Stamp Duty on Leases in Kenya

Introduction

In Kenya, when entering into a lease for a period above 3 years, you are required to register the lease and pay stamp duty. This part is crucial for the legal validation of your lease agreement. A lease is a legally binding agreement between a landlord (lessor) and a tenant (lessee) that allows the tenant to occupy and use a property for a specified period in exchange for rent. The lease outlines the terms and conditions of the rental arrangement, including the duration of the lease, the amount of rent, payment due dates, responsibilities for maintenance, and other regulations regarding the use of the property.

This article is an analysis of stamp duty on leases in Kenya.

What Is Stamp Duty?

Stamp duty is a tax levied on legal documents to ensure they are valid, enforceable and recognizable under the law. In Kenya, stamp duty is governed by the Stamp Duty Act. The Act requires that certain documents, including lease agreements, be stamped. Stamping itself is the affixing of a franking mark on the face of the document.

Once the person responsible for stamp duty pays it, the document, in this case the lease, is stamped/franked, making it legally binding and admissible in court. Although failing to pay the stamp duty doesn’t invalidate the agreement or release the parties from their obligations, it renders the document inadmissible in court and may render it invalid and unenforceable.

• Read more on invalidity and unenforceability in our article: Contract Law in Kenya: A Comprehensive Guide

The Importance of Stamp Duty in Lease Agreements

Stamp duty serves several purposes:

1. Legal Validity: Paying stamp duty ensures your lease agreement is fully compliant with the law and therefore recognized by the law.
2. Dispute Resolution: In case of disputes, if a document is required to be stamped, it is inadmissible in court if it is not presented for stamping.
3. Official Records: Payment of stamp duty is a prerequisite for the registration of the lease with the relevant authorities, and creates a public record of the transaction.

Who Pays Stamp Duty on A Lease?

Typically, the tenant pays the stamp duty unless the lease agreement states otherwise. However, both parties must ensure the duty is paid.

Calculating Stamp Duty on A Lease

The amount of stamp duty payable depends on two factors:

1. Term of the Lease: The duration of the lease agreement determines the applicable rate.
2. Annual Rent: The stamp duty is calculated based on the annual rent agreed upon in the lease.

The rates are as follows:

• Lease Term Below 1 Year: Stamp duty is 1% of the total rent payable.
• Lease Term Between 1 and 3 Years: Stamp duty is 2% of the annual rent.
• Lease Term Over 3 Years: Stamp duty is 2% of the annual rent for each year of the lease.

Practical Example: Calculating Stamp Duty

Suppose you enter into a lease agreement with an annual rent of Ksh 500,000 for a term of five years. The calculation will look like this:

• Annual rent: Ksh 500,000
• Stamp duty rate: 2%
• Total stamp duty: 500,000 x 2% = Ksh 10,000 per year
• Total for five years: 10,000 x 5 = Ksh 50,000

Exemptions from Stamp Duty

Not all lease agreements attract stamp duty. For example:

• Leases Below Three years: Short-term leases often do not require stamp duty.
• Government-Owned Properties: Leases involving certain public properties may be exempt.
• Special Categories: In specific circumstances, exemptions may apply based on the purpose or nature of the lease. Always consult a lawyer for clarity.

Payment of Stamp Duty

How to Pay Stamp Duty on Leases in Kenya

The process for paying stamp duty is straightforward and involves the following steps:

1. Draft the Lease Agreement: Ensure the lease document is properly prepared, indicating the agreed rent and duration.
2. Assessment of Stamp Duty: Submit the lease to the Lands Office or Huduma Centre for assessment. The assessment determines the exact amount payable.
3. Payment of Stamp Duty: Pay the assessed amount through the Kenya Revenue Authority (KRA) iTax platform. You can make payments via bank transfer, mobile money, or other authorized channels.
4. Stamping the Lease: Once payment is made, the lease agreement is stamped by the designated authority. The stamp is proof that the duty was paid.

Consequences of Not Paying Stamp Duty

Failure to pay stamp duty on a lease agreement can lead to serious consequences, including:

1. Inadmissibility in Court: If a dispute arises, unstamped agreements cannot be used as evidence.
2. Penalties: The government imposes fines and interest on unpaid stamp duty.
3. Void Agreements: In extreme cases, the lease may be considered invalid.

How to Verify Stamp Duty Payment

After paying stamp duty, it is crucial to confirm that the payment is reflected in official records. You can verify this:

• Online via the KRA iTax system
• By visiting the Lands Office
• Through your lawyer or property agent

Common Mistakes When Dealing with Stamp Duty on Leases

1. Underreporting Rent: Some parties underreport the rent to reduce stamp duty. This is illegal and can lead to penalties.
2. Delaying Payment: Late payment attracts interest and penalties.
3. Relying on Verbal Agreements: Verbal leases are difficult to enforce and do not exempt you from stamp duty obligations.
4. Not Seeking Professional Advice: Always consult a lawyer or property expert to ensure compliance with the law.

FAQs on Stamp Duty on Leases in Kenya

1. How long do I have to pay stamp duty after signing a lease?
You must pay stamp duty within 30 days of signing the lease agreement.

2. Can I pay stamp duty myself, or must I use a lawyer?
You can pay it yourself through the iTax system, but consulting a lawyer ensures accuracy and compliance.

3. What happens if my landlord or tenant refuses to pay stamp duty?
Both parties should ensure that stamp duty is paid. Disputes over payment responsibility can lead to delays and legal issues.

4. Are subleases subject to stamp duty?
Yes, subleases also require stamp duty based on their terms and rent.

5. Is stamp duty refundable if the lease is terminated early?
Stamp duty is generally non-refundable, even if the lease ends before its term.

Conclusion

Payment of stamp duty on leases in Kenya is an essential legal requirement that protects both landlords and tenants. Paying this tax ensures your lease agreement is valid, enforceable, and compliant with the law. To avoid penalties or disputes, always calculate and pay stamp duty on time. If you have doubts, seek professional advice to navigate the process smoothly.

If you are contemplating a lease and require legal assistance, Schedule A Consultation with our team, Email Us or fill out the form on our Contact Us page.