Many Kenyan developments are built on a simple bargain: one party has the land, another has the money and expertise to build. Real estate development agreements in Kenya turn that bargain into a workable, bankable deal. This guide explains the common structures, the agreements that hold them together, and the risks that sink the deals that are poorly drafted.
This guide is for landowners approached by developers, developers structuring a project, and investors funding one. If your venture will be held through a company, read this alongside our guide to shareholders agreements. For the finished units, see our guide to sectional titles, and for the transfers, our guide to conveyancing in Kenya.
In practice, development deals in Kenya usually take one of a few shapes, and getting the structure right at the start saves a great deal later.
In practice, a development is a stack of linked contracts, and a weakness in any one of them travels through the whole deal.
The issue that causes the most disputes is what happens to the land during the project. For example, if the landowner keeps the title while the developer spends money building, the developer needs security that it will get its units or its share. By contrast, if the land is transferred into a company or to the developer, the landowner needs security that it will be paid or receive its units. In practice, the answer usually lies in a careful mix of charges, cautions, escrow and staged transfers under the Land Act, 2012, so that neither party is left exposed while the other performs. This is the heart of the legal work on a development.
Importantly, how the finished units are titled should be decided at the start, not the end. In practice, apartments and units in a modern development are usually titled under the Sectional Properties Act, 2020, which lets each unit be sold and charged on its own title. Planning the sectional titling early keeps the sale programme on track, and it is covered in our guide to sectional titles in Kenya.
Development deals fail in predictable ways. For example, planning and approvals may not come, or come late, so the agreement must say who carries that risk. Similarly, funding may fall through, so drawdown and security need to be tied to milestones. In addition, a party may become insolvent mid-project, so the agreement should provide for step-in and for what happens to the land and the works. Finally, large joint ventures can raise competition-law questions, so a sizeable deal should be checked against the merger-control thresholds before completion.
What is a real estate joint venture? An arrangement where a landowner and a developer combine land, funding and expertise, and share the units, proceeds or profit.
Should we use a company or a contract? A contractual joint venture is simpler; by contrast, a company suits larger, longer projects and changes the control, tax and risk position. Take advice on the fit.
Who holds the land during the project? That is the key negotiation. Whoever does not hold it needs security, through charges, cautions, escrow or staged transfers.
How are the finished units titled? Usually as sectional titles under the Sectional Properties Act, 2020, so each unit has its own title.
What is the biggest risk? Usually approvals, funding or the insolvency of a party. A good agreement allocates each of these clearly.
For example, the recurring failures are a thin development agreement that does not say what happens if the project stalls; leaving the land unsecured so one party is exposed while the other performs; and deciding the titling route too late, which delays sales. In addition, others omit the deadlock and exit terms in a corporate joint venture, or ignore the competition-law thresholds on a large deal.
A real estate joint venture in Kenya cannot proceed to construction without planning approval from the relevant county government under the Physical and Land Use Planning Act, 2019. The application requires submission of architectural and engineering drawings, a development brief describing the proposed use, intensity and layout, and evidence of title or authority over the land. For larger developments, a change of user application may be required where the proposed development is inconsistent with the existing zoning of the land. The National Environment Management Authority (NEMA) requires an Environmental Impact Assessment licence for residential developments above 50 units, all commercial developments and mixed-use schemes above a defined threshold. The NEMA process includes public participation and can take three to six months in practice; it should be factored into the development programme from the outset. JV parties should agree at the term sheet stage which party is responsible for obtaining planning and environmental approvals and how the costs of those approvals are shared before they are reflected in the project budget.
The National Construction Authority Act requires that all contractors engaged on construction projects in Kenya hold valid NCA registration in the appropriate category for the scope of works. As a joint venture developer, you are responsible for ensuring that any contractor appointed on the project meets this requirement, and failure to do so exposes the development to enforcement action and — in the event of a payment dispute — may weaken the contractor’s ability to pursue claims in certain forums. The NCA also has powers to issue stop-work orders where projects are non-compliant. JV agreements should require the project manager or employer’s agent to verify NCA registration before any contractor is engaged, and to maintain a compliance register updated throughout the build period.
One of the most commercially sensitive provisions in any real estate JV agreement is the profit distribution waterfall — the mechanism that determines how project profits are divided between the parties once the development costs, financing costs, and priority returns have been satisfied. The simplest structure is a straight percentage split based on the parties’ relative contributions of land, capital and expertise. More sophisticated agreements use a waterfall structure with preferred return hurdles: the capital-contributing party receives its investment back with a preferred return (often expressed as an IRR target) before the profits are split according to the agreed ratio. Where one party contributes land and the other capital, the land value at the date of contribution (established by an agreed independent valuation) forms the basis for calculating the land party’s share of project costs and profits. Clear waterfall mechanics, with worked numerical examples agreed at heads of terms stage, prevent later disputes about how the numbers should be calculated when sales proceeds are actually received.
JV agreements should contain clear provisions dealing with what happens when a party wants to exit the development before completion, when a party is in default of its obligations, or when the parties reach an impasse on a material decision. Common exit mechanisms include tag-along and drag-along rights (which allow a selling party to require the other to sell alongside it, or a majority party to compel a minority to sell in a third-party transaction), buy-sell or shotgun provisions (which allow either party to name a price at which it is willing either to buy the other’s interest or to sell its own), and put and call options over a party’s interest at an agreed or formula price. Default provisions should specify the events that constitute a default (failure to fund a capital call, insolvency, breach of the development agreement), the cure period available to the defaulting party, and the remedy available to the non-defaulting party — typically the right to purchase the defaulting party’s interest at a discount to market value.
Our real estate and corporate teams structure and document property developments and joint ventures for landowners, developers and investors: development agreements, joint-venture and shareholders agreements, the security over the land, construction contracts and off-plan sales, and the sectional titling of the finished units. For the underlying land transaction, read our guides on buying land and transferring title, stamp duty on property transactions, restrictions on foreign land ownership, and off-plan purchase protections. To structure a development, contact John Maina, Partner, at OLM Law Advocates LLP.
This article is a general guide only and is not legal advice. Please seek advice on your specific circumstances.
OLM Law Advocates LLP advises landowners, buyers, developers and investors on Kenyan property, from transactions and titles to disputes.
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