A Lawyer’s Guide on How to Secure an Off-plan Investment

Over the years, the Kenyan real estate market has grown exponentially as many Kenyans consider real estate to be the most secure form of investment. Interestingly, statistics show that in the wake of the Covid-19 Pandemic, many people have now prioritized homeownership in fear of the economic uncertainties and this, among other factors, has created a boom in the uptake of real estate properties particularly off-plan purchases.

So, what is an off-plan purchase?

“An off- plan purchase refers to buying of property before its completion or in the early stages of the project, relying on the promise that the project will be completed in a certain duration of time.”

The concept of off-plan purchases has gained traction among Kenyans as it allows the end buyers to acquire properties below their actual market value while holding on to the promise of capital appreciation once the projects are completed. Undoubtedly, this makes off-plan purchases great investment opportunities.

Unfortunately, it is not always sunshine and roses as history has shown that off-plan purchases are rife with risks that unsuspecting purchasers have had to deal with after the fact. Some of these risks include;

• the project not kicking off at all;
• the project not being completed on time or stalling due to misappropriation of funds by the developers;
• the developers handing over incomplete projects;
• unscrupulous developers duping purchasers that they have ownership of the project land;
• lack of quiet possession after project completion due to auction threats from financiers of the project; and
• in some instances developers failing to issue titles to purchasers at completion.

All these happen notwithstanding the purchasers having paid their purchase price and incidental costs in full.  

Regrettably, there is no specific legislation governing off-plan investments in Kenya and as such, one can only rely on the existing land laws and the Law of Contract, CAP 23 of the Laws of Kenya. As per the Law of Contract, agreements for the purchase of land must be in writing for them to be enforceable. Unfortunately, despite being written, contracts between developers and buyers are often manifestly one-sided. The terms of the contract therein always favour the developers who are often unwilling to accept the purchaser’s terms or to negotiate some of the absurd and vague terms particularly on completion. Ultimately, the purchasers are left at the developers’ mercy and they end up yielding to the unfair terms of the contract due to the allure of the discounted purchase price.  

To some extent one may argue that these one-sided contracts fail to achieve the key element of consensus ad idem (meeting of the minds between the parties) in a contract. Additionally, one is left wondering whether the developers ever enter into off-plan contracts in good faith ? It seems from the way the contracts are drafted the developers already contemplate their failure to discharge their obligations as promised especially with regard to completion.

Due to these risks, it is important for an investor to involve an advocate conversant with conveyancing law and practice before entering into an off-plan transaction. The advocate will advise on some of the key factors to consider before entering into such a transaction.

Before signing an agreement for an off-plan purchase, the purchaser or their advocates should undertake thorough due diligence on the following matters;

• Due diligence on the Project Land: Obtain a copy of the title and carry out an official search at the relevant lands registry to ascertain the ownership of the land and whether the land is encumbered. Ensure that the developer owns the project land and if the developer is selling as a beneficial owner, confirm when the title will pass to the developer but in the meantime, ensure that the registered owner issues a confirmation of sale and the intention to transfer the project land to the developer. A physical inspection of the property and a regular site visit should also be carried out to keep abreast with the progress of the project. Investigate any threatened, pending or completed litigation on the property as well. 

It is also common for developers to obtain financing to fund the project and thus charging the project land. In the unfortunate event that the developer fails to repay the loan, the financier may auction the property and thus, jeopardizing the buyer’s interest. To avoid such pitfalls, ensure that the purchase price is paid to an account held by the financier, an account that services the loan. Some developers re-route these payments and fail to pay the financiers leaving purchasers at the mercy of lenders. Your advocate should also ensure they obtain a written consent to sell by the financier or an undertaking by the financier that the property will be discharged fully upon payment of the purchase price in full.

• Due diligence on the Developer: find out whether the developer has successfully completed other projects in the past, whether there are any pending litigation cases against the developer and generally look into the developer’s reputation and possibly their financial muscle. Do not limit your interaction to the Project Agents alone, go further and learn the identity of the developer and its directors.

• Verification of the Project Approvals: Before a development is approved for construction, there are various approvals that a developer must obtain prior and these include; Construction Approvals from the National Construction Authority, the Environment Impact Assessment (EIA) License from National Environment Management Authority (NEMA), the Approved and Registered Building and Floor  Plans, Change of User (if necessary) from the respective county government among others. Request the developer to furnish you with these approvals for your due diligence and verification. Unscrupulous developers are setting up projects without the requisite approvals and leave the purchasers without recourse as to completion and processing of titles. You can take a step further and investigate the certification of the project team to ascertain their credentials and reputation.

• Terms of the Agreement: After sufficient due diligence has been done, the purchaser and developer should enter into a written agreement. As stated earlier, for a contract of land to be enforceable, it must be in writing. The contract helps outline the terms of the agreement, the rights and obligations of each party and provides remedies should either of the party default on their obligations.

There are key terms that should be included in the Agreement to protect the buyer’s interest. First, the payment plan should be spread out within the construction period with the final payments being made at completion. Secondly, the developer should give warranties as to its ownership of the property. Further, the completion dates should be well stipulated. Some developers provide vague completion dates leaving such agreements open in perpetuity to the disadvantage of the purchaser.

In conclusion, despite the risks associated with off-plan purchases, with extensive due diligence and a solid agreement for sale, an off-plan purchaser can make an informed decision in making real estate investments and ultimately avoid falling prey to these unscrupulous developers.