Introduction;
Embarking on the journey of real estate investment in Kenya, the allure of off-plan purchases has become a captivating prospect for many. In this distinctive approach, investors channel their resources into properties or projects that are yet to see the light of completion. It’s a venture fueled by the belief that, despite its current state of inception, the project will unfold and flourish within a predefined timeframe.
Picture this: an off-plan investor not only injects capital into a project yet to break ground but also places their trust in the foresight of developers. This act, in essence, kickstarts and ensures the realization of a real estate dream. The symbiotic relationship between the investor and the development company is crystal clear – the buyer’s financial contribution paves the way for the project’s commencement and ultimate fruition.
In the dynamic landscape of Kenyan real estate, off-plan purchases have evolved into a popular and enticing investment avenue. What makes it so appealing? The answer lies in its unique promise – the opportunity for investors to secure a property at its current market value with the anticipation that it will multiply in worth upon project completion.
We want to delve into the intricacies of off-plan purchases in Kenya, by exploring and covering all your legal questions to enable you to decide on whether to dive in or not.
Legal Rationale Governing Off-Plan Real Estate Investments.
In Kenya, the realm of off-plan investments lacks specific legislation. However, since these transactions involve real estate and immovable property, it’s crucial to delve into the laws governing such sales. Focusing on the Law of Contract Act Cap 23, Land Act, No. 6 of 2012, Land Registration Act, No. 3 of 2012, Sectional Properties Act, No. 21 of 2020, and their respective regulations.
- Principles of Contract Law: Contracts involving the disposition of an interest in land must adhere to specific criteria. They should be in writing, signed, and witnessed by an individual present during the contract signing. Fundamental principles of contract law, such as the necessity for an offer, acceptance, compensation, an intention to create a legal relationship, and the requisite capacity of the parties, also apply. Additionally, it is imperative that the developer is both the legal and beneficial owner of the property being developed, in adherence to the legal principle that one cannot transfer what one does not possess.
2.2 Due Diligence: Conducting due diligence is imperative, especially when acquiring immovable property, with particular importance in off-plan purchases. In such instances, where the project is yet to materialize, due diligence is crucial to confirm the following:
- Ownership of the Property: The land designated for the project must be registered in the name of the real estate company or the entity responsible for the development.
- Clean Title: The project’s land should be devoid of encumbrances, such as charges or debentures, caveats, cautions etc. to prevent potential legal disputes.
- Physical Inspection of the Property and Building Plans: A thorough physical inspection of the project land, along with a meticulous examination of building and floor plans, is a vital aspect of due diligence for investors.
- Use of Land: Determining the registered “user” or “use” of the land is essential, particularly for off-plan developments. The land’s designated use must align with multi-dwelling residential purposes.
- Approvals: Verification of necessary approvals from authorities such as the National Construction Authority, the relevant County Government, and the National Government is crucial. This includes construction approvals, environmental impact assessments, approved building and floor plans, and any other required permissions.
- Developer: Due diligence on the developer is mandatory. Investigating the developer’s construction track record, assessing previous projects, reviewing the legal status of the institution and its directors, and checking for any ongoing litigation cases are essential steps.
- Project Finance: Confirmation of project financing by a financial institution is advisable. This is vital because financing results in an encumbrance registered against the project’s land. It also guides investors on expectations regarding consent to transfer from the Financier and partial discharge of charge after project registration, in compliance with legal requirements.
The Contractual Stage (Sale Agreement)
Upon completion of thorough due diligence on both the property and the developer, it is imperative for the involved parties to formalize their agreement through a comprehensive written contract. Engaging the services of a legal
advocate during this contractual stage is highly recommended. This ensures the inclusion of crucial clauses aimed at safeguarding your interests in the Agreement for Sale. Noteworthy clauses to consider encompass:
- Investor’s Pulling Out Options: Clearly defined clauses providing options for investors in the event of withdrawal.
- Property Dimensions: Accurate delineation of the property’s dimensions to prevent any ambiguity.
- Purchase Price, Payment Plans, and Milestones: Explicit detailing of the purchase price, payment schedules, and associated milestones.
- Defect Liability Period: Establishing a defined period during which the developer is responsible for addressing any defects.
- Projected Completion Date: Specifying the anticipated completion date of the project.
- Granting Possession to the Investor: Outlining the conditions under which possession of the property is granted to the investor.
- Warranties and Representations: Comprehensive coverage of warranties and representations made by the developer regarding the property.
- Any Variation of Building Materials: Addressing any potential changes or variations in building materials during the construction process.
- Legal Remedies in Case of Default of Conditions and Warranties: Clearly stating the legal remedies available in the event of default on agreed conditions and warranties.
Ensuring these specific clauses are incorporated into the contract will provide a solid foundation for a transparent and secure real estate transaction.
TAX IMPLICATIONS
Subject to the stipulations outlined in the Stamp Duty Act, Cap 480, Laws of Kenya, the Investor is obligated to pay stamp duty on the property, determined by its market value as assessed by the Government Valuer. Additionally, following the provisions of the Income Act, Cap 470, Laws of Kenya, the Developer is required to remit Capital Gains Tax at the prevailing rate.
CONCLUSION
In conclusion, engaging in an off-plan investment entails inherent risks. However, by conducting thorough due diligence and establishing a legally robust contract, an investor can position themselves to make well-informed decisions when purchasing an off-plan property. Seeking the assistance of a legal advocate is instrumental in navigating and ensuring the comprehensive execution of these crucial steps.
