What are the advantages of using Sectional Properties Act instead of Subleases

The National Housing Survey Report of March 2015 established that 75% of the new housing development projects in Kenya are of a high-rise nature. Most practitioners in the field are currently using the Registration of Documents Act (RDA 1901) to register subleases. In this article, part of the reap benefits living together series, we are going to compare the popular practice of registration of subleases against the registration under the Sectional Properties Act.

Registration

RDA provides for the registration of any document registrable under the provisions of the Government Lands Act (Cap. 280), the Registration of Titles Act (Cap. 281), the Land Titles Act (Cap. 282) or the Registered Land Act (Cap. 300). SPA provides for registration under RLA. Unfortunately, all of these laws were repealed in 2012 and shall cease to have effect when new Land Regulations are enacted. In any case, when you register a sublease, a relationship is established between you, (the sub-lessee) and a the landlord (also called the sub-lessor). The lessor is the one whose title is registered at the lands registry and holds the “mother title”. The landlord can actually still subdivide or further develop the property. On the other hand, when property is registered under the Sectional Properties Act, the register for the old property is closed and a new register is created for every new unit established. Thereafter, all transactions can only be entered against the new titles, not the old one.

Boundaries

SPA sets very clear expectations regarding the mapping requirements for sectional property – the property needs to be accurately georeferenced. A licensed surveyor is required to ensure that the buildings do NOT encroach on the neighbour’s property – and if they do, that an easement has been properly registered with the neighbour’s consent. If you go the sublease way, you should keep in mind that the courts have determined that a lease is not valid if the boundaries of the property are not accurately described – there is no avoiding the need to prepare accurate maps for the property merely because it is a sublease. It is risky to buy a flat based on the architect’s drawings alone – because the building may have been built on a public reserve or in someone else’s property. Get the services of a licensed surveyor.

Payment of Land Rates

Under the sublease arrangement, the local authority land rates are paid by the landlord. Failure by the head tenant to pay rates on time shall have devastating impact on the sublease holders. Under SPA, the local authority land rates are payable by the individual unit holders. Charging of rates against common property is forbidden. Failure by one unit holder to pay their rates does not affect other unit holders.

Corporation / Company

Under the sublease arrangement, it is common to have a company being registered under the companies Act as the owner of the head lease. The owners subleases are then registered as shareholders in this company. This company is required to file returns annually and to pay taxes on its profits. For property registered under SPA, a corporation is automatically created to manage the common property on behalf of the owners. This corporation is exempted from reporting and taxation obligations of the Company’s Act. This is a democratic corporation with a legally defined governance structure. Shareholding is based on a unit factor which is calculated based on the number of units held.

Transition from Development to Occupation

In the beginning, all property is owned by the developer. The developer has a big say over the affairs of the property. The developer then begins selling units one at a time to the new unit owners. These owners may need to make deposits and make gradual payments to own the property – or they may even buy the property “off-plan”. The SPA provides a framework on what should be included in the purchase agreement, and how to deal with any payments made or expected to be made. It also defines at which time the developer must hand over the corporation to the unit owners. Under the sublease arrangement, these must be covered by separate contractual agreements.

Charging the Property / Commercial Use

It is not very clear to me at this point how one can perform a search,charge the property, place a caution against a sublease. All of these probably need to be done against the head lease. Under SPA, each unit has its own title which can be searched, charged, cautioned, sold or gifted as the proprietor may wish. The protections accorded to matrimonial property are fully in force for property registered under SPA. Succession is also handled just like for any other property.

Management

The management of property registered under the sublease arrangement is left to the discretion of the landlord and the tenants. SPA on the other hand requires that an institutional manager be employed and has set minimum qualifications for the institution manager. They need to be either a registered accountant, advocate or estate manager. The act also has specific requirements for the insurance of all the units and the common property against loss resulting from destruction or damage caused by fire and such other perils as are specified in the by-laws; and damages awarded against the developer, the owner of a unit or the Corporation in an action for occupier’s liability; This provides a measure of protection against the risks inherent to the sectional property. SPA also sets out the procedure of obtaining payments from units for all expenses required to run the property.

Reinstatement of Unit in case of Disaster

In the event of a disaster that destroys the property, a unit holder apply to the court to have his unit re-established / re-developed or to have the interests of owners of units that have been wholly or partially destroyed to the other owners in proportion to their unit factors. The sub lease arrangement needs to make special provisions for this to happen.

Governance

Under SPA, the management board is elected democratically. The corporation is given legal power to require payments from all unit holders. The owners of the units may change their by-laws when they wish. The corporation also have power on further leasing of the property by the owners, over subtenants and their use of premises to ensure they do not adversely affect other unit owners.

So there you go, I would really like to hear from you (especially if you are subleasing), why you prefer one arrangement over the other

Now, I have just happened on a law firms article proposing quite the opposite of the above arguments – please have a look at this and judge for yourself http://mmwadvocates.com/sub-leases-v-sectional-properties/ 

[Editors Note: This article has been edited to insert the last paragraph above]

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