Every so often a case like the recent Erdemann case pops up and Kenyans are aghast. How can a court give a bank the right to auction off properties that have been seemingly sold off to homeowners by a developer?
The situation is regrettable but the cause of this is simple enough: buyers on average never get their own real estate lawyers to review the paperwork or undertake due diligence before purchase. Courts don’t exist to rewrite contracts but to interpret them based on the facts and the law.
At the point of purchase of properties, especially apartment units, the purchaser is given a schedule of costs which include the purchase price, the stamp duty, service charge, management company costs, and of course the legal fees of the advocates for the developer.
A buyer looking to keep costs down naturally does see the need to engage another lawyer. This is in large part because “the documents are standard” and the “seller will not accept any changes”. This is of course the first nail on the coffin.
Just because you pay the developer’s lawyer, it doesn’t make him your lawyer. He owes you no fiduciary duty and is under no obligation to alert you if anything goes wrong. His loyalties lie with the Developer and the developer only. He is not obligated to alert you of any red flags in the documentation or development.
The buyer of a property development or an off-plan house needs an independent lawyer to
- undertake due diligence on behalf of a buyer – we have come across instances where the developer is not the owner of the land but has entered a joint venture arrangement with a landowner to develop the land and thereafter sell off the units. In such a case, unless the developer is actually noted on the title, he has no interest to sell.
- ascertain that planning permissions have been obtained – we have also come across instances where the developer: fails to change the permitted user of the land or get zoning approval where the development is done, fails to undertake an environmental impact assessment for development, or fails to register to build
- check that the contract protects you from construction delays or delays in giving you title to your apartment unit and alert you of any clauses that may be contrary to your interests in the lease or sale agreements – most of the contractual clauses in development sales are boilerplate and tilted in favor of the developer or seller. You will be hard-pressed to find clauses that put the developer or seller to task on any issue. For example:
- purchase monies being paid directly to the seller – would it be better to have the money in escrow or held by the advocate? Even where this is not practical in cases of default can there be clear timelines for refunds?
- For off-plan developments – can there be a milestone schedule showing progress from groundbreaking to completion?
- Can there be clear remedies for breach both by the buyer and the seller?
- What is the dispute resolution mechanism? Is arbitration really the best way to resolve disputes?
- Are there clear timelines for getting a title?
- check that the property you are trying to buy is not charged to a bank as security – while it is not unusual for the entire development land to be charged to banks as security for some lending, upon purchase of a unit it is important to ensure that you get a document called a partial discharge of charge for your unit. This document essentially releases the unit you have bought from the larger loan that the development land secures.
Please contact Divinah Sarange Ongaki (dso@smc-legal.com or info@smc-legal.com) in case you require any clarification on the contents of this article.