A Comprehensive Legal Guide
Investing in off-plan properties has become an increasingly popular choice for real estate investors in Kenya. Off-plan properties, purchased before completion, offer various benefits, such as lower prices and the potential for high returns. However, the lack of specific legal frameworks governing these transactions necessitates a thorough understanding of the legal implications and risks. This guide provides a detailed overview of the off-plan purchasing process, key legal considerations, and best practices for ensuring a secure investment.
Understanding Off-Plan Properties
Definition and Context
Off-plan properties refer to real estate available for purchase before construction has commenced or is completed. Buyers typically rely on architectural plans, blueprints, and relevant approvals to decide whether to invest in that property development concept. For off-plan sales, the payment terms always depend on the arrangement between the buyers and the sellers, and at times, they can be done in instalments as the project progresses. This type of investment can be appealing due to potentially lower prices and the opportunity for capital appreciation once the project is finished.
Legal Benefits of Off-Plan Properties
- Lower Purchase Prices: Developers often offer off-plan properties at discounted rates to attract early buyers. This allows investors to secure properties at a lower cost than completed projects.
- Potential for Capital Appreciation: As the property market in Kenya continues to grow, off-plan properties can appreciate significantly in value by the time they are completed.
- Customization Options: Buyers can often influence the design and layout of their properties, ensuring that the final product meets their specific needs and preferences.
- Long-term investment Potential: Off-plan properties are seen as long-term investments, especially in rapidly developing areas, thus driving the demand for them. Investors and buyers anticipate the surrounding infrastructure, amenities, and property values will improve when the project is completed.
Legal Risks Involved
- Developer Reliability: There is a risk that the developer may not complete the project on time or may abandon it altogether. Legal safeguards are essential to mitigate this risk.
- Market Volatility: Real estate market fluctuations can impact the value of off-plan properties, potentially affecting the expected returns on investment.
- Construction Delays: Construction delays can disrupt investment plans, mainly if the property is intended for resale or rental upon completion. Developers often do not complete the construction within the promised time frame, affecting the buyer’s financial plans.
- Quality Concerns: The completed property may not meet the expected standards or match the initial plans and specifications.
- Financing Challenges on Loan Approval: Securing financing for off-plan properties can be more challenging than purchasing a completed property. This is because lenders may have stricter criteria and requirements for financing off-plan investments, including higher down payments or additional documentation
- Absence of Rental Income: Until the property is completed, buyers cannot generate rental income from their investment. This lack of immediate cash flow can disadvantage buyers who rely on rental income to offset their expenses or finance their investments.
Governing Laws and Regulations
The legal landscape for off-plan properties in Kenya is primarily governed by general land laws and the Law of Contract. However, no specific provisions address off-plan transactions, leaving buyers vulnerable to various risks. However, the primary legislation that offers buyers the confidence to invest in off-plan properties is The Sectional Properties Act of 2020. This act provides a framework for subdividing buildings into units owned individually. It can be registered, and the owner issued a certificate of title, with common areas jointly owned by the unit owners. The certificate of title if the property is freehold or a certificate of lease if it is leasehold shall include its proportionate share in the common property.
Key Contractual Element contained in an Off-Plan Sale Agreement
Based on a review of an actual Agreement for Sale, here are some critical contractual elements to consider when securing an off-plan property in Kenya:
- Definitions and Interpretations:
- Key terms such as “Commencement Date,” “Certificate of Practical Completion,” “Completion Date,” “Construction Commencement Date,” and “Certificate of and “Defects Liability Period” should be clearly defined.
- Example: “Certificate of Practical Completion” means the certificate issued by the Architect to the effect that, in the Architect’s opinion, the Works have reached a stage where they can be used for the purpose they were built.
- “Certificate of Occupation” means the certificate issued by the relevant County Government or any other competent authority that the Property is fit for occupation.
- Construction and Approvals:
- The vendor must procure all necessary approvals, consents, licenses, and permits for the construction.
- The approvals, consents, licenses, and permits necessary or relevant to the carrying out of the works include –
- Copy of the Title for the property;
- National Construction Authority (NCA) approval.
- National Environment Management Authority (NEMA) approval;
- Registered building plans.
- Registered floor plans for the particular Flat No.
- Management company registration documentation; and
- Borehole drilling approval (if applicable).
- Payment Terms:
- The purchase price should be clearly outlined, along with the payment schedule comprising the deposit and the balance to be paid in particularized instalments.
- Defects Liability:
- The vendor is responsible for rectifying any defects within a specified period.
- Example: The Vendor shall, at its own cost and expense, make good any defects, shrinkages, or faults that appear in the Premises within the Defects Liability Period.
