Off-Plan Purchases in Kenya: Protecting Money Paid Before Completion

Off-plan buying in Kenya works well when the developer completes. The legal question is what happens when they do not, and the honest answer for most purchasers is that they join the queue of unsecured creditors behind the bank that funded the site.

This article sets out where off-plan money actually sits, the protections that exist, and how to assess a development before committing.

What is your legal position before completion?

When you buy off-plan you are buying a contractual right to a unit that does not yet exist. You have no interest in the land unless the contract creates one, and standard developer contracts do not.

If the developer becomes insolvent, the position is stark. Secured creditors are paid first from their security — and the development land is usually charged to the project financier. Preferential claims follow. Unsecured creditors, including off-plan purchasers, rank last and typically recover a modest dividend or nothing.

That is the default. Everything below is about changing it.

Protection one: escrow

The cleanest structure. Purchase instalments are paid into an account controlled by an independent party — commonly an advocate acting as stakeholder — and released to the developer against verified construction milestones rather than on demand.

Two things make escrow real rather than nominal. The account must be genuinely independent of the developer, not an account the developer can draw on. And the release conditions must be tied to certified progress, verified by a professional the purchasers can rely on.

Escrow reduces the developer's working capital, so many resist it. That resistance is itself informative: a well-funded developer can accommodate escrow, and one that cannot is funding construction from purchaser deposits.

Protection two: security over the development land

Where escrow is unavailable, the alternative is to take security. A charge registered over the development land in favour of purchasers, or a trustee acting for them, converts an unsecured claim into a secured one.

In practice this usually requires the project financier's consent, since their charge ranks first, and a second-ranking charge behind a substantial senior facility may be worth little. Ask what the senior debt is and what the land is worth. If the answer is that the site is fully charged, a second charge is decoration.

Protection three: completion guarantees and bonds

A performance bond or completion guarantee from a bank or insurer obliges the guarantor to fund completion or repay purchasers if the developer defaults.

Read the trigger conditions carefully. A guarantee that only responds to formal insolvency will not assist where the developer is simply not building. A guarantee capped well below the aggregate purchase moneys is partial protection presented as full.

What should the contract itself contain?

Beyond the security question, several provisions determine your position.

Defined completion date with consequences. A date without a remedy is an aspiration. The contract should provide for liquidated damages for delay, and a long-stop date after which the purchaser may rescind and recover all sums paid with interest.

Specification and variation limits. The developer will reserve a right to vary the specification. It should be limited to variations of equivalent or better quality, with material changes requiring the purchaser's consent.

Area tolerance. Units are commonly delivered marginally larger or smaller than the plan. The contract should state the tolerance and provide a price adjustment beyond it.

Defects liability. A period after handover during which the developer must remedy defects, with retention of a portion of the price until it expires.

Title obligation. An express obligation to procure registration of the sectional title and to transfer within a defined period. Purchasers who take possession without title are exposed if the developer later fails.

Diligence on the developer and the site

The contract matters, but so does whether you are dealing with someone who will complete.

The land. Official search confirming ownership, tenure, unexpired term and encumbrances. Establish what the site is charged for and to whom.

Approvals. Approved architectural plans, change of user where applicable, NEMA approval where required, and confirmation that the development as marketed matches the development as approved. Marketing brochures showing amenities that are not in the approved plans are a recurring problem.

The sectional plan. For apartment developments, sectional title is what allows individual units to be registered. Confirm the sectional plan has been or will be registered, because without it a purchaser cannot obtain title to a unit.

The developer. Company search, directors, filing history, and previous completed projects. A developer with a history of delivered schemes is a materially different counterparty from one with none.

Funding. Ask how construction is funded. Where the answer is entirely from purchaser deposits, the project depends on continuing sales, and any slowdown stops construction.

Payment structuring

Align payments with construction progress rather than with time. A schedule requiring 60% before the slab is poured transfers most of the risk to purchasers at the point the developer has done the least.

Milestone-based payments verified by an independent professional protect both sides: the purchaser pays for work done, and the developer receives funds as they perform.

Resist payment schedules keyed to calendar dates regardless of progress, which is a common feature of contracts drawn entirely for the developer's benefit.

What if the development stalls?

Act early, because the remedies deteriorate with delay.

Review the contract for the long-stop date and rescission rights. Establish, with other purchasers, whether the problem is temporary or terminal — organised purchaser groups obtain information and leverage that individuals do not. Consider lodging a caution against the title to protect any interest you have.

Where the developer is insolvent, the collective remedies are administration or liquidation. Administration is a rescue procedure and may allow the project to be completed by another party, which usually serves purchasers better than liquidation. Our dispute resolution practice acts for purchaser groups in these situations, and the outcome is consistently better where purchasers organised early rather than individually pursuing the developer.

Marketing claims and what the contract actually promises

Off-plan sales are made on renderings and specifications, and the gap between the brochure and the contract is where most post-completion complaints originate.

Amenities shown in marketing — a pool, a gym, landscaped grounds, a clubhouse — bind the developer only if the contract obliges them to build it. Confirm each material amenity appears in the approved plans and in the contractual specification. A brochure is unlikely to be actionable on its own once an entire agreement clause is in the contract, which it invariably is.

The same applies to completion dates given verbally by sales agents, to promises about rental yields, and to assurances that a particular finish will be used. If it matters, it goes in the contract.

Where the development is phased, establish which phase your unit is in and whether the amenities are being delivered in your phase or a later one. Purchasers in phase one frequently fund amenities delivered with phase three, and where the later phases do not proceed, those amenities are never built.

Tax and holding costs on completion

Stamp duty is payable on the transfer at 4% of assessed value in urban areas — assessed by the Ministry of Lands valuer, not taken from your contract price.

From handover, service charge, land rates and, on leaseholds, land rent become payable. Service charge arrears attach to the unit, so a purchaser taking assignment of another buyer's contract should confirm the position.

Where the unit is let, rental income is taxable and a non-resident landlord's tenant or agent may carry a withholding obligation. Our tax practice addresses this at acquisition, because the structure that suits an owner-occupier is not always the one that suits an investor letting the unit.

Buying from another purchaser before completion

Off-plan units are frequently resold before handover, and the buyer of such a contract acquires a different thing from the original purchaser.

What is being transferred is the benefit of a contract, not a unit. The mechanism is usually an assignment or a novation, and most developer contracts either prohibit assignment or require the developer's written consent — often accompanied by a transfer fee.

Before taking an assignment, confirm what has actually been paid to date and obtain the developer's written confirmation of the account. A seller's word about the balance outstanding is not sufficient; purchasers have acquired contracts with arrears they did not know about.

Confirm also whether the original purchaser has any accrued rights you are acquiring — a delay claim, for example — and whether the developer accepts that those rights transfer. Where the contract is silent, they may not.

Assessing an off-plan opportunity properly

Establish what happens to your money if the project fails, and do not accept "the developer is reputable" as the answer. Confirm the land is owned by the contracting entity and understand what it is charged for. Verify approvals match the marketing. Align payments to milestones. Insist on a long-stop date with a right to rescind and recover. And instruct your own advocate rather than the developer's.

Off-plan purchases in Kenya can be sound investments. The ones that fail were almost always identifiable as risky at the point of contracting, by anyone who asked where the money would sit.