Legal Review: An Overview of Off-Plan Real Estate Investments

 

1.0 Introduction 

Many Kenyans consider real estate as one of the most stable and secure forms of investment. One of the options available to a person wishing to invest in real estate is to purchase the property “off plan”. The Real Estate industry holds immense significance in the economy of any nation. It serves as a catalyst for growth, generating numerous employment prospects and stimulating economic activities across various sectors. Notably, Off-plan investment in the Real Estate sector has emerged as an enticing opportunity, offering a mutually beneficial platform for both developers and buyers. 

Real Estate development relies on several elements, primarily financing and marketing. Real Estate finance involves providing the necessary financial resources for investment projects aimed at expanding building infrastructure and services. On the other hand, Real Estate marketing serves as a connection between those responsible for the production of various Real Estate properties such as residential houses and offices and those who purchase and benefit from them. 

Off plan investing is defined as the process through which an investor buys into a Real Estate development before it is completed. Sometimes, or most times, an off-plan investor invests in a project that is yet to start, banking on a promise that the project will be started and completed within a specified duration.

The selling or buying of property is done before the property is built, when there are only plans outlining the development concept alongside the relevant project approvals. The purchaser would ordinarily have to pay the entire purchase price or the larger portion of it, which is ideally supposed to be utilised in the construction of the project.

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 installments as the project progresses. Upon completion, the end buyer may decide whether to sell the unit on profits, to move into the property or rent out the property. Developers on the other hand stand to gain from capital injection since off plan investments have proven to be an effective mode of Real Estate financing.

2.0 Five key things you need to know before committing your finances to an offplan

Is the Developer Trustworthy and Professional? Off-plan investments usually require you to make protracted payments throughout the development process and the balance upon completion of the project. As such, the developer should have a trustworthy team that will ensure that your money is secure throughout the period of construction and also be capable of seeing the project through its initiation to completion, successfully,

Transparency and Accountability- The developer should be willing to divulge all crucial information that might help the client understand them better. This includes information pertaining to their projects. A credible developer will also be transparent with information on how your money is managed throughout the construction stages. You should receive regular updates either monthly or quarterly so you can see where every coin is going, and the work quality,

Developer Due Diligence/Track record- The firm should have previous experience in real estate development. Find out how long the company has been in business and how many completed developments it has under its belt. You might also consider visiting the completed developments and talk to owners. Find out if they were completely happy with the home they received; whether the developer was responsive when they raised issues during and after construction; and whether they now feel they got value for money. Trustworthy developers remain responsive after the handover of the property because most new homes need some kind of post-delivery attention,

+++Buyers need to run a background check on the developer and consulting firm that is implementing the project prior to purchasing a property. This is essential as it helps the buyer identify the developer’s reputation, the previous projects undertaken to completion, whether the developer is a registered company in the county of operation, etc. Additionally, having information of the company directors, their delivery to promise and proof of timelines met is also important in avoiding fraudulent off plan investment cases. This due diligence will help the buyer become aware of who he or she is to deal with before committing to a project,

Project Viability/Due Diligence: – Investigate the location of the project and the surrounding properties as well. As an investor, you want to make sure that the location is prime and attractive to occupants, especially as a buy-to-let investor. This will also ensure that there is a high probability that your investment will appreciate in value. To this end, expert developers should have their market feasibility studies which should be easily availed to you as a client, and

This entails checking for the viability of a project through:

1. Visiting the project site to ensure that the actual site exists,
2. Evaluating the development titles to have proof that the owner of the land is genuine in the transaction,
3. Evaluating the project plan approvals to understand if the developers have the legal rights to develop the properties and to prevent delays in project delivery,
4. Evaluating the project team, experience, history and capability to gauge if they can deliver the project,
5. Getting regular updates from the developer to ensure that timelines set for project delivery will not be compromised,
6. Conducting research on Comparables to gauge the possibility of earning potential returns as promised by the developer, and,
7. Understanding the project design team to understand the credibility of key individuals in the development process such as contractors and engineers.

Payment Options/Financial Strategy- An ideal payment plan should last up to the end within the completion dates of the project. Be sure to seek legal advice for interpretation of the contract that you are provided with before appending a signature. The contract should clearly state the amount of initial deposit agreed upon and then detail the specific dates when other payments are expected to come through until completion of the project.

++The buyer should have a financial plan as to how the property will be purchased, from the options that exist such as mortgages, instalment plans, and, cash at hand among others. Mortgages are regarded as debt instruments and are usually secured against a collateral of a Real Estate nature, on the other hand, instalment payments refer to a payment plan made in agreement by both developers and buyers where the investors make payments in small portions throughout a fixed period of time. With the limited funding options in Kenya, the buyer can consult his or her bank for financial advice and position, to avoid financial losses, i.e. the initial deposit, as result of failure to make subsequent payments.

