From deposit to delivery: The risks and protection when buying off-plan property in Kenya

Off-plan property purchases have become a hallmark of Kenya’s evolving real estate sector. As urbanization accelerates and demand for affordable housing rises, more investors are buying properties based on architectural plans, blueprints, and relevant approvals.

This article builds upon our earlier piece on due diligence for an off-plan purchase and delves deeper into the risks and protection mechanisms every buyer should consider before committing to an off-plan investment.

Risks associated with off-plan investments

Although off-plan purchases may promise attractive benefits, they carry substantial legal and financial risks that can jeopardize your investment:

• Fraudulent developers: Unscrupulous developers may disappear with purchasers’ deposits without completing the project.
• Project delays: Delays due to factors such as financing issues and regulatory hurdles can frustrate purchasers’ expectations.
• Quality concerns: Finished units may deviate significantly from initial promises, with inferior finishes or design changes leaving purchasers dissatisfied.
• Developer insolvency or project abandonment: A developer may become insolvent or mismanage funds, resulting in stalled or abandoned projects.
• Construction delays: Construction delays can disrupt investment plans, mainly if the property is intended for resale or rental upon completion.
• Financing challenges on loan approval: Banks and lenders often impose stricter requirements for off-plan properties, complicating loan approvals.
• One-sided sale agreements. Most off-plan purchase agreements are drafted in favor of developers, with vague terms, little clarity on handover timelines, and weak penalties for delays or substandard finishes.

Protection mechanisms when purchasing properties off-plan

Given the numerous risks associated with off-plan investments, purchasers must take proactive steps such as those listed below to protect their interests:

• Due diligence on the title: The land designated for the project must be registered in the name of the real estate company or the entity responsible for the development. The purchaser should ensure that the mother title and the unit being purchased are devoid of encumbrances, such as caveats, cautions, etc. to prevent potential legal disputes.
• Due diligence on the developer: Verify the developer’s financial stability, reputation, and construction track record, assess past projects, review the legal status of the institution and its directors, checking for any ongoing litigation cases.
• Insist on escrow arrangements: Use escrow accounts for payments to protect investments. Funds are only released upon verification of completed construction milestones with the final instalment of the purchase price due upon completion.
• Seek legal advice: Engage professionals to review the sale agreement to ensure your interests are well-protected and that the terms are clearly defined.
• 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.
• Project approvals – the purchaser should also seek to know if the developer has obtained the necessary approvals for the development and hence has the legal right to develop the property to prevent delays in the delivery of the project.

Conclusion

A well-informed buyer is a protected buyer. While off-plan investments in Kenya offer strong potential, they require thorough due diligence and professional legal advice. In today’s fast-moving real estate market, making informed decisions is not just prudent, it’s essential.

Should you require any further information, do contact us at info@cfllegal.com.