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How investors can secure viable off-plan purchase

By Norah Mutuku, Irene Kariuki and Josphat Kaibiru

Many Kenyans consider real estate as one of the most stable and secure forms of investment. One of the options available to a person wishing to invest in real estate is to purchase the property “off plan”.

An off-plan purchase is an arrangement where the purchaser invests their money into a project or a property that is yet to be developed or to be completed, on the promise that the property will be fully constructed within a particular time span. The purchaser would ordinarily have to pay the entire purchase price or the larger portion of it, which is ideally supposed to be utilised in the construction of the project.

Most purchasers and investors are attracted to off-plan purchases due to the lower prices offered by the developers, as compared to investing in already constructed houses. While this may be a reasonable allure, off- plan investments are rife with risks that some purchasers have had to bear.

The legal framework on off-plan transactions in Kenya is the general land laws and the law of contract, with no specific provisions for off-plan transactions. The basic principles of the law of contract also apply to land transactions including the principle of nemo dat quon non-habet, which means that the person selling any property must have the legal ownership of the property.

The grievances by most off-plan purchasers include the failure by the developers to deliver on their promises or to deliver them on time, developers delivering poor quality properties, and the purchasers being duped by unscrupulous people who pose as developers only to later find out that the purported developers did not own the land on which the proposed development was to be undertaken. In some cases, the purchasers, after completion of the project, receive auction threats from financiers of the developer’s project despite having paid the entire purchase price to the developers.

What then should the purchasers look out for when purchasing properties off-plan? Before entering an off-plan purchase transaction, the purchaser or their advocates should conduct exhaustive due diligence on the parcel of land on which the developer intends to construct the property to ascertain that the developer owns the land. While the construction of the project can be executory (meaning that it will happen in future), the ownership of the land by the developer/vendor must be present. The purchaser should also visit the project site and conduct periodical searches over the property whenever possible even after entering the agreement to purchase to ensure that the property has not been charged without the purchaser’s knowledge.

The purchaser, or their advocates, must also conduct due diligence on the developer to find out whether the developer has successfully completed any projects in the past, whether there are any court cases against the developer, and generally on the reputation of the developer. The purchaser should also demand for proof of all relevant government approvals and development plans for the project.

It is also important for the purchaser, with the help of their advocates, to find out whether the parcel of land on which the project is to be developed is encumbered. This is to avoid a scenario where the purchaser, after obtaining possession of their property, is threatened by financial institutions wanting to exercise their statutory power of sale over the land on which the property is constructed.

Consequently, if the land is charged to a financier, the purchaser or the purchaser’s advocates ought to confirm before signing the sale agreement whether the purchase price is to be paid to the financier. This is because some developers, despite having agreed with their financiers to have the purchase price paid to the financier or through the developer’s account with the financier, re-route the money to accounts in other banks failing to service the loan. This often leaves the unsuspecting purchasers at the mercy of the financiers. The purchasers should also ensure that the financier issues written consent for the purchase of the property from the developer/vendor and where possible obtain an undertaking from the financier that the financier will discharge the property once the purchase price is paid in full.

In addition to conducting due diligence on the land and developer, the purchaser should pause and consider possible risks, however remote, before signing a manifestly one-sided contract with the developer. Most developers prefer a one-sided contract that only protects them and leaves the purchaser to proceed in the hope that the developer will honour their side of the bargain. As the units are usually marketed as “being sold below market price”, some buyers, even after hiring a lawyer to advise them and receiving advice that the contract is one sided, usually succumb to the developers “take it or leave it” attitude as they cannot stand missing out on the deal. Once the purchaser has signed the one-sided contract and paid a deposit, and sometimes the entire purchase price, he or she remains at the mercy of the developer who may take years to complete the development, if at all. The purchaser cannot take legal action against the developer as the developer would be acting within agreed terms.    

To sustain confidence in the off-plan developments, developers should strive to protect their interest while at the same time ensuring that the purchasers’ interests are not compromised. It is common for developers to obtain financing from financial institutions to put up a project. In such a case, it would be good for the developer to ensure that the purchasers and the financier are aligned. The first step would be to ensure that the purchaser is aware of the loan and the financier is aware of every unit that is sold and gives written consent to the sale. A case in point is the case of Innercity Properties Limited v Housing Finance & another; Josephine Mukuhi & another (Interested Parties) (2020) (eKLR). The plaintiff was the proprietor of Zahara Apartments, and the interested parties were the purchasers of the apartments. The defendant, the bank, had financed the development and was threatening to exercise its statutory power of sale over the apartments due to the plaintiff’s default in paying off the outstanding debt. The plaintiff and the interested parties applied for an injunction to stop the bank from exercising its statutory power of sale. Justice Majanja in his determination indicated that the bank, being the chargee, must give its consent to the vendor to sell the property and the purchasers must show that they received the consent of the bank to purchase the apartments or that they had paid to the bank any money. “Since they have not established a legal claim against the Bank, the court cannot issue an injunction in their favour”. 

It is however not all doom and gloom for off-plan purchasers and potential investors in off plan property. With the proper legal advice and thorough due diligence, the purchasers can make informed decisions and avoid falling victim to unscrupulous developers.

The article was featured in the Business Daily on 7 December 2021 and can be accessed here

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