Property Trade In Or Swaps In Real Estate, Kenya

1. Introduction. 

Real Estate in Kenya has experienced a significant growth over the years, driven by urbanization and increased demand for both residential and commercial properties. A unique and frequently overlooked aspect of real estate in Kenya is the practice of trade in or swaps of properties, which has emerged as an alternative for buyers and sellers seeking alternatives to the conventional sale of property.  

Property trade ins or swaps in real estate typically involve the exchange of properties of similar value between two parties based on a mutual agreement. However, this does not exclude the payment of money altogether as one of the two properties to be exchanged may exceed the other in value. This practice is particularly beneficial in circumstances where liquidity is a challenge or whereby transactional costs of buying and selling of property are relatively high.  

Trade ins or swaps may take place between individuals, developers, investors and government institutions, and would include residential properties (houses and apartments), commercial properties (office buildings, retail spaces and mixed-use developments) and vacant land. Section 2 of the Land Act, 2012, defines the term “exchange” as form of disposition to land which includes the terms trade in or swap of properties.  Notably, the process of transferring ownership must follow the same legal procedures and requirements as if the property were being sold, therefore, the provisions of the law such as the Land Act, the Land Registration Act and the Law of Contracts Act, would apply.  

While trading in assets is a common practice, one may wonder whether it is feasible to trade in such properties similar to how one might trade in a car. This article aims to explore the various methods of property trade-ins or swaps (hereinafter “Property Swap”) in Kenya, legal requirements, tax implications and other relevant considerations. 

2. Common Types of Property Swaps in Real Estate. 

They are several notable ways under which parties may agree to engage in Property Swaps such as:
i. Property Swap of a vacant land and a developed property 

 This type of exchange is mainly common between property developers and individuals who intend to purchase a developed property and a developer looking for a vacant land to develop. 

 ii. Property Swap of an old house/apartment with a new one. 

The process of exchanging an old house or apartment for a new one is a prevalent arrangement, especially between property developers and individuals looking to upgrade to newly constructed residential units, or commercial space, as may be agreed by the parties. In such instances, the developer often takes the old property, particularly with the aim of reserving the land and demolishing the old apartment/house so as to develop new/modern units.  This is most common in urban areas where the demand for modern housing is high and where property developers are actively redeveloping older neighbourhoods to accommodate the growing population.  

 iii. Property Swaps between residential and commercial properties. 

For instance, individuals residing in areas that were once primarily residential may find themselves in neighborhoods that have gradually transitioned into commercial or industrial zones, making them less suitable for residential living. In such cases, the individual might consider trading their property with a developer or another individual interested in acquiring land for commercial purposes. 

iv. Property Swaps for purposes of a joint venture. 

This type of Property Swap involves two parties (often developers or investors) exchanging properties with the intention of collaborating in a future development project. The intention of this type of exchange is to facilitate pooling resources, expertise and assets. In this case, the developers would enter into a joint venture agreement upon exchanging their properties where they agree that they will share costs, responsibilities and profits based on their contributions. In this case, they would use one of the properties for the project.    

 v. Property Swap for debt settlement. 

This occurs where one party offers property as an alternative to settling a debt. It is especially applicable where one party is struggling to meet their financial obligations but can provide a property in exchange. For instance, a borrower may swap their land with a lender to settle an outstanding debt, especially when liquidating the property for cash is not a viable option.  

vi. Property Swaps for relocation purposes. 

There are situations where a person may intend to relocate to a different town or location and might want to swap their property with someone who is looking to move to the area they are vacating. This could involve either a developed property or an undeveloped piece of land. 

NOTE: In either case outlined above, the parties must undertake valuation to assess the amount (if any) that one party will pay the other party (cash compensation) with respect to the difference in value, if the two properties being swapped are not of the same value.  

 3. Steps and Legal Considerations involved in Property Swaps in Real Estate. 

Like all real estate transactions, Property Swaps in Kenya must comply with Kenya’s legal frameworks to avoid disputes and also ensure true ownership of the properties. In essence there are some key steps and legal considerations involved in real estate Property Swaps as highlighted below; 

 i. Identifying an exchange partner- this may involve engaging a real estate agent so as to source for an appropriate exchanging partner.  

 ii. Real Estate Appraisal- This involves conducting a valuation of both properties being exchanged to determine their market values. This would enable the parties to assess whether the properties are of equal value, and if not, the difference between the two properties in value and the amount which the respective party should pay. 

 iii. Cash Compensation- Upon finalizing the above step outlined in ii above the parties shall then agree on the remittance of cash compensation.  

 iv. Negotiations-After appraisal the parties should then proceed to engage on the relevant negotiations on how to proceed with the proposed Property Swap.  

 v. Conducting Due Diligence on the respective properties - In addition to conducting valuation of the properties, the parties involved in a Property Swap must conduct due diligence on the respective properties that they intend to acquire. It is recommended that the parties appoint an advocate for legal representation from this step onward. The due diligence formalities include: 

 a.  Title Search 

This is one of the most crucial steps in any Property Swap as one must verify the registered proprietor to ensure that it reflects the name of the other party in the Property Swap and whether the property contains any encumbrances registered thereupon. An application for an official title search may be submitted online or physically at the relevant registry depending on the location of the respective property.  

b. Confirmation of Use 

Before a Property Swap occurs, it is advisable to confirm the current use of the respective properties to ensure that it corresponds to the negotiated terms.  

