INTRODUCTION:
A real estate contract is a legally binding document that outlines terms agreed upon when two or more individuals negotiated a real estate transaction. It contains information such as the parties involved, price and terms, contingencies, acceptance date, expiring date, and homestead classification. A real estate contract aims to clarify the home buying process or renting while offering protection to both the buyer and seller.
Real estate contracts in Kenya, like in many other jurisdictions, play a crucial role in defining the rights, obligations, and responsibilities of parties involved in property transactions. Key elements of real estate contracts in Kenya include purchase agreements, leases, and property management agreements. To create enforceable contracts, certain legal requirements must be met, and it is essential to be aware of common clauses and potential pitfalls. Let's explore these elements in more detail:
A. PURCHASE AGREEMENTS:
Legal Requirements: A valid purchase agreement in Kenya must fulfill essential elements such as mutual consent, lawful object, consideration (price), capacity of parties, and compliance with formalities (e.g., written form, stamp duty).
Common Clauses: Purchase agreements typically include clauses specifying the property details (e.g., location, size), purchase price, payment terms, conditions precedent (e.g., obtaining financing, obtaining clear title), warranties, dispute resolution mechanisms, and timelines for completion.
Potential Pitfalls: Common pitfalls include unclear or ambiguous terms, inadequate property descriptions, incomplete or incorrect information, lack of proper title investigations, failure to comply with statutory requirements, and inadequate remedies in case of breach.
B. PROPERTY MANAGEMENT AGREEMENTS:
Legal Requirements: Property management agreements require mutual consent, consideration, and compliance with contractual formalities. They should clearly outline the scope of services to be provided by the property manager and the compensation to be paid.
Common Clauses: Property management agreements often include clauses addressing the duties and responsibilities of the property manager, the compensation structure (e.g., flat fee or percentage of rent), term and termination provisions, liability and indemnification clauses, and dispute resolution mechanisms.
Potential Pitfalls: Pitfalls in property management agreements may include unclear or overly broad scope of services, inadequate provisions regarding liability and insurance, insufficient termination provisions, and failure to address conflicts of interest.
C. LEASES:
Legal Requirements: For a lease agreement to be enforceable, it must generally meet the same legal requirements as any other contract. It should include the identity of the landlord and tenant, clear property description, lease term, rent amount and payment terms, and any additional terms agreed upon.
Common Clauses: Lease agreements commonly contain clauses related to the lease term and renewals, rent payment and escalation, maintenance and repair responsibilities, rights and restrictions on use, subletting or assignment provisions, default and termination clauses, and dispute resolution mechanisms.
Potential Pitfalls: Potential pitfalls include inadequate property inspections, failure to specify rights and obligations clearly, insufficient rent escalation mechanisms, lack of clarity on repairs and maintenance responsibilities, and failure to address default and termination procedures.
Essential Elements of a Valid Lease
An occupier or lessee– Refers to the person who resides in the leased premises.
Exclusive possession– The lessee must have an interest that entitles him to exclude all other persons, including the lessor from the premises. The exclusive possession must be transferred or granted by the proprietor, this encompasses the obligation of the lessor to the lessee.
The period of a lease must be certain – The Land Act, 2012 permits an owner to lease land or part of it to any person for a definite term. It is advisable not to create leases that have clauses for perpetual renewal. It can be held to be void due to uncertainty of the period of the intended lease.
Obligations Implied on a Lessor
a) To give quiet and peaceful possession to the lessee.
b) Not to derogate from the grant/lease as given to the lessee. There shouldn’t be use of adjacent property in a manner that would otherwise render the leased property unfit for purpose.
c) To ensure that the premises are fitting for habitation.
d) To ensure the property is fit for purpose. Where it can no longer be used for the purpose intended, one may terminate by giving one month’s notice.
e) To pay all rates, taxes due, and outgoings except to the extent otherwise specified in the agreement.
Obligations Implied on a Lessee
A. To pay rent on time and in the manner specified.
B. To use the leased land in a sustainable manner and in accordance with the conditions in the lease.
C. To yield up land and buildings in the same condition as they were when the term began. Exemptions for deterioration caused by reasonable wear and tear or natural disasters and acts of God.
D. To keep all buildings comprise in a reasonable state of repair.
D. SALE AGREEMENT IN RELATION TO LAND
Buying land properly involves taking a number of processes, key among them is ensuring you the purchase do proper due diligence. In most cases, this will involve such things as going for the physical site visit, doing a land search and a company search if buying from a registered company.
Once you are done with the due diligence, you will proceed to negotiate on the price and other terms of the purchase thus forming a contract that can be enforced by the law that is where a sale agreement comes in.
A sale agreement in relation to land is a contract for the sale of land is the document prepared at the time of full payment made by the buyer and preceeds the actual transfer of the property. The contract is drawn by the vendor’s advocate who must confirm the vendor’s capacity to sell.
The particulars of sale describes the particulars of the land as well as the nature of estate being sold (i.e. freehold or leasehold). A mis-description may entitle the buyer to rescind the contract and seek a refund of the deposit purchase sum paid.
If any chattels are to be included in the sale, it is good practice to have a separate list of the same which can be attached to the final form of contract as an annexture.
The particulars of sale must state distinctly or by necessary implication that which is the subject matter of the contract. The property must never be described inaccurately. In Kenya the interest sold will either be freehold or leasehold.
