by Gregor Pannike

Why Due Diligence is Essential in Property Transactions

Due diligence is a commonly used phrase in most property transactions in Kenya but is greatly overlooked in practice. Beyond a standard search at a land registry, most purchasers do not investigate the conditions or history of a property before signing a sale agreement or transfer.

The key objective of due diligence with respect to the property is to thoroughly inspect every relevant aspect of a property, the seller, compliance with any restrictions, and the terms and conditions on which the property is held. A simple search is not enough.

The principle of Caveat Emptor places the responsibility on a buyer to sufficiently examine a property before making a purchase. This is the first of a two-part series covering due diligence in land transactions in Kenya. We seek to highlight the key steps of a property due diligence exercise and the key issues to look out for when investigating a property, you wish to purchase or lease.

Why it doesn’t end at a search

Currently, the Ministry of Lands is implementing the much welcome digitization of land registry records. However, for a long time, our land registries and land offices operated on manual record keeping. The manual system lent itself well to sabotage and corruption. There are documented cases of abuse of original documents (including forgeries and multiple title allocations). For a long time in Kenya, it was not possible to definitively ascertain the following issues:

  • Whether a person was the genuine proprietor of a particular property;
  • Whether all planning laws and environmental laws were complied with when any developments on a property were undertaken;
  • Whether a property was subject to multiple title allocations; and
  • Whether the records obtained from the relevant Land Registries in the course of a due diligence exercise were genuine and authentic or had not been forged.
Steps to Conduct Property Due Diligence

1. Search

A search report from the land registry should inform you who the owner of the property is and if there are any security interests or restrictions on the property. For properties held under a lease, the search should disclose who the head lessor is and what the term of the lease is.

a) Property Charged to a Bank

Where a search reveals that a property is charged to a bank, a purchaser should ideally get a statement of loan repayment and loan balances if the purchase of the property is subject to the bank’s security interest. If the sale is not subject to the charge or other security interest, the purchaser should request a discharge as part of the documents for the completion of the purchase. Where the transaction is a lease of property, the bank’s written consent to the lease should be obtained before registering the lease and/or making any payments to the lessor. A bank with a security interest over a property has a superior right and if the transaction is not notified and consented to by the bank, it is not registrable.

b) Property with a Caveat or Caution Registered

A caution or caveat is a restriction on dealings in the property. Where a search reveals a caveat or a caution has been registered on the title, the buyer should investigate the circumstances under which such caution or caveat has been registered. The buyer should also request that the seller ensures the caution is lawfully removed before completion of the purchase of the property.

Potential buyers should however note that there are interests that though unregistered are protected by law and are binding on the owner of the property. These are called overriding interests. Examples include:

  • spousal rights over matrimonial property;
  • trusts including customary trusts;
    rights of way, rights of water and profits subsisting;
  • natural rights of light, air, water and support;
  • rights of compulsory acquisition, resumption, entry, search and user conferred by any other written law;
  • charges for unpaid rates and other funds which are expressly declared by any written law to be a charge upon land;
  • rights acquired or in process of being acquired by virtue of any written law relating to the limitation of actions or by prescription;
  • electric supply lines, telephone and telegraph lines or poles, pipelines, aqueducts, canals, weirs and dams erected, constructed or laid in pursuance or by virtue of any power conferred by any written law; and
  • any other rights provided under any written law

A search would therefore not disclose such interests but a thorough due diligence exercise would.

2. Covenants and Restrictions noted on the title

It is important to review and obtain legal advice on the terms and conditions under which a property is held. Some titles contain provisions on the percentage area of the land that can be developed e.g 50 % or 75% or the type of user that the land can be put to such as commercial, residential or agricultural.

While covenants and restrictions can be amended and the user of the land can be changed, this all happens at a cost. A buyer should be aware of these costs if he or she wants to move forward with the sale. A buyer should also confirm that the seller has not breached the terms and conditions on which the title is held.

3. A due diligence survey

It is very prudent to have a survey of land before the purchase or development of a property. This is especially important when there is intent to make a large capital investment on a property such as a development.

A due diligence survey should ideally be able to ascertain the following key issues:

  1. that the beacons for a property are in place and that the boundaries as identified by the beacons correspond to the Registry Index Maps (RIM) of the property;
  2. that the Registry Index Map (RIM) for a property properly identifies such property and reflects the actual dimensions of the property and its boundaries on the ground;
  3. that there are no squatters or any persons in occupation of a property and that there are no structures or other encroachments on a property; and
  4. that there is an unrestricted right of access to and from a property.

The Ndung’u Report

The Ndung’u Report is the Report of the Commission of Inquiry into the Illegal/Irregular Allocation of Public Land, June 2004. It publishes several properties whose title is subject to challenge. The National Land Commission also publishes notices detailing properties whose title is has disputes or is subject to challenge. Buyers should engage professionals who can comb through these databases to ensure that they do not buy properties which are listed under the Ndung’u Report.

This is the first of a two-part series covering due diligence in land transactions in Kenya. In our next article, we shall cover specific issues that come up during a due diligence exercise and how to tackle them. If you are looking to purchase a property in Kenya, please reach out to Divinah Ongaki (d.ongaki@agema-analysts.com ) or Elizabeth Omol (e.omol@agema-analysts.com) for more specific advice.

The information contained in this publication is provided for informational purposes only, and should not be construed as legal, risk or investment advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal, risk, investment or other professional advice. The contents of this publication contain general information and may not reflect current legal, risk or investment developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this publication. Agema Analysts makes no representations as to the accuracy, completeness, suitability, or validity of any information in this publication and will not be liable for any errors or omissions in them for delays in publication of information, or for any losses, injuries, or damages arising from the display or use for any other reason whatsoever.

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