- Handover:
- The conditions for handing over the property should be specified.
- Example: On the Completion Date, after the Purchaser’s full payment of the purchase price and costs delineated in Schedules 2 and 3, the Vendor shall hand over the keys to the Premises to the Purchaser.
- Dispute Resolution:
- The dispute resolution mechanism should be clearly stated through ADR (Negotiation, Mediation and Arbitration) or the Court Process.
The Process of Purchasing an Off-Plan Property in Kenya
Purchasing an off-plan property involves several critical steps that ensure the buyer secures a legal and viable investment. Below is an outline of the various processes involved:
- Initial Research and Developer Vetting
- Identify Potential Projects: Research various off-plan property projects and identify those that meet your investment goals.
- Developer Background Check: Investigate the developer’s history, previous projects, financial stability, and reputation in the market.
- Project Viability Assessment: Evaluate the project’s feasibility, including location, infrastructure development, accessibility, and market potential.
- Legal Due Diligence
- Verify Land Ownership: Ensure the developer has a valid title deed for the land on which the project is being developed.
- Check Approvals: Confirm that the developer has obtained all necessary approvals, licenses, and permits from relevant authorities (e.g., National Construction Authority, county government).
- Engage a Lawyer: Hire a qualified lawyer to help with the legal due diligence process and review all documents.
- Review and Sign the Sale Agreement
- Drafting the Agreement: The developer, usually through their legal team, drafts the sale agreement. This document outlines the terms of the purchase, payment schedules, timelines, and obligations of both parties.
- Contract Review: Your lawyer should thoroughly review the sale agreement to ensure it protects your interests and is in compliance with Kenyan laws.
- Negotiation: Negotiate any unfavourable terms in the agreement with the developer.
- Signing the Agreement: Once satisfied, sign the sale agreement and pay the initial deposit as stipulated.
- Payment Plan and Financing
- Structured Payment Plans: Most off-plan purchases involve staggered payments tied to construction milestones. Ensure the payment plan is clear and manageable.
- Mortgage Options: If financing through a mortgage, liaise with your bank to secure a mortgage facility that suits your needs.
- Developer Financing: Some developers offer in-house financing options. Compare these with bank loans to determine the best option.
- Monitoring Construction Progress
- Regular Updates: Maintain regular communication with the developer for updates on the construction progress.
- Site Visits: Schedule regular visits to the construction site to monitor progress and ensure adherence to agreed specifications and timelines.
- Progress Reports: Obtain progress reports from the developer and the architect overseeing the project.
- Handling Variations and Delays
- Variations: If there are any changes to the original plans, ensure these are documented and agreed upon by both parties.
- Dealing with Delays: Understand the provisions in the contract regarding construction delays and how they are to be handled. Ensure any extensions of time are justified and documented.
- Inspection and Handover
- Pre-Handover Inspection: Once the property is nearing completion, conduct a thorough inspection to identify any defects or issues that need addressing.
- Defects Liability Period: The developer is usually responsible for fixing any defects identified during this period. Ensure all issues are rectified before the final handover.
- Handover Process: Upon satisfactory completion and payment of all dues, the developer will hand over the property to you, including keys and necessary documents.
- Registration and Transfer of Ownership
- Preparation of Documents: The developer’s lawyer will prepare the necessary documents for the transfer of ownership.
- Stamp Duty Payment: Pay the required stamp duty, which is typically 4% of the property’s value.
- Registration: The transfer documents are lodged at the Lands Registry for registration. Ensure the property is registered in your name.
- Post-Purchase Considerations
- Service Charges and Maintenance: Be aware of any service charges or maintenance fees applicable once you take possession of the property.
- Insurance: Obtain adequate insurance coverage for the property.
- Moving In: Plan and manage the move into your new property, including any final touches or furnishings.
- Dispute Resolution
- Arbitration and Mediation: Understand the dispute resolution mechanisms outlined in your sale agreement. Arbitration or mediation is often recommended for resolving conflicts with the developer.
- Legal Recourse: In case of unresolved disputes, you may seek legal recourse through the courts. Ensure your lawyer is involved in all stages to protect your interests.
Conclusion
Investing in off-plan properties in Kenya can be rewarding when approached with careful legal planning and due diligence. The process involves multiple stages, from initial research and developer vetting to legal, due diligence, structured payment plans, and diligent construction progress monitoring. Understanding the legal framework, particularly the Sectional Properties Act of 2020, is crucial in ensuring your investment is secure and all regulatory requirements are met.
At Njaga & Co. Advocates, we are committed to providing comprehensive legal services to assist you in navigating the complexities of off-plan property investments. Our expertise in Real Estate Law ensures that your interests are protected and your investment journey is smooth and successful.