Buying a house? Here's how to protect your investment

Shocked, you visit the said bank sure that there is a mistake because you have never taken a loan against your property.

But it turns out that a loan was actually taken against your property. In disbelief, you go to court to stop the auction, only to learn that the bank can auction your house even though you paid for it fully – you are staring at a foreclosure courtesy of a loan you never took.

These things happen to people a lot more than you can imagine, that is why it is important to conduct due diligence before investing your hard-earned money. What exactly is due diligence?

It starts with understanding the laws that govern property ownership in Kenya. Needless to mention, the law can be bit confusing for laymen, yet every stage of the home buying process is governed by various laws. Ordinarily, you will start with shopping for properties.

Once you identify a home you like, you conduct a site visit. You will move from room to room trying to envision yourself or your family living their best life in that space. If within your budget and are satisfied with the amenities, the buying process begins and so does the due diligence.

1. Registry search

Your first serious step is to make sure the piece of land on which the property stands belongs to the development company or individual selling the units. Renu Hunjan the Director, Evermark Limited, a property and estate management company, says you should conduct a search at the Land’s Registry. This is a basic step but is the most crucial.

Mary Mukoma, an advocate and lead Council at Mukoma & Associates, adds that the search doesn’t just show you the current property owner, it will give you information on the lease status of the land and whether there’s an incumbrance on the property.

An incumbrance refers to restrictions on the property by second or third parties. It could be an individual with interests in the property, a financier who loaned the owner money or a court. If there are unpaid land rates or taxes, a search will let you know.

Most people assume that a search is all you need to do, but Mukoma refutes this.

“Your lawyer should also visit the surveyor’s offices to ensure the development is not on riparian land, a road reserve or government property. They should also go through the Ndung’u and NLC land reports to ensure the property is not on the list of irregularly allocated land,” adds Mukoma.

2. Investigate the developer

To authenticate the development company, a search through the company’s registry is also necessary. If the developer is an individual, Mukoma suggests a search through the National Integrated Identity Management Systems.

Hunjan explains that due diligence means going the extra mile to gather information.

“Evaluate the developer’s track record. Look at other projects and their record in delivering within stipulated timelines. Evaluate the project’s team, starting with the main contractor to the architects to ascertain whether the project is in good hands. Is the main contractor registered? Insist on periodic updates on the development and pay in line with construction progress if it’s off-plan. Lastly, seek legal advice for interpretation of any document issued in respect to the development,” she says.

It sounds like a lot of work, but it is better to be safe than sorry.

3. Engage lawyer to scrutinise terms

If you are satisfied with the developer’s credibility, the paperwork begins – note that every clause in home buying documents is legally binding. The developer’s sales representative will first give you an offer letter which is drafted by their legal representative.

You ought to go through this letter with an advocate to ensure you understand its contents. It entails your (buyer’s) details, seller’s details, basic specifics of the unit you’re hoping to buy and a few details on payment terms. You’re given time (up to a week or more) to go through this document. Signing and submitting the offer letter means you have accepted the terms outlined.

You may also negotiate for better terms such as flexible payment terms or a lower price if the sale process is open to bidding. You will then be handed your next document, a sale agreement.

This document is also drafted by the developer’s legal representative and should be reviewed by your lawyer as well. It will outline all the payment terms that might have been left out in the offer letter.

4. Payment

The next step will be paying the required deposit as outlined in the sale agreement. The seller’s lawyer will then draft transfer of ownership documents and submit them at the Lands Office. A valuation will then be conducted to ascertain the property is sold at the right price.

After the valuation, the seller’s lawyer will pay your stamp duty, after which you should expect an email confirmation from the Kenya Revenue Authority. Finally, the lawyer will proceed to register the transfer at the Lands Registry. Under the new Sectional Properties Act, 2020, you’re supposed to get a Title Deed for your unit once the process is completed.

What could go wrong

It all sounds simple on paper but a lot could go wrong. Mukoma says your lawyer should be your eyes and guide you in following due process. Sometimes seemingly minor mistakes like the developer’s lawyer failing to pay stamp duty can occur. Other times, it is costly mistakes.