Contents to include in a Sale Agreement
A land sale agreement should include but not limited to:
Identity of both the buyer and the purchaser. This will include full names, Identity card number, phone numbers, and the address code. In most cases, these are also the details to be included in the title deed after the transfer
The cost of purchase, this defines the agreed amount to be paid, how it is to be paid (Instalment/cash), and when the amount is to be paid.
The description of the property being sold. This will include the size of the land, the title number, where the land is located, and the condition of the land.
Distribution of costs involved. This define who pays for the different cost involved in the process of transferring the land to the purchaser from the vendor. Some of the common costs will include stamp duty, legal fees, and title transfer costs.
The obligation of each party involved in the transaction. This will help outline all that is to be done by both the purchaser and the vendor.
Remedies for breach of the contract. To help ensure that the interest of each party is protected a sale agreement will also outline how non-performance of the agreed terms of the agreement are to be handled.
A sale agreement unlike any other contract must provide the following to be valid:
1. The contract must provide that the vendor is vested with capacity to sell as the beneficial owner of the property;
2. The price at which the property is sold at is very important and must be stated;
3. The deposit payable at the signing of the contract i.e. 10% of the purchase price for most contracts;
4. In some contracts the deposit payable may be higher i.e. 20% or more;
5. That the deposit will be held by the vendor’s advocate pending completion as a stakeholder pending completion;
6. The contract completion date i.e. when the completion documents change hands vis a vis payment of the balance of the purchase price;
7. The contract completion clause may also stipulate how the balance of the purchase sum will paid. Is it by banker’s cheque or by means of professional undertaking by the purchaser’s financiers directed at the vendor’s advocates;
8. If interest is payable on the balance of the purchase sum should there be delay in completion and the rate of such interest this should also be stipulated in the contract;
9. The rate of interest should be specified;
The conditions of sale must be included. Most contracts for the sale of land in Kenya are subject to the Law Society Conditions of Sale (1989) Edition so long as the conditions do not contradict the terms of the contract. Alternatively if necessary the conditions may be varied accordingly to be in conformity with the terms of the contract.
Completion of Sale of Land
Completion documents must be included in the completion clause of the sale agreement and it includes the following:
1. The Original Title documents;
2. Transfer duly signed by the vendor
3. Land Rent Clearance Certificate; (For leasehold Titles only)
4. Land Rates Clearance Certificate; (For Municipal / urban properties of both a leasehold and freehold nature provided a local government authority has levied land rates on the property);
5. Relevant consents applicable to the Transfer. i.e
6. Consent of the Commissioner of Lands to leasehold interests;
7. Consent of the Land Control Boards for Agricultural land obtained in pursuance of the Land Control Act Cap 302 of the Laws of Kenya;
8. Consent of any chargee or Mortgagee having an interest in the land;
9. Consent of any statutory authority having an interest in neighbouring property (e.g KPC, KAA, KCAA,) etc;
10. Notice of withdrawal of caveat or caution if there are any third parties having an interest in the property;
11. Original Land Rent payment Receipts;
12. Original Land Rates payment Receipts;
13. PIN of the vendor;
14. 3 coloured photographs of the vendor or vendor’s directors
15. Copy of the Vendor’s ID
Special Conditions to be Included in The Agreement
- Capacity of the vendor
- Payment of deposit
- Payment of balance and interest on unpaid purchase price
- Payment for chattels and fixtures
- Possession before execution
- Time and schedule within which the matters affecting the title must be dealt with
- Date of completion
- Exceptions and reservations
- The risk and liability for insurance pending completion
- Power of vendor to rescind the contract
- Power of either party to serve Completion Notice
- Make sale subject to mortgage, consents,
Common clauses to include in sale agreements in Kenya include:
1. Date and Parties to the contract
2. Recital of the property
3. Definitions and Interpretation
4. Law Society Conditions of Sale 1989 (General Conditions)
5. Agreement for Sale and interest sold
6. Purchase Price and Deposit
7. Interest on late payment
8. Completion
9. Encumbrance
10. Special Condition(s)
11. Capacity
12. Possession and Movables
13. Matters affecting the Property
14. Outgoings and Income of the property
15. Warranty
16. Survival
17. Time is of the essence
18. Assignment
19. Default
20. Non-merger
21. Stamp duty and related costs
22. Disclaimer
23. Guarantee of title
24. Arbitration
25. Termination
26. Legal and other costs
27. General
28. Intention to be bound
29. Schedules
30. Execution
CONCLUSION:
In conclusion, it is of importance for Real Estate Companies to ensure strict adherence to the Law of contract. Agreements must be authentic and should address all key elements so that they are easily enforceable. This is important because:-
a) The agreement acts to protect both of the purchaser and seller’s interests and to ensure that both get what they rightfully deserve without getting duped. The sales agreement fully protects the rights and interests of the buyer and the seller because if one party fails to adhere to the contract the other party can take legal action to recover the damages caused.
b) The sales agreement is filled in triplicate one for the vendor, one for the purchaser, one for the lawyer/ legal advisor overseeing the transaction.
c) Having a sale agreement also conforms to The Law of Contract that provides for written agreements in disposition of land hence it ensures legal compliance and validity to bind the parties.
d) It ensures enforceability in the event of fraud, default in payment, and breach of terms among other reasons for failure of an agreement. Without having a written sale agreement it would be difficult to prove to the court that an agreement regarding the sale of land existed or took place.
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