c. Obtaining Relevant approvals and consents where applicable  

For instance if either property is charged, the lender’s consent shall be required or if financing shall be applicable, by the parties especially in the amount being topped up.  

 vi. Execution of the relevant contractual documents – Once the parties have negotiated the terms of their agreement and completed the due diligence formalities on the properties, it is important to ensure that all relevant legal considerations have been  addressed and the relevant contractual documents such as the property swap  agreement, transfer documents etc. relating to the Property Swaps have been well prepared by their advocates and executed by the parties.   

 vii. Payment of Stamp Duty - A person acquiring property bears the obligation of paying for stamp duty on the transfer of property in their favor. Therefore, both parties in a Property Swap will be required to pay Stamp Duty. The Stamp Duty rate is 4% for properties located in urban areas and 2% for properties located in rural areas. The stamp duty will be assessed on the market value of the properties being exchanged. Once stamp duty is paid, the parties shall present the transfer documents at the respective lands registry for stamping.  

 viii. Registration and grant of possession - Once the documents have been stamped with stamp duty, the parties should conclude the transaction by exchanging the properties simultaneously, upon successful registration and grant of possession as appropriate.  Thereafter, the parties will be issued with their Title Deeds or applicable title documents. In the event that the transaction includes a cash compensation, the party paying such amount in cash must do so prior to registration or in accordance with the terms of the property swap agreement.  

 ix. Payment of Capital Gains Tax (CGT) - Capital Gains Tax in Kenya is chargeable on the net gain accruing to a company or individual (whether resident or non-resident) upon the transfer of property situated in Kenya. CGT applies to gains realized on or after 1st January 2015, regardless of whether the property was acquired before this date. The applicable CGT rate is 15% of the net gain. For CGT purposes, a “transfer” is defined to include any sale, exchange, conveyance, or other form of disposal, regardless of whether consideration is provided.  

To calculate the gain or loss for CGT, the market value of the property at the time of transfer is compared to its acquisition cost. Therefore, where the market value of the property being acquired exceeds the acquisition cost of the property being disposed, the transferor is subject to CGT on the gain.   

The Eighth Schedule to the Income Tax Act provides the due date for CGT payment to be the earlier of the receipt of the full purchase price or the registration of the transfer. In such cases involving Property Swaps, CGT is applicable on the profit made from the transfer of property, so if there’s a gain from the exchange, it will be taxable and the tax (CGT), liability is triggered at the latter of the two dates. 

Advantages of Property Swaps. 

Some of the notable advantages of Property Swaps are: 

a. Simplification of the process as it saves time and saves the parties the hustle of sourcing for a buyer and awaiting to get proceeds in order to buy another property. 

 b. Property owners can swap properties without the need to secure large amounts of money for the purchase price, as is the case in a conventional sale transaction. This is especially beneficial for individuals or investors who wish to swap their properties but do not have the liquidity to buy a new property.  

 c. It is not necessary to take out a loan which would typically involve interest payments such as in a traditional property purchase where buyers often rely on loans from financial institutions to fund the transaction. By not taking out a loan, the parties retain more control over their finances, and the transaction becomes less financially burdensome. 

 d. It can be a good option for investment especially for someone who wishes to swap a vacant land with some developed units for generation of rental income.  

It is time efficient. As long as it is a well-coordinated exchange where the terms of the Property Swap are agreed upon and both parties have conducted their due diligence beforehand, it will save parties’ time by proceeding more swiftly.  

e. There is flexibility in negotiation among parties involved in the exchange. For instance, if the properties are not of equal value, the difference can be settled with cash compensation. 

 5. Challenges of Property Swaps.  

While property exchanges in Kenya can offer various benefits, there are several challenges to consider, including: 

a. Although it is quite a simplified process, it also comes with limitation. For instance, at times there is a limited choice of an exchange partner. This may be due to a limited network of individuals or entities who are open to exchanging their property in the Kenyan real estate market, especially one that would meet a party’s criteria, such as the type or location of the property.  

b. If a cash compensation is necessary, the relevant party may be unable or unwilling to pay the difference, hence, this would delay and/ or complicate the Property Swap.  

c. There may be disagreements on property value which can lead to delays or disputes between the parties.  

d. There may be risk of fraud such as fraudulent title deeds and illegal sale of the same property to a different party or parties during an ongoing Property Swap. However, an extensive due diligence conducted by an advocate must be done to avoid potential fraud or disputes over ownership.   

e. At times and as noted above, unless the properties being swapped are of equal value, there will still be the CGT tax implication on the gains.  

 6. Conclusion. 

When engaging in real estate Property Swaps, it is essential for the involved parties to assess various factors to determine the viability of the proposed Property Swap. As discussed in this article, it is crucial to consider all relevant aspects prior to proceeding with a trade-in. For example, identifying the most suitable exchange partner is vital, as certain properties may not qualify for a swap due to specific issues, such as a land prone to extreme flooding.  

Conversely, if a property requires significant renovations but is located on prime land suitable for multi-dwelling developments, it would be wise to seek a developer capable of demolishing the existing structure and maximizing the land's potential. For developers, investors and individuals looking to optimize their property portfolios, these transactions provide an alternative to the conventional sale transaction. However, as with any real estate transaction, it is essential to conduct due diligence and engage legal professionals to ensure a fair and smooth process.  

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Disclaimer 

This article is for informational purposes only and should not be construed as legal advice.