It is neither really a new invention of law nor should it be really surprising. But it has been concerning, especially in this age of increase in off plan real estate developments where property developers rely on credit from financial institutions to put up off plan property developments.
On 19th April 2024, the Court of Appeal agreed with the High Court in dismissing an application brought by a property developer, (Erdemann Property Limited-the developer of Greatwall Gardens in Athi River), and allowing Kenya Commercial Bank (KCB) to auction 100 unit apartments that had already been bought by off plan purchasers. The argument by the property developer was that the said apartments units had been wrongly sold to the buyers who were innocent purchasers when they should have been reserved for the bank as security. In holding thus, the Court of Appeal and the High Court gave a priority right to the bank over the apartment units, as they had been charged as security for a loan. Accordingly, the bank is at liberty to sell the said unit apartments to recover its lent money. The only remedy for the unit buyers is to maintain a legal claim against the property developer for breach of contract for sale of the apartment units.
The law on security or collateral has always been that a chargee or a lender has priority rights over charged property over and above other competing rights or claims. Courts in Kenya have made similar decisions in the past (though they may have not garnered as much publicity as the Erdemann case above). In Innercity Properties Limited v Housing Finance & another; Josephine Mukuhi & another (Interested Parties) (2020) eKLR (para 41), the High Court refused to grant an injunction against an intended sale of charged property by a bank. The court was emphatic that the seller/developer ought to have obtained the consent of the bank/financier in order to sell the units to the purchasers given that as a chargee, the bank had an interest in the property and the purchaser must show they had obtained the consent of the bank to purchase the units or they had paid some money to the bank if there is to be a legal claim against the bank.
In Willow Park Limited v Jamii Bora Bank Limited & another [2019] eKLR, the court found in favour of a bank which had extended loans to a developer to build housing units and registered a charge against the said property. Purchasers of the off-plan development who had paid deposits to the developer in consideration for the housing units were held not to have a superior claim to the bank which was a secured creditor (para 65). As such, the off plan unit buyers were prevented from stopping the intended sale/auction of the property by the bank for default of the loan by the developer. The Court took issue with the failure by the buyers to produce evidence of any registrable interest on the property such as a caution or caveat (which the Bank would have noted when extending credit to the developer) and their failure to conduct due diligence by undertaking a search to ascertain the status of the property even as they continued to make payments to the developer.
The implication of this legal position is that buyers (or lawyers acting for buyers) must conduct thorough due diligence (through a search) to ascertain whether a property developer has charged the property or secured any financing on the security of the property that is the subject of sale. Where the property is charged, buyers must obtain consent from the chargee or the lender for such sale to be valid. Even then, the buyers must always be aware of the potential sale of the properties by the chargee/lender in the event the property developer (borrower) defaults on the loan facility.
These legal developments and cases of off plan unit buyers losing their investments (and unable to recoup against property developers some of whom fold and disappear) have elicited discussions around enhanced consumer protection for off plan property buyers. One proposal towards this end has been to require all off plan property developers to disclose details of any charge over property the subject of the sale, so that the same is readily apparent even without requiring due diligence by a buyer.
Notably, section 43 of the Sectional Properties Act 2020 (Cap 286) now require imposes a duty on any developer selling a unit to avail certain documents including a copy of a charge, where there is a subsisting charge affecting the particular unit. Under the Act, where property is charged, a developer is required to notify the purchaser of the charge particulars including the maximum principal amount available under the charge, maximum monthly payment that may be paid under the charge, amortization period, repayment instalments, relevant interest rate, prepayment privileges (if any) and repayment duration.
Disclaimer:
The information herein must not be taken as legal advice. For detailed legal opinion/advice, please contact the firm at: This email address is being protected from spambots. You need JavaScript enabled to view it. or Muriuki Muriungi at This email address is being protected from spambots. You need JavaScript enabled to view it.