Contracts Due Diligence: Before signing any agreement from the seller such a sale agreement, it is advisable for the buyer to carefully read the terms and conditions in order to avoid risks of malpractices or compromise. Moreover, the buyer should engage a conveyance lawyer to ascertain the effectiveness and legitimacy of the agreement to prevent fraudulent cases in future, and,

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3.0 The process involved in Off Plan Purchases

It is important for buyers to understand the processes involved in off plan investments in order to have an understanding of areas where they need to be actively involved in. The figure below shows the necessary steps that should be considered in the off plan investing process;

3.1 Identifying the Property

This first step involves an investor identifying the development project that is ongoing or yet to be executed. During this period, the investor has to do proper due diligence on the developer undertaking the project. Doing market research is also an important necessity for this step as it provides the buyer with information of the performance of the development against similar Comparables,

3.2 Choose a Payment Plan

After identifying the property to be purchased, the buyer and seller have to come to terms on the payment plans and schedules for the development. There are various payment plans used to make purchases for off plan developments which include cash payments, installments, and mortgages, among many others. Here, it is important for the buyer to choose from the various payment plans available; the one that best works for him/her,

3.3 Reserve the Property

After identifying a suitable payment plan, the buyer will be able to reserve the desired property awaiting for the project completion. This is achieved by making an initial deposit for the property which is in other terms a reserve or holder for the property,

3.4 Signing of Agreement

This process entails signing of contracts such as the sale agreement contract that will be presented to the buyer by the seller. Prior to signing any binding agreement, it is important for the buyer to read through the document thoroughly to ensure it is not compromised and that they are aware of what they are signing. Here, the buyer should also seek legal advice from a well-qualified lawyer to further ensure smooth and effective conveyance process before settling,

3.5 Project Construction

This is the actual execution of the development project. The period of construction varies depending on the development design, type, and mix. During this period, the buyer should also track the development process i.e. by doing periodic site visits and inspections in order to be well informed on the process. The developer also needs to make frequent updates on the status of the project to the buyer and communicate in any case of anticipated delays, and,

3.6 Notice of Completion and Hand Over

Once the project is fully implemented, the buyer will be notified of the project completion, and the property officially handed over to him/her.

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4.0 Frequently asked questions on offplan purchases

There are a number of legal questions that are important to consider if making such an investment?

4.1 Does the developer hold good title to the property which it can transfer to you on completion of payment?

In law good title refers to ownership of property which is totally free of claims against it and therefore can be sold, transferred, or put up as security. To verify whether a developer has good title to the property, you would need to investigate title documents, identification documents for both individual and corporations, building and constructional approvals and any other documents related to the property. The seller is obligated to provide all the documents and information to enable you to make proper investigations to the title within fourteen days of entering into a purchase agreement.

4.2 Can you recover monies paid to the developer if they do not complete the construction?

If you wish to recover monies paid for construction not done, there must first have been a written contract in place. Contracts for sale of land or property must be in writing to be valid. With a contract in place there are two grounds you can present in a claim through court to recover monies paid.

4.2.1 Breach of Contract

A breach of contract is defined as: Failure, without legal excuse, to perform any promise which forms the whole or part of a contract. The legal remedy for breach of contract is to sue for money that will put you in the position you would have been in, had the breach not occurred. In this case you can sue for the deposits paid to the developer, interest and any reasonable expenses incurred to recover the money.

4.2.2 Frustration of Contract

The doctrine of frustration provides: a party in a contract is excused from performance if performance has been rendered impossible through no fault of his own. You would therefore consider this option if the developer claims that the contract has been frustrated, for example a natural disaster renders the development impossible to complete. The external frustrating event renders it impossible, illegal or commercially useless to perform the contract.

The law allows a party to recover money paid before the contract became frustrated. It also prevents one from paying any further money that might be claimed. However if the developer has incurred expenses towards performing the contract they may be allowed to retain part or all of the amount paid. However, this is only possible though if the developer can prove that its conduct did not cause the frustration and that the thing that caused the frustration was unforeseen and outside its control.

4.3 Can the developer terminate the agreement if you have been making payment on time?

Termination of the agreement is referred to as discharge which means terminations of all rights and obligations arising out of a contract. Subject to the contract, there are two ways in which a developer may terminate a contract.

By Breach. This is where the developer fails or refuses to honour further payments. The effects of breach have been addressed above.

By operation of law. This is usually through frustration which has been covered above. However, if the developer becomes insolvent, or dies the agreement may also be terminated. It is important to note that a good agreement will anticipate all these ways which a contract may be discharged and provide for them.

4.4 What remedies do you have if the developer delays the construction beyond the completion date?

The completion of construction is evidenced by a certificate of occupation/completion provided by the county government. This is definitive confirmation that the construction is completed and the property is of standard. Failure to complete the construction would constitute a breach of contract which would be remedied as described above.

