Viewing a house under construction or as a plan is all fine and dandy, but do not rush to buy, as there are no guarantees if the development is not completed. sxc
A few months ago after writing an article on the case for regulation of the real estate sector in Kenya I received an interesting question from a reader.
It is common for developers to sell off housing units even before constructing them...as they use the monies paid to finance the construction. What happens if the developer goes under receivership even before construction takes place...does this mean that the buyer will lose his investment?
That was a very interesting question and actually a bit difficult to resolve due to several reasons. Firstly the purchaser’s position is wholly unsecured because the sale does not put him in the position of a creditor and even if it did, he is unsecured. This means that in the event of winding up or liquidation such as when the developer goes under receivership, it is very difficult for him to recover his funds. Secondly the contract laws are not on his side. In the event the construction work is delayed due to a fault of the contractor then he has no privity of contract...meaning he cannot recover from the contractor directly.
The construction contracts are between the contractor and the developer amongst other professionals. The sale contract between the developer and the buyer may also be insufficient as the force majeure (hardship) clause may exempt the developer from liabilities occurring due to delayed construction amongst other things.
This is why it is timely for the Government to establish a real estate oversight body to regulate the sector and protect buyers from such eventualities, just in the same way investors in the capital markets are protected by a series of regulations made mostly in their interest.
Entering into such a contract for buying a yet to be constructed property, is very risky. The developer may not complete the construction in time, perhaps the finished product is a far cry from the architect’s plans....or in a case like the one posed above, the developer may go under, leaving the work incomplete.
Welcome to the world of purchasing off plan property. Off plan property is property that is sold even before construction takes place. The only tangible evidence for the purchaser is the architect’s plans and drawings. The developer uses the money paid to construct the units already paid for. Most of the time the finished product is not what was agreed upon during the time of sale.
The finishings may be poorly done and some amenities that were promised are left out at the time of completion, much to the shock of the buyer. There is a lot of marketing hype when the development is taking place....if you have been to a homes expo then you know what I am talking about. But in most cases the end product is wanting.
In Spain there is a big boom in the real estate sector. The off plan concept is appealing to both the developers and the buyers. Normally when a property is sold off plan, it is sold at a cheaper rate than a normal sale as the developers seek to attract as many buyers as possible. This is a win for the buyers. The developer gains as he is able to access funds to carry on with construction.
Insurance clause
There is only one big difference between Kenya and Spain when it comes to off plans. The law in Spain requires the developer to issue either a bank guarantee or take out an insurance policy for the deposit paid by the buyer. In the event the construction is not completed or the developer goes under then the buyer does not lose his investment as he can be compensated by the bank or the insurer.
This, in a way hedges the buyers against risk and protects their investment from loss. In the event the developer is placed under receivership then the buyer’s position is superior to the bank’s in that, the buyer is paid off before.
Perhaps Kenyan buyers should have a clause on bank guarantees or insurance policies included in the sale agreement. It must be a condition before the buyer can release the purchase price. In this way if anything goes wrong then the buyer shall not lose his investment as the insurance policy covers him as well as the other parties involved.
A lot needs remains to be done in the real estate sector when it comes to policy and framework.
Mputhia is an Advocate of the High Court of Kenya. [email protected].
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