For instance, during your search at the Lands Registry, you might have noticed that the title was ‘charged’. A legal charge means the title has been used to secure a loan or mortgage. The lender registers the charge to protect their interest, and in case the property is transferred to another buyer, they might be liable for repaying the loan. 

It is normal for developers to seek additional funding when constructing units because it is capital intensive. It is not a big deal if the title is charged, but if you buy a unit from the developer, they ought to ‘partially discharge’ your unit to ensure no one knocks on your door years later with an auction notice.

5. Post-Transfer Search

Mukoma explains that if the developer has an existing loan with the property in question as the security, their lender expects all funds accrued from selling the units to go into repaying the loan.

Legally, the units are charged, meaning the lender perceives them as a security and may auction them in case the developer defaults. However, to protect buyers from liability in the future, the developer ought to seek consent from their lender to partially discharge your unit when you begin your payment process.

Discharging means you (as the buyer) are lifted from repaying the loan even if the developer defaults. Note that in a development with hundreds of units, some may be discharged while others are not, it is therefore the buyer’s duty to follow up.

Mukoma notes that this bit is usually problematic for cash buyers.

“Buyers who buy units through mortgages or top-up loans will need their units’ documents to access credit. As expected, the lenders conduct thorough due diligence before lending money to a buyer. If the unit is charged, the lender will definitely not offer additional financing. If it is discharged, then the buyer may qualify for financing,” says Mukoma.

If the property is charged, the bank will let you know and you can follow up with the developer to discharge your unit. On the contrary, cash buyers often pay for units only for their titles to be processed a bit later, and once ownership documents are in their hands, the excitement of finally owning a home may blind them into assuming all is done.

Mukoma advises buyers to always conduct a post-transfer search to ensure that the titles do really appear in their names as the new owners and to establish whether their title is charged or discharged.

6. Check for changes in law

When laws are amended or repealed, those concerned are expected to adjust accordingly. Failure to comply with new laws has consequences. In December 2020 for instance, the president signed into law the Sectional Properties Bill. This new Act replaced the 1987 Sectional Properties Act which governed ownership of units in a development.

As Hunjan explains, in the past, once developers sold out units, they were required to form management companies. These companies are responsible for managing common areas in a development, enforcing management by-laws, protecting buyers’ interests and overseeing payment of service charge.

The developer’s reversionary interest would be transferred to the management companies. Reversionary interest refers to the interest that reverts back to a property owner when the lease period expires.

Under the old laws, developers were also expected to surrender their mother titles to management companies. Hunjan further explains that if the developer ended up owning shares in the development company, then they would have access to the mother title.

This allowed them to take up loans which could easily threaten the investments of other unit buyers. Also, if the developer owned large pieces of land and only developed a small part of it, they could easily take up loans using the remaining chunk as security.

Fortunately, when the law changed, these gaps that threatened buyers’ interests were sealed. For instance, if the developer has a large chunk of land, he can subdivide it and get separate titles so that the developed area does not share documentation with the undeveloped piece.

In addition, all common areas are co-owned by each unit owner equally. Any dealings concerning common areas should be approved by all unit holders unanimously, each unit holder owns one share which equals one vote. Also, unit owners get individual titles and the mother title is closed once new registers are opened for the units thus protecting buyers from further loans by developers. 

Compliance 

Some tiny details that unit owners may however miss are the compliance requirements. For instance, all old long term sub-leases are supposed to be converted into units so that owners are equipped with the new generation titles.

The conversion should be done within two years, if not, it attracts hefty fines. Also, reversionary interest is no longer transferred to the management company, rather, to the buyers, meaning that each individual will be required to renew their leases once they expire, unlike in the past where management companies renewed leases for unit owners. Failure to renew an expired lease could attract a new owner for your unit.

To wrap up the conversation, owning a home is not the end of your journey. Update yourself on new and existing laws. If it is too complicated, consult your lawyer. Remember, absolute property ownership is not guaranteed, going by Kenya’s laws. It takes personal effort to protect your investment.

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