EFFECTS OF CONTROLLED TENANCIES ON MARKET VALUE
EFFECTS OF CONTROLLED TENANCIES ON MARKET VALUE. A COMPARATIVE ANALYSIS OF COMMERCIAL PROPERTIES WITH & WITHOUT CONTROLLED TENANCIES.
MARVIN OTIENO ODIEMBO
A Research Project Submitted in Partial Fulfilment for the Post Graduate Diploma of the Institution of Surveyors of Kenya
CHAPTER ONE: INTRODUCTION1.0 Background of the Study
Control of tenancies has been in the country since before independence. The Rent Restriction Act came into force in the year 1959 while The Landlord and Tenant Act came into force later after independence in the year 1965.
Other countries in the world adopted control of tenancies and particularly rents of residential properties during the First World War. These enactments could have been understandable in the context of the shortages, ideologies and craze of controlling nearly everything ranging from wages and prices. The tenancy control statutes have been modified, abolished or reintroduced in a number of countries CITATION Kow12 l 2057 (Kowuor, 2012).
The Rent Restriction Act applies to dwelling houses with monthly rents of Kenya Shillings Two Thousand Five Hundred (equivalent to approximately twenty five US dollars at current exchange rate) and below. Such rentals form the bulk of rentals for informal housing units in the country, which again form the largest portion of rental market. The statute restricts increase of rent, right to possession, execution of premiums and provides for fixing of standard rents.
The Landlord and Tenant Act (Shops, Hotels and Catering Establishments Act), (Cap 301) of the Laws of Kenya) apply to certain premises and protect tenants of such premises from eviction and exploitation by the landlord. It applies to premises where tenancy has not been reduced to writing, or where reduced to writing, the tenancy is for five years and less, or the tenancy has provided for termination of the tenancy within five years from the commencement of the tenancy otherwise than for breach of covenants of the tenancy.
Despite the aforementioned provisions by The Landlord and Tenant Act (Cap 301), a controlled tenancy cannot arise where one of the parties is government department or agency or a local authority.
Behind the face of every commercial building, there may lie a complex system of relationships created by the distinctive nature of property as an economic commodity. The market for property is not necessarily driven by the desire to own land and buildings. It is instead a market for rights in the product which may have many tiers of ownership. Consequently, a single building might represent the property rights or interests of several different parties CITATION And07 l 2057 (Baum, Sams, Ellis, Hampson, & Stevens, 2007).
Commercial lease agreements are more complicated than residential leases because the terms are negotiable and vary greatly from lease to lease. Before signing a commercial lease, it is usually important to understand the lease terms that define the rights and responsibilities of each party. It is a norm for landlords of various properties in Kenya, to run background checks on potential tenants and ask for references. Most commercial landlords request for personal financial information in addition to information about a potential tenant’s business or firm. It is therefore very easy for a landlord to lose sight of the fact that he is the one in control because they literally hold the key to commercial rental properties.
At times, it is easy for landlords to forget to make informed choices by doing thorough research. This is because leasing terms and rent of commercial properties have remained the big test for both the new and existing players in the real estate industry. New entrants in the real estate industry will tend to engage professionals in the sector so as to make informed decisions such as looking for tenants who will add value to the property by bringing in the right type of business good for other tenants and the surrounding community. In the long run, this enables them to maximize on their returns on investment.
In circumstances whereby a landlord may not have the resources to maintain the property, or not care about the quality of their tenants, thus the state of disrepair of the property may increase as there may be no regular repair and maintenance of the development. Lack of resources to maintain a property may force a landlord to be desperate and lease the property to a tenant without making informed decisions such as not reducing the tenancy into writing, reducing the tenancy into writing but for five years and less and lastly providing for termination of the tenancy within five years from the commencement of the tenancy otherwise than for breach of covenants of the tenancy. This eventually brings about the aspect of controlled tenancy which may hinder the investor on realising the actual potential of the returns on his investment.
The research has been fuelled by the researcher’s desire to establish the effects of controlled tenancies on market value of commercial properties.
Research ObjectivesThe overall objective of this research work is to establish the effects of controlled tenancies on market value of commercial properties in Nairobi’s Zone 1A (CBD).
The specific objectives can be stated as follows;
To establish the challenges of controlled tenancies on commercial properties.
To give recommendations on how to avoid creation of controlled tenancies.
Research QuestionsWhat are the challenges of controlled tenancies on commercial properties?
What are the effects of controlled tenancies on market value of commercial properties?
What are the recommendations on how to avoid creation of controlled tenancies?
The research has adopted the following null (H0) and alternative (Ha) hypotheses;
H0: Existence of controlled tenancies reduces the market value of commercial properties.
Ha: Existence of controlled tenancies does not reduce the market value of commercial properties.
Study Area and Scope
The scope of the study shall be limited to investigating the effects of controlled tenancies on market rental value on commercial properties. The researcher shall concentrate on sample commercial properties within Nairobi’s Zone 1A (CBD) and thus any other real estate sub-market within Nairobi City County and elsewhere will not form part of this research project.