4.5 Does the promoter of the development have any liability if the final product is inferior to what was advertised?

Every consumer has a constitutional right to goods and services of reasonable quality and compensation where there are defects in the goods or services. Services have been defined to include rights and interests in property. If the promoter of a development falsely represents the property, then you can make a claim for compensation through court action.

4.6 Can you sell your interest in the development before completing payments?

Selling your interest in the development means that you transfer your rights and obligations under the contract to a third party who would now be able to enforce the contract. Since a contract involves the agreement of two parties, any transfer of rights or obligations would need the consent of all parties to the contract.

4.7 Does completion of the development include completion of any facilities and common areas and clearing of construction material?

What constitutes completion of the development is normally defined in the agreement. If that is absent, then completion of development will be defined by when the county government issues a certificate of occupation/completion.

4.8 Are you obliged to use the vendor’s advocate to register the title?

 Most vendors will require you to use their chosen advocate to register the title. The rationale behind this is that since this advocate is handling several registrations, they are best placed to be the most efficient. They also prefer their advocate retaining possession of the original title documents which will be required for each of the transfers. There is no legal obligation but it is usually a non-negotiable term of the sale agreement and failure to agree with it might mean that the vendor withdraws their offer to you.

5.0 A review of the Benefits and challenges in offplan purchases 

5.1 Benefits of buying off-plan property in Kenya

5.1.1 Lower initial prices

Buying off-plan property means enjoying relatively low prices compared to when a property is complete. When we started our Moon valley project in Kileleshwa, the initial cost for the 3-bedrooms with a DSQ was 24M. The same unit is currently going for 27.5M. The unit has had an appreciation value of 15%.

5.1.2 Flexible payment plans

Most developers require a 20%-30% deposit as a down payment. For instance, in the Wilma Towers in Kilimani, we broke ground in October 2019. One of the 1-bedroom units was initially going for 4.9M and is currently going for 6.8M. Therefore, if you buy a unit now, the unit will have appreciated by 39%

5.1.3 Easy to change the layout plan 

Since construction has not begun or is ongoing, you have the benefit of making changes to the initial house layout. For instance, if you want a bigger bedroom and a smaller living room, you can adjust your house plan accordingly.

5.1.4 The option of changing your finishing materials

However, it is essential to note that any additional cost incurred is billed to the buyer.

5.1.5 Monitoring progress

You can monitor the construction of your house from the foundation, the finishing material used, to the completion.

5.2 Challenges of buying off plan property

The uncertainty of buying a property that is under construction at the time of purchase – Developers sell you the future ROI. There are chances of the property not appreciating to the extent the developer had promised. Property appreciation is affected by a change in market conditions, political and social changes, and poor infrastructure development, among other reasons.

5.2.1 Uncertainties of the completion date

A real estate sales agreement has two dates, a shortstop, and a long stop. A short stop date is the estimated date the developer expects to finish a project while the long stop date is the date by which they must have done so. In the Kenyan real estate market, developers are given a 6 months leeway after the shortstop date elapses. Thereafter, financial compensation is expected or the amendment of the contract.

5.2.2 The completed property may not be per the buyer’s expectations 

This mainly applies to the material used for the finishing. A developer may end up using materials of inferior quality compared to the desired quality.

5.2.3 Developer’s insolvency

As seen before, there have been instances where developers have become insolvent after buyers and investors have bought an off-plan property.

5.2.4 Mortgage financing

Most financiers do not offer mortgages for off-plan projects.

6.0 Conclusion 

Generally, Involving qualified professionals, such as valuers, lawyers, risk analysts and financial advisors before committing to the investment will assist the potential investor arrive at an informed decision.

Notably, Due diligence can be in three-fold: Developer Due Diligence, Project Due Diligence and Contracts Due Diligence.

Developer Due Diligence entails:

• Interrogating the developer and his business wholly;
• Knowing the developer company’s directors and their track records;
• Interrogating the mode of financing the project; and
• Knowing whether the developer is a member of a professional organization which advocates for better market conditions for both parties (e.g. Kenya Property Developers Association).

Project Due Diligence requires the investor to:

• Visit the project site;
• Confirm the developer is the registered proprietor of the subject land;
• Confirm relevant authorities have approved the project plans; and
• Demand for the site development plan, an elevation (shows the completed unit from different perspectives), a detailed floor plan and a specifications schedule (outlines finishes that will be used).

Contracts Due Diligence involves documenting the agreed terms of purchase. A lawyer’s input in the contractual stage will ensure important clauses are captured and appreciated which include, but are not limited to:

• Investor’s pulling out options;
• Property dimensions;
• Purchase price;
• The agreed mode of payment;
• Defect liability period; and
• Legal remedies available in case of default of conditions and warranties.

An off-plan investment is quite risky but due diligence conducted well will alleviate any fear of paying premium price for inferior units, signing standard contracts that downplay defects liability and falling victim of false advertising by developers.

Please contact us vide the comments section should you require more information.