Lack of written tenant-landlord agreements hampers tax collection

The lack of tenancy agreements between landlords and tenants as detailed in the Kenya Housing Survey Basic Report 2023-24 explains why this section of businesses has been a challenge for the taxman to net. 

Several efforts by the Kenya Revenue Authority (KRA) over the years to formalise landlords’ businesses have not been as fruitful, with data from the Kenya National Bureau of Statistics (KNBS) indicating that seven out of 10 tenants do not have a written agreement with their landlords. 

As a result, 76.5 per cent of tenants pay their rent directly to the individual landlord. Findings of the report were collected from a sample size of 25,900 households across the 47 counties. 

According to the report, 71.8 per cent of Kenyan tenants did not have written agreements, whereas only 28.2 per cent had penned down one. 

“The counties of Kajiado (69.4 per cent ), Taita Taveta (50.2 per cent), and Nairobi City (40.5 per cent) had the highest proportion of tenants with written rent agreements,” the report says.

“Conversely, none of the households in Mandera County had a written rent agreement.”

The lack of an agreement puts at risk the relationship between landlords and their clients, even as the KNBS report shows a majority of tenants have not experienced a rent increment in the last five years.

The report states that rent agreements are vital in fostering a transparent relationship between landlords and their tenants.

“The most basic purpose of the rent agreement is to outline the terms of the lease, including the monthly rent, maintenance and repairs of the house, security deposit on the rental, when the rent is due, among others,” the report reads.

“Rent agreements are vital in fostering a transparent, fair and legally protected relationship between landlords and tenants.”

Silvana & Associates, a legal consulting firm, describes a tenancy agreement as a legally binding agreement between a landlord and a tenant. This agreement then allows the tenant to occupy a property owned by the landlord for a specified period, under clearly defined terms and conditions. 

A written tenancy agreement, it adds, is essential as it minimises misunderstandings between the tenant and landlord.

“It clearly outlines expectations from both parties, reducing the likelihood of legal issues. Oral agreements are harder to prove in court, and having a written contract safeguards the interests of both the landlord and the tenant,” the firm explained.

The informality of the landlord-tenant relationship partly makes it a challenge for the taxman to snoop into how much the individuals make. 

Sometime back, during the tenure of former Commissioner General John Njiraini, KRA opted to release agents in a bid to get the necessary data on rental properties and income. 

Landlords are required to pay rental income tax at the rate of 7.5 per cent. However, National Treasury and Economic Planning noted that landlords are among the hard to tax individuals. 

This is one of the reasons KRA set up a new department targeting micro, small and medium enterprises (MSMEs) where a majority of landlord fall. 

“We are only collecting Sh17 billion per year, and we have the potential to collect at least Sh100 billion. Many of us here own property, and we know the scope, but we are not paying rental income tax which is 7.5 per cent,” said National Treasury Cabinet Secretary John Mbadi during the 2024 KRA Tax Summit.

Apart from sending rent directly to the landlord, tenants also have an option of paying the landlord through an agent, which is a bit formal or send it to a private company if that is the one managing the property. 

Interestingly, the proportion of private companies collecting rent is highest in Bomet County, at 13.4 per cent compared to Nairobi City County at 5.3 per cent.

Isiolo is the second county with the highest proportion of private companies collecting rent at 12.8 per cent, followed by Wajir at 7.2 per cent. 

The county with the highest proportion of landlords collecting rent individually is Elgeyo Marakwet at 97.0 per cent, followed by Tana River (96.9 per cent) and Kitui coming third at 96.6 per cent.

In Nairobi City County, this figure stands at 69.8 per cent. Agency collections are also highest in Laikipia County at 36 per cent, followed by Nakuru (35.1 per cent), and Kajiado coming third at 29.2 per cent. 

In Nairobi City County, this figure stands at 24.0 per cent. “The entity or organisation to whom rent is paid can significantly impact various aspects of their renting experience, such as regulations, affordability, flexibility of the lease agreement, ethical guidelines, among others,” the KNBS report says. 

The report shows that during the study period, 2019 and 2023, a majority of tenants did not report any rent increment. 

Over the period, 87.4 per cent of tenants reported to have not experienced rent increment, whereas 12.6 per cent had experienced rent increments.

“Tenants who paid rent to government entities and faith-based organisations did not report rent increments. However, 13.4 per cent of those who paid rent to individuals through agents, and 12.0 per cent of those who paid to individuals directly, have experienced rent increments,” the report says.