Property buyers, financiers face shock of defaulted rates
The Chester House Nairobi on July 31,2013 after it was clamped over rate payment arrears. The building was released back to its owners after they paid Sh1.3 million in outstanding rates. FILE
What you need to know:
Buyers and financiers of property such as employers, banks, and mortgage firms who engage in transactions involving parcels with unpaid rates will now inherit the defaulted amounts.
The burden of due diligence has been placed on prospective buyers who are to ensure that sellers have cleared their land rate balances or seek a discount equivalent to the bad debts.
Land rates default in Nairobi is estimated at Sh14 billion.
Nairobi County authorities have issued an order freezing transfers of property with unpaid land rates as part of efforts to collect billions of shillings in outstanding debt.
Buyers and financiers of property such as employers, banks, and mortgage firms who engage in transactions involving parcels with unpaid rates will now inherit the defaulted amounts.
The burden of due diligence has been placed on prospective buyers who are to ensure that sellers have cleared their land rate balances or seek a discount equivalent to the bad debts.
“Before engaging in purchase of rateable property within the county it is important to obtain a clearance certificate from the county which confirms payment of all dues failure to which you may inherit debts which will deny you transfer of the property to yourself,” reads a notice from Nairobi County in the newspapers on Sunday.
With the majority of landowners in Nairobi defaulting on land rates, the demand for clearance certificate as a prerequisite for transfer approval is set to slow down property sales in the short term.
Land rates default in Nairobi is estimated at Sh14 billion, with owners of properties in the central business district and affluent residential and commercial zones paying most of the rates.
Sellers will have to either clear their rates balances or agree to cut their asking price so that buyers can then assume the responsibility of settling the debts.
The hardest hit are properties whose outstanding land rates constitute a significant percentage of their current market value, implying a major loss if their owners were to dispose of them in the short term.
City authorities have always required that property ownership be transferred once land rates have been cleared but this has not been strictly enforced, partly due to administrative lapses.
Past deals that flouted this requirement would, however, now be followed up with the city county, with current owners of the properties having to pay the outstanding rates or risk seizure of their assets.
“The county would like to engage the services of credible firms who will be employed in the impending mass action against the defaulters,” Nairobi County said in a statement.
Analysts say the tough stance taken by the city authorities will see buyers and financiers intensify their due diligence efforts to avoid inheriting unpaid land rates or losses arising from denial of transfer of targeted properties.
“Counties have a lot of leeway in enforcing land rate collections. Buyers should therefore discharge the risk of inheriting the rates,” said Ibrahim Mwathane, a consultant surveyor.
For properties with outstanding land rates, Mr Mwathane said, the owners can be stopped from selling them or face forced takeover by the county authorities who can later auction the assets.
Financiers of big-ticket property projects say getting clearance in terms of land rates is part of what they do to comply with the laid-down regulations and avoid exposure to land rates enforcement action from city administrators.
“For us, getting certificate of clearance [for land rates] is a routine thing,” said James Karanja, the head of project finance at mortgage firm Housing Finance.
County authorities say land rates are applicable to all parcels within its jurisdiction whether or not a demand notice has been issued before.
This has effectively extended land rates liability beyond land in prime locations, with owners of properties that have not been previously assessed facing backdated claims.
Land rates apply to all parcels in Nairobi, excluding public land and places like churches and mosques which are offered exemptions on application after proving that they are run on a non-profit basis.
The rate levied varies depending on value of land as determined by its location and whether it has been developed, with improved sites paying higher rates in absolute terms.
The authorities charge a percentage of the value of the property — mostly below one per cent — which amounts to hundreds of millions of shillings given the rapid appreciation of property values.
Statistics show that land rates are the single biggest revenue earner for the city but its collection remains way below potential.
Data from the former City Council of Nairobi shows that collection of land rates by the local authority stagnated at about Sh2 billion or a fifth of its budget from 2009 to 2011.
The Sh14 billion in default represents about 85 per cent of its annual land rates collection and it remains to be seen whether the new county chiefs will stem the mounting bad debts.
Nairobi County has resumed attaching of properties whose owners continue to default on land rates.
The exercise, which started last year, saw Chester House, Marshall House and Mwea Rice House, all on Koinange Street, seized late last month. The three properties were, however, released back to their owners after they paid a combined Sh2 million in outstanding rates.
The aggressive debt collection measures are aimed at boosting the coffers of the newly created county which has a larger service delivery mandate under the devolved system of government.
