Real estate development and joint ventures in Kenya

Who this guide is for

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.

The common structures

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.

• Land-for-units. The landowner contributes the land and, in return, receives an agreed share of the finished units, while the developer keeps the rest to sell. No cash changes hands for the land up front.
• Revenue or profit share. The parties sell the finished development and split the proceeds or the profit in agreed proportions.
• Corporate joint venture. The parties set up a company, the landowner transfers or leases the land into it, the developer funds and builds, and each holds shares. This suits larger or longer projects.
• Sale with development. The developer buys the land outright and develops it alone, sometimes with the seller taking deferred or off-plan consideration.

The agreements that hold it together

In practice, a development is a stack of linked contracts, and a weakness in any one of them travels through the whole deal.

• The development agreement. The master contract: what each party contributes, the programme, the split of units or proceeds, approvals, and what happens if the project stalls.
• The joint-venture or shareholders agreement. Where a company is used, this governs control, funding, deadlock and exit between the parties. We cover it in our guide to shareholders agreements in Kenya.
• The construction contract. Between the developer or the company and the contractor, fixing scope, price, time and defects.
• The sale agreements. With the eventual buyers, often off-plan, which need to protect deposits and match the titling route.

The land question

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.

Titling the finished units

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.

The risks to manage

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.

Common questions

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.

Common pitfalls

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.

What you should do now

• First, choose the structure, contractual or corporate, on control, tax and risk, not just simplicity.
• Next, secure the land position for whichever party does not hold the title.
• In addition, put the full stack of agreements in place: development, joint-venture, construction and sales.
• Meanwhile, decide the titling route early, usually sectional titles for units.
• Finally, allocate the approvals, funding and insolvency risks clearly, and check competition thresholds on large deals.

How OLM Law can help

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. 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.

Author

John MainaPartner · Advocate of the High Court of KenyaView profile