29/07/2020
LEGAL ALERT!
NEW POLICY ON STAMP DUTIES FOR LEASE AND TENANCY: HOW IT AFFECTS YOU AS A TENANT
The Federal Inland Revenue Service has issued a new policy making it mandatory for tenants to pay up to 6% stamp duties on tenancy/lease agreements entered into with their Landlords The policy which was disclosed in a statement on Wednesday, July 22nd, 2020 by the Director, Communications and Liaison Department of the FIRS, Abdulahi Ahmad, has been strongly criticized as being outrageous, ill-timed and unduly burdensome on tenants. But in swift reaction, the FIRS on Saturday, 25th July 2020 via its twitter handle stepped in to clear the air, stating that that the 6% stamp duties earlier announced does not apply across board but relative to certain types of tenancy. What therefore is the implication of this new policy to current and prospective tenants? What types of tenancy does it apply? What are the rates stamp duties applicable to each type of tenancy? These are some of the issues that we shall discuss in this newsletter.
What are Stamp Duties?
Stamp duties are a form of tax that government place on legal instruments (documents). It is usually imposed on but not limited to the transfer of assets or property. It is otherwise called Stamp Taxes. In Nigeria, stamp duties have been a major part of our Nation's laws since 1939. It is regulated by the Stamp Duties Act (SDA) Cap. S8 Laws of the Federation of Nigeria 2004. This piece of legislation was amended in 2019 by the sFinance Act. Section 19 of the SDA provides for the legal effect of a duly stamped instrument which is that it will admissible in evidence in a court of law.
Imposition of Stamp Duty on Lease/Tenancy:
The SDA provides for certain transactions and matters that must be stamped and further prescribes in its Schedule the rate of duties payable in respect of same. One of such transactions which attract stamp duty payment is a lease transaction. A lease is an agreement to rent a property for a period of two years and above. It is distinguishable from a tenancy which is a short term lease usually for a year or less. In this article both terms are used interchangeably.
It is important to note that the imposition of stamp duties on tenancy/lease agreements is not alien to our laws. It has always been recognized under the Stamp Duties Act although it was never enforced. Section 68 of the SDA and the Schedule to the Act specifically provides for stamp duties to be charged on leases as well as the applicable rate.
Rate of Stamp Duties for Lease/Tenancy
The Schedule to the Stamp Duties Act stipulates the applicable rate of duty to be paid on lease/tenancy transaction. Contrary to the 6% flat rate initially announced by the FIRS, stamp duties on lease and tenancy are charged ad valorem i.e. according to the percentage of the total value or sum of the tenancy or lease. Hence different rates apply to different categories of tenancy. Accordingly, a tenancy of less than 7-years is liable to a stamp duty of 0.78% while the rate of 3% applies to tenancy of 7 to 21 years and 6% in respect of tenancy of 21 years and above.
It must however be noted that stamp duties on lease/tenancy only apply to new agreements and not renewals except such renewal is on terms which are different from the initial agreement. Thus where an existing tenant merely renews his tenancy on the same terms as the previous agreement, he is not liable to pay stamp duties on the said renewal. But if a new agreement is drawn up with terms different from the earlier instrument, the appropriate rate of stamp duties will apply.
Implications for Current and Prospective Tenants:
The implementation of the new policy on stamp duties for lease/tenancy imposes a responsibility on tenants to calculate, deduct and remit to the FIRS the correct percentage of stamp duties in respect of a tenancy or lease agreement entered into with the landlord in accordance with the statutory rate stated above. This is without prejudice to any additional charges such as agency, agreement and service fees/charges which may be payable by the tenant the landlord. Although the FIRS has downplayed concerns that the new policy may lead to an increment in rent, there is no guarantee that property owners or their agents will not increase rents to cover for the amount to be deducted by the tenant and remitted to the FIRS as stamp duties. This has the effect of increasing the cost of housing and causing untold hardship to tenants.
Conclusion:
Stamp duties have been an integral part of our laws since the colonial period. The recent policy of FIRS mandating the payment of stamp duties on lease/tenancy agreement is merely in compliance with the provisions of the Stamp Duties Act which has not been enforced hitherto. The policy when fully implemented holds the prospects of increased revenue for the government and may significantly increase the cost of leases for residential and commercial purposes. Parties to any lease or tenancy agreements are therefore advised to comply with the new policy in order for such agreement to have a binding effect.
DISCLAIMER: This newsletter is for informational purposes only and is not intended to be a substitute for specific legal advice from a qualified legal professional on the subject which it purports to address nor create an attorney-client relationship between our firm and any person who may have access to the information or views expressed herein.
