Duties Of Developers And Purchasers In Off-plan Projects

Introduction

A real estate developer's/vendor’s responsibilities are multifaceted. They include initiating, organizing, carrying out, and overseeing development projects. The significance of developers carrying out their responsibilities with diligence has been brought to light by recent matters that highlight the duties of a developer towards a purchaser and any other interested parties to avoid breach of their obligations and guarantee ethical, compliant and sustainable development operations.

Purchasers also have a duty to ensure that they conduct proper due diligence prior to the purchaser of property in an off-plan project. The duties of developers and purchasers are elaborated further in this article.

Parties’ obligations in Off-plan transactions 

Duties of the Developer

The duties of a developer can be drawn out as follows;

1. Adherence to Contractual Obligations on Financing Agreements

Developers must ensure that they carry out their end of the bargain with investors/lenders. This includes adhering to set timelines for completion of the project, making payments at the agreed timings to their lenders and generally acting responsibly with regards to their contractual obligations. 

When dealing with a property that is Charged, the Chargee's consent must be obtained for any dealings involving the property, such as selling or leasing it. The consent protects the Chargee's interests and the interest of the person acquiring the interest. Failure to secure this consent constitutes a breach of the Charge agreement, potentially leading to legal action, foreclosure or forced sale of the property. 

Section 59 of the Land Registration Act and Section 87 of the Land Act provide that it is the duly of the Chargor to obtain the written consent of the Chargee prior to dealing with any property. This includes properties in an off-plan development. Once the consent of the Chargee is obtained, a partial discharge of the charge can be procured for purposes of transferring the property, free of encumbrances.

2. Stakeholder Engagement

It is essential to engage and communicate effectively with all parties involved when carrying out land dealings. If any overriding interests exist on the property or material conditions that affect dealings with the title of the property, it is important to notify all relevant parties to the transaction and especially those seeking to acquire the interest in the property.

3. Financial Management

Effective finance management is crucial for every development project to succeed. Developers are responsible for making sure that money is spent wisely and financial commitments are fulfilled. Financial irregularities or poor management may result in default proceedings such as auctions which cause irreparable damage to stakeholders.

Duties of a Purchaser

1. Conduct due diligence 

When purchasing an off-plan property, the Purchaser is expected to conduct due diligence for purposes of verifying the validity of the title and the legality of the transaction. This includes confirming its ownership, the physical status of the property, reviewing the legal approvals and determining financial encumbrances associated with the property. 

Part of the due diligence would require assessing the credibility of the developer. The track record and credibility of the developer is crucial in assessing whether the developer is likely to fulfill their obligations. The purchaser must probe the history of the developer and determine whether there are patterns that would indicate potential risks such as stalled projects or litigation disputes that arose from their projects.

2. Recognizing the provisions of the Sale Agreement

A crucial stage in off-plan purchases is contract exchange. It binds you legally to purchase the property at the asking price, even if the market rates change in the future. It is the duty of the purchaser to examine all the details thoroughly before executing the contract. It is crucial to read the provisions on the anticipated completion date, interest on late payments and key terms such as default provisions to make sure that they understand the expectations from every party to the Sale Agreement which on the part of the purchaser would mainly entail payment of the purchase price. 

Recent Developments

One of the notable cases giving guidance on the duties of a developer is P.J. Dave Flowers Limited –Vs- Limuru Hills Limitedand 2 others, Civil Appeal No. 123 of 2019. The case elaborated onthe hierarchy of interest when a purchaser moved to the court of appeal to challenge a Chargee’s interest in property over their own interest. The property was sold to the Appellant as an off-plan purchase. However, there was a Charge on the head title. This resulted in a collision of interests between the Chargee and the Purchaser because at the time the case was being decided in court, the Chargee had already initiated the sale of the property in order to secure loan repayment by the defaulting Owner of the property. The auction took place and the purchasers are engaged in a legal battle in court in an attempt to salvage their proprietary interests in the units that were auctioned. The occurrence of this matter indicates that purchasers need to ensure that even in off-plan projects, good title is acquired. 

Legal implications of the decision in P.J. Dave Flowers Limited –Vs- Limuru Hills Limited and 2 others Civil Appeal No. 123 of 2019

1. Extensive Due Diligence: 

The standard for due diligence required to detect legal and financial risks requires that purchasers scrutinize the history of the property they aim to purchase so as to not have their interests swiftly defeated by those with an overriding or priority interest.

The above-mentioned case also highlighted the importance of ensuring that claims are raised promptly as it mentioned the doctrine of laches and elaborated the need to attend to any legal concern with diligence. Additionally, any interest that is intended on being acquired after an already existing one excludes a purchaser from relying on the doctrine of a bona-fide purchaser for value without notice.

2. Sturdy Compliance Framework: 

Stakeholders to a transaction must create a sturdy compliance framework to avoid legal battles where rights are infringed. For example, purchasers should ensure that they conduct a search on the land via the ministry of lands where ownership rights or any interests or caveats can be confirmed from the registry. Additionally, the purchaser should ensure that the developer has met certain standards in order to be in a position to adhere to the terms and conditions of the sale agreement, which should also offer legal protection to the purchaser. The purchaser must also be aware of the approvals and permits that the developer must adhere to.

Conclusion

In conclusion, developers and purchasers play crucial roles in off-plan property transactions to ensure everything runs smoothly and legally. Developers need to stick to their contracts, get consent from Chargees for property deals, communicate well with stakeholders, and manage finances carefully to avoid any legal issues. Purchasers must thoroughly investigate the property and the developer’s track record, ensure their payment is handled securely, and read all contract details closely. The P.J. Dave Flowers Limited vs. Limuru Hills Limited case highlights the importance of thorough due diligence and a strong compliance framework to protect everyone’s interests and avoid legal conflicts.

Contributors 

Stella Njagi
Joan Maina
Mercy Kirui