OFF-PLAN PROPERTY INVESTMENTS: An Advisory

INTRODUCTION

It is an old age adage that when the deal is too good, one must always think twice. We are currently engaged in major class action litigation against an infamous real estate company in Kenya, that focusses mostly on off-plan developments.

This real estate company duped several persons into entering into contracts for the purchase of housing units and land. Unbeknown to the unsuspecting members of the public, the company had not purchased the land, nor had they concluded any legally binding agreement with the landowner for the project to kick-start. The completion date for the project came and passed without any activity happening on the land. The nature of the litigation led me to consider writing an advisory article on off-plan property investment.

For the benefit of our readers, allow us to define what an off-plan investment in property really means. An off-plan investment occurs where an investor invests money in a property, or a project that is yet to be completed. Sometimes, an off-plan investor invests in a project that is yet to start, banking on a promise that the project will be started and completed within a specified duration.

Mechanics of Off-Plan Real Estate investments

In off-plan investments, the investor provides the company with the funds necessary to commence and conclude a real estate project. Real estate companies would then rely on amassing a huge number of investors, in order to raise the capital needed to complete a housing project. It is for this reason that you will always find that most off-plan investments are for residential homes.

There’s always a presumption that when many people come together, and contribute towards a common housing project, the risk is spread over the large group, thus minimizing the chances of loss, and increasing the chances of profit.

Legal Dynamics Involving Off-Plan Real Estate Investments

All real estate transactions involve land. Thus the various laws relating to land and its use have to come to play. For instance, under Section 23(3) of the Law of Contract Act CAP 23 Laws of Kenya, all contracts with regard to the disposition of an interest in land must be in writing, signed, and witnessed by a person who was present during the signing of the contract.

The basic principles of the law of contract also do apply to contracts for the sale of land. There must be an offer to sell, which must be accepted and a price paid for it. There must also be an intention to create legal relationship by the persons in the transaction, and the persons must have the requisite capacity.

A general principle under the law with regard to contracts for the sale of land, is that the person selling the property MUST have the legal ownership of the property. One cannot give what one does not have (Nemo dat quon non-habet). This applies to off-plan projects as well.

It is important for any person willing to invest in off-plan real estate projects, to ascertain that the land which will house the project, is in the name of the real estate company. Some real estate companies put clauses in the contract that state that the contract is “executory” in nature. They do this as a means of evading or even misleading the public to enter into contracts for the purchase of land and housing units when the land has not even been purchased.

An executory contract is a contract for the performance of a future activity, not for the future ownership of property. For example, if today I enter into a contract with you to come and paint your house tomorrow, that is an executory contract. That is because I am bound today to do an activity tomorrow.

I, however, cannot legally enter into a contract with you to sell you a car tomorrow, when I don’t have that car.

Thus while conducting due diligence, investors in off-plan real estate projects must be sure that the company selling, owns the parcel of land to which the project will stand. Construction of the houses can be executory, but ownership of the land must be current.

Track Record of the Real-Estate Company

Before engaging in an off-plan investment, it is important to do a historical search over the record of the real estate company. Does the company have any successful projects? How long did those projects take to complete? Are there any disgruntled customers of the company? A good real estate company should have a record of timely delivery of projects.

Project Completion Timelines

Before signing any contract for an off-plan development, an investor should be able to judge as to whether or not the timelines specified in the contract, for the delivery of the project to completion, are reasonable. Some companies insert clauses in contracts for completion of development in less than 6 months.  When the deal is too good, think twice.

Project Finance

An investor should be able to compare the cost of investing in off-plan developments with the real estate company, vis a vis engaging in their own purchase and development of the land. As an investor, I will compare the cost of buying a house that sits on a quarter acre, using off-plan methods, with actually buying the land at current rates, and building myself the house. If the cost is greatly variant, it should cause me to inquire further.

User of the Land

An investor in off-plan development should also conduct a due diligence search on the land to determine the registered “user” of the land. The term “user” in this case denotes the allowable activities on the land.  The “user” of land for an off-plan development, must be “residential” in nature and not “agricultural”.

If a company is selling a residential project that is based on land which is designated as “agricultural”, the project will be bound to fail, unless a change of use is first conducted before the project is undertaken.

Encumberances

The land should also be free from any encumbrances such as mortgages, charges, and any other superior rights of third persons over the land. This is for the purpose of avoiding unnecessary court litigation over stalled projects.

Conclusion

While we always advise against off-plan investments, to the investor who is keen to invest in off-plan developments, the above mentioned due diligence is very key in order to protect investments. It always pays to seek legal advice before putting pen to paper for such engagements. When the deal is too good, think twice.