said as a warning, caution or requirement. In order to place a caveat, they require one to have the following documents:

4 documents Required:

  1. The required form.
  2. An Affidavit detailedly explaining the cautioner interest on the land.
  3. A copy of the title number or title.
  4. Provide the required fees.

10 Major provision in lease agreement and their significance

They usually include the following characteristics in a lease finance agreement, which are:

  1. The lessor must grant the lessee a licence of quiet possession within the stipulated time frame.
  2. Lessee must maintain and return the assets to the lessor under obligation.
  3. Aggrieved party has the right to damages in case of default of any obligation.
  4. Every third party deals with the asset, is subject to the lien, and has the lien over the asset.
  5. Lessor is not responsible for the injury, damage or death caused by the use of the asset by the lessee or third party.
  6. The lessee bears the risk of loss of the asset unless  stated in the financial lease agreement.
  7. Both the lessee and lessor are free to determine the contents of the agreement based on the idea of freedom of contract.
  8. The lessee’s right can only be transferred to a third party by with the consent of the lessor, while the lessor is at liberty to transfer his right on the asset without consent of the lessee.
  9. Agreement is terminated when there is a partial loss of asset. However, if there was total loss of asset, the agreement is terminated after the lessee accepts inspection regarding the loss.
  10. In financial leasing, the lessor duty to the lessee is independent and cannot be changed.

Documenting a lease

The lease process is documented by the leasing institution, be it a bank or financial house. A commitment letter should contain details about the contract and rights of the parties  in case of default. They usually sign the contracts during the same period with the lease agreement. The lessee terms should be clear on the lessee’s right to use the asset within the stipulated time.

Do I need a lawyer to create a lease ?

It is very important to seek professional legal advice and help before creating a lease because:

  1. A lawyer makes negotiations such as maintenance, fees or building repairs easier and faster.
  2. The lawyer can help you negotiate the terms and conditions of the lease.
  3. A lawyer can create the lease for you and ensure that you understand your rights and responsibilities regarding the list.

In Kenya, they govern Leases by two main  acts of parliaments namely:

  1. The land Act Number 6 of 2012
  2. The Landlord and tenant Act CAP 301 Laws of Kenya. This applies to shops, hotels and catering institutions.

3 leases under the land act

There are two major leases under PART IV of  the land Act:  these leases are:

  1. General Leases
  2. Periodic Leases
  3. Short-term leases

General Lease

These are leases that have a fixed term and also provide the option of lease termination through issuing notice. It is not periodic. The lessor who wants to end the general lease must depend on issuing notice, as stipulated in the lease agreement.

Periodic Leases

This is a type of lease that takes place when the term of the lease is not fixed or determined and there is no provision of issuance of notice of termination in the lease. Such lease is terminated  as stated in Section 57(3) of the Act. According to the Act, the lease is terminated by reference to when the rent is payable.

This implies that if a business owner wants to end his periodic lease agreement, he will give notice based on the period by which the rent is payable. Hence, if the rent is paid every six months, he will give six months’ notice.

Short-term leases

These are leases whose duration is less than two years with no option of after expiration. They are usually periodic by nature hence, the procedure for handling periodic leases also applies to them.

What happens if a land lease expires?

The following occurs when a land lease is not renewed when it expires. They are:

  1. The lessee gives up the right to use the land on which the home is built.
  2. The lessee sometimes has to surrender any improvements done to the land such as houses.
  3. It is very important to always ensure you get every information about the property before you buy them.

Leases under the landlord and tenant (shops, hotels and catering institution)

These leases are controlled via tenancies, and they are backed up by legislation. Tenancy becomes controlled tenancy when it has one of the following conditions:

  1. The duration is not more than 5 years.
  2. Has a provision for termination for default of contract within 5 years from commencement.
  3. Involve premises such as shops, hotels and catering institutions as stipulated in the Act specified by the cabinet secretary through Gazette Notice.

When one of these conditions exist, then the tenancy is a controlled tenancy according to section 4(4) of the Act  and is terminated by issuance of 2 – month notice. 

Conclusion

Termination can be made earlier if there are clauses in the agreement that support such. It is advisable to seek legal advice especially on points in the agreement that you have doubt. This is done by the issuance of notice which depends on the period when the rent is due. For periodic tenancy, a notice of 2-months is given before the lease agreement is terminated. Other lease acts have duration of termination. I believe this article has taught you all you need to know about lease in Kenya.  

Categories: Personal Finance
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