Revisiting due diligence in light of the Supreme Court Decision in Dina Management Limited v County Government of Mombasa & 5 others [2021].

Due diligence refers to the process of investigating and verifying information about an asset before transacting on it.

In terms of land, the key objective of due diligence is to thoroughly inspect every relevant aspect of a property, its owner, and the owner’s compliance with any restrictions, terms, and conditions on which the property is held.

Unfortunately, buyers and their advisors often do not go beyond a property search in the due diligence process. The principle of Caveat Emptor which means “buyer beware” places the burden on a buyer to sufficiently examine a property before making a purchase. The principle in effect states that where a buyer relies on his own skills and the land purchased turns out not to be what he bargained for, he cannot later complain.

The pros and cons of a property search at the land registry

A search is a fundamental first step in the due diligence process. A property search discloses:

1. who the owner of the property is;
2. if a leasehold property the term of the lease and the head lessor;
3. the size of the property; and
4. any encumbrances such as caveats, leases or charges on the property.

However, a search cannot disclose

• the regularity of the chain of title – this can only be done through a historical due diligence to ascertain that how the property changed hands from the point title was created and whether each transfer was lawful.
• whether physical planning and land use laws were followed in developing the land – this will involve a separate due diligence into the approvals process for the developments and buildings.
• Overriding interests – these are interests which though unregistered are protected by law and are binding on the owner of the property and include spousal rights, rights of way, charges for unpaid land rates.
• whether the land described in the title relates to the specific parcel on the ground in terms of location, boundaries, size – this can only be verified by a ground survey by a surveyor.

A key point to note is that property searches rely heavily on the records at the relevant land registry. While we laud the Ministry of Lands efforts to digitize land registries, most registries outside Nairobi are still utilizing manual systems. Manual systems are heavily susceptible to sabotage, forgery and multiple allocation and a host of other abuses. That is why it is important to go beyond a property search in the due diligence process.

After the decision in the Dina Management case, the scope of due diligence has formally been expanded by law. Property buyers must now investigate the history of the property, review all relevant documents related to the property, and engage qualified professionals such as lawyers and surveyors to assist in the exercise.

The Dina Management Case

In Dina Management Limited v County Government of Mombasa & 5 others (Petition No. 8 (E010) of 2021), involved a challenge to the validity of title for a property Dina Management Limited had acquired in 1989. The County Government authorized the demolition of the wall facing the beach and flattened the whole suit property to be at the same level as the beach. The County argued that its entry and demolition was an enforcement action to create a thoroughfare to the beach as the suit property was public land and not private. Aggrieved by the actions of the County Government Dina Management moved the court to assert its ownership to the suit property.

Dina Management, a second purchaser of the property, claimed that it was a bona fide purchaser for value, having paid KES.18 million to acquire the property years ago. Dina Management pleaded that it was not party to the unprocedural process of acquiring the title and had undertaken its due diligence before acquiring the said title. Unfortunately, Dina Management could not be protected as an innocent purchaser without notice as it failed to demonstrate that it was diligent before purchasing the suit property. On appeal, the Court agreed holding that Dina Management could not enjoy protection under the doctrine of innocent purchaser and that where property is acquired through a procedure against the law. It was further held that the title subsequently issued was invalid having been acquired illegally and irregularly and as such could not qualify as indefeasible. This decision was reaffirmed by the Supreme Court.

Who is an innocent purchaser now?

An innocent purchaser was a buyer who in good faith paid valuable consideration for property without notice of prior adverse claims. Historically, in order to be considered a bona fide purchaser for value one had to prove that:

• they acquired a valid and legal title;
• they carried out the necessary due diligence to determine the lawful owner from whom they acquired a legitimate title; and
• they paid valuable consideration for the purchase of the property.

However, the decision made in the Dina Management Limited v County Government of Mombasa & 5 others has changed this. The Supreme Court held that to prove one is a bona fide purchaser for value, we must first go to the root of the title, right from the first allotment and establish regularity from there.

A prospective purchaser must therefore undertake due diligence to ensure that the title is valid before purchasing the property. A buyer cannot rely solely on the defense of being a bona fide purchaser for value without notice of defect to the title. However, the sad state of land records in Kenya and ongoing digitization efforts poses great challenges to conducting a full due diligence.

At SMC we partner with surveyors, tax advisors and government officials to ensure that a thorough due diligence undertaken before transaction. Do no hesitate to reach out to us for all your property, company, business and other due diligence needs.