Off-plan property purchases have become a significant trend in Kenya’s real estate market. These transactions involve buying property before it is fully built or in the early stages of construction, offering potential benefits like lower prices and capital appreciation. This allows buyers to acquire properties at prices below the actual market value, with the expectation of capital appreciation upon project completion. However, they also come with substantial risks that require careful consideration and mitigation.

CHARACTERISTICS OF OFF-PLAN ARRANGEMENTS

1. Pre-Construction Purchase: Buyers commit to purchasing property before it is fully built.
2. Developer Financing: Developers often use Funds from these sales to finance the construction.
3. Payment Structure: Purchasers typically pay in stages, with a deposit followed by installments aligned with construction milestones.
4. Discounted Prices: Properties sold off-plan are often offered lower than completed units.

LEGAL FRAMEWORK GOVERNING OFF-PLAN PURCHASES IN KENYA

Currently, there is no specific legislation governing off-plan investments in Kenya. Purchasers rely on existing land laws and the Law of Contract, which mandates that agreements for land purchase must be in writing to be enforceable. Unfortunately, these contracts often favor developers, leaving purchasers vulnerable to unfair terms.

A CAUTIONARY TALE FOR OFF-PLAN INVESTORS- WILLOW PARK LIMITED V. JAMII BORA BANK LIMITED- [2019] EKLR

In the case Willow Park Limited v. Jamii Bora Bank Limited, Willow Park Limited (the developer) obtained financing of KShs. 180 million from Jamii Bora Bank for the construction of four blocks of apartments on land parcel LR No. Kiambaa/Thimbigua/7186. The loan was secured by a charge registered against the property. Despite several extensions of the repayment period, Willow Park Limited defaulted on the loan.

Off-plan purchasers, who had bought units in the development through agreements with the developer, found themselves at risk when Jamii Bora Bank moved to realize its security by selling the charged property. These purchasers sought to stop the sale, asserting their proprietary interests in the units they had paid for.

COURT’S RULING: BANK’S RIGHTS PREVAIL OVER OFF-PLAN PURCHASERS

The court addressed several consolidated suits involving off-plan purchasers, the developer, and the bank. The court ruled that:

1. Statutory Right of Sale: Jamii Bora Bank had the legal right to exercise its power of sale due to the developer’s default on the loan repayment.
2. Notice to Purchasers: The bank was not obligated to serve statutory notices to the off-plan purchasers because their interests were subordinate to the bank’s charge.
3. Protection of Bank’s Interests: The court upheld the bank’s right to recover its loan by selling the charged properties, emphasizing that the purchasers’ agreements with the developer did not override the bank’s secured interest.

RISKS ASSOCIATED WITH OFF-PLAN INVESTMENTS

Investing in off-plan properties can offer substantial benefits, including lower purchase prices and the potential for capital appreciation. However, these investments also come with significant risks that buyers must carefully consider and mitigate. Understanding these risks is crucial for making informed decisions and protecting your investment.

1. Legal Risks: As highlighted in the Jamii Bora matter, banks’ rights to recover loans can supersede the rights of off-plan purchasers.
2. Fraud: Unscrupulous developers may disappear with purchasers’ deposits without completing the project.
3. Project Delays: Delays due to various issues can frustrate purchasers’ expectations.
4. Quality Concerns: Finished units may not meet the promised standards, leaving purchasers dissatisfied.

PROTECTING PURCHASERS’ INTERESTS

Given the numerous risks associated with off-plan investments, it is crucial for purchasers to take proactive steps to protect their interests. Implementing a robust strategy that includes thorough due diligence and legal safeguards can significantly mitigate potential issues and enhance the security of your investment.

1. Due Diligence on the Title: Verify if the property is encumbered to a bank and assess the performance of any existing loans.
2. Due Diligence on the Developer: Verify the developer’s financial stability, track record, and ensure the project has necessary approvals.
3. Register Interests: Register a caution or caveat against the title to notify third parties of your interest.
4. Insist on Escrow Arrangements: Use escrow accounts for payments to protect investments.
5. Structured Payment Milestones: Ensure the payment agreement is based on construction phases, with the final purchase price due upon completion.
6. Refund Clause: Include a clause in the contract that provides for a refund in the event of inordinate delays or default by the developer.
7. Seek Legal Advice: Engage professionals to review the sale agreement to ensure your interests are well-protected.
8. Monitor the Project: Regularly check the project’s status to ensure progress aligns with the agreement.

CONCLUSION

The off-plan property market in Kenya continues to grow, driven by urbanization, demand for affordable housing, and investor interest. While the market presents lucrative opportunities, it is not without its challenges. This kind of Investment can be risky for buyers when developers secure project loans from banks and fail to repay which leads to the Bank exercising its power of Sale to recover its debt. This will lead the buyers losing their investment. Purchasers should therefore carefully review contracts and conduct thorough due diligence on the developer’s financial stability and track record before committing to a purchase. Regulatory improvements and increased transparency are essential to safeguard buyers and sustain the growth of this sector.