At present, the housing gap in Kenya stands at 250,000 annually and rising. A burgeoning middle class and rapid urbanization have resulted in heavy demand for housing. Off-plan sales, which have had success in multiple jurisdictions have had a rocky history in the country.
From the Simple Homes Housing co-operative debacle of 2017 to the Banda Homes scandal, there seems to be more fear than love about the buying of off-plan properties in Kenya. In this article we explore what off-plan purchases are, the weighty considerations to have in mind before committing to such a purchase and the legal protections that do or should exist.
What is an off-plan sale?
Buying a property off-plan essentially means entering into a contract with a developer to purchase a property before construction has started or is completed. In such a case, a buyer is working off blue prints, plans, architectural drawings or CGI renderings of the project in deciding what to buy.
The Advantages of Off-plan Purchases
The advantages of buying houses off-plan are self-evident.
- Off-plan pricing is often discounted below market. This allows a purchaser to acquire a future asset at the current market price but have a capital appreciation up to the period when construction is completed, and this allows for gains of up to 30%. In short, you can buy a house at 6.5 million which may be valued at 9 million after the construction period.
- Off-plan sales usually have flexible payment structures tied to certain milestones in the project. This allows a purchaser to plan how to stagger payments over the course of the construction period instead of being crippled by one-off payments in ready-made houses. The purchaser also had direct access to the developer, and this cuts middleman cost such as agency fees.
- A purchaser can select fixtures and fittings to suit their own tastes and preferences.
The disadvantages of Off-plan Purchases
While there are instances where the risks pay off, there are disadvantages to off-plan sales. For example,
- The final product may substantially differ from the computer-generated images or product brochures.
- There may be inordinate delays during construction whether due to financing or lack of good project management. This may have a negative impact as property values may change across the construction period with the property market being fundamentally cyclic in nature.
- Changes in laws, policies, and regulations may affect the initial vision or plans for the project.
What questions should a buyer ask themselves before committing to purchase a property off-plan
A buyer needs to ask:
- How reliable is the developer of the project?
Historically, which projects have the developer been tied to, and have they been successful? It has come to light that in some of the recent housing scandals in Kenya, the directors or key officers of the companies implicated had implemented similar scams in the past. Is the developer giving regular construction updates? Are regular site visits scheduled? Be wary of projects giving you a completion date without setting out the relevant milestones i.e. when is groundbreaking? when will the foundation be done? when will the tenth floor be reached and will you be allowed to visit to see all this milestones. Ideally each construction project should have a critical path schedule that outlines the sequence of construction activities from start to finish and with key milestone dates
- Does the Project have all the required regulatory approvals?
At SMC we have come across instances where purchasers have signed on to a project where the developer has not even acquired title to the project land. Some of the key questions to ask are:
- Is the developer the owner of the land and this can be verified by a due diligence into the property.
- Has the developer changed the user of the land as per zoning laws so that they conform to the intended use of the project land? We have come across multiple instances where estates are built on agricultural land, where commercial or mixed-use estates are put up in areas zoned as residential or 40 apartments are built on a land meant for a single residential dwelling. A purchaser should ask for the relevant PPA 1 and 2 where a developer asserts he has changed the user.
- Are the building plans registered with the relevant county government and building permits issued? Has an environmental impact assessment been carried out on the project land and have NEMA approval issued? Is the project registered with the NCA?
- How long will the project take? This affects a purchaser’s budgeting for payments
- What are the full costs? Purchase price, advocates’ fees, service charge, management fees. You should be aware of all costs above and beyond the purchase price before committing your deposit.
Does Kenyan law protect purchasers of off-plan properties?
Unfortunately, there is currently no comprehensive legislation that specifically touches on the issues the sale and marketing of off-plan purchases.
The Sectional Properties Act, 2020 touches briefly on this. Under its section 43 it requires a developer selling proposed units to disclose certain information such as the management by-laws and the charge on the land including the term of the loan and loan amounts outstanding. This is crucial information as we at SMC have seen instances where a purchaser buys an off-plan property but at the point of completion, the property is not discharged from the loan secured by the project land. Where a developer defaults the financier has the right to sell the land plus the apartments that were bought but not discharged.
The Consumer Protection Act, 2012 also has general provisions that may have some application to off-plan purchases which speak to issues of false or unconscionable representations to consumers. The Act seeks to protect consumers generally from fraudulent conduct.
However we at SMC also wish to emphasize the importance of negotiating the off-plan purchase contract. The temptation for most Kenyans has long been to save on legal costs by utilizing the developer’s lawyer but be warned that the developer’s lawyer is there to protect the developer’s interests and, in most cases, the sale agreement for off-plan purchases is skewed in favour of developer.
Lessons from other Jurisdictions
The Kenyan government has made housing a big focus item. With the increased availability of off-plan developments and projects, surely it is time for the government to address issues of developers going insolvent or simply not completing projects so as to protect purchasers who have invested in off-plan projects from loss. We can borrow a leaf from these jurisdictions:
- The UK: The UK has a Consumer Code for Home Builders which sets out mandatory requirements that home builders must meet in their marketing and selling of new homes and their after-sales customer service. This is in an effort to make the process fairer and more transparent.
- Australia: Australia’s conveyancing legislation has the following protections:
- Developers have to attach a disclosure statement to the off-plan purchase contract that outlines key information such as a draft plan of the project prepared by a registered surveyor showing key details of the development.
- Developers have to notify purchasers of any changes during construction that will adversely affect the use or enjoyment of the property being sold such as the schedule of finishes or the facilities. Purchasers are allowed to rescind contracts or claim compensation in the event of such material changes.
- In Australia, any money paid by the purchaser by way of deposit or installment under the off plan purchase contract must be retained by the stakeholder in a trust and cannot be released to the developer before completion.
We believe these are all precedents we could borrow from to ensure fairness in off-plan sales.