Why Due Diligence is Essential in Property Transactions

Most buyers don’t investigate property before signing sale agreements. It’s a buyers responsibility to do due diligence before purchasing property. Here’s how.

due diligence in property transactions

Due diligence in property transactions refers to the process of conducting a comprehensive investigation and analysis of a property before entering into a purchase or investment agreement.

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 property is to thoroughly inspect every relevant aspect of a property. To ensure the seller is in compliance with any restrictions, and the terms and conditions 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 property due diligence and the key issues to look out for when purchasing or leasing.

Currently, the Ministry of Lands is implementing the 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 are genuine and authentic or have not been forged.

READ ALSO: 6 Common Property Due Diligence Issues and How to Solve Them

Steps to Conduct Property Due Diligence

A search report from the land registry informs 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 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 registered, the buyer should investigate the circumstances. The buyer should also request that the seller ensures the caution is lawfully removed before the completion of the purchase. 

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 the 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, wires and dams erected, constructed, or laid in pursuance or by virtue of any power conferred by any written law;  
  • Any other rights provided under any written law

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

2. Review 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 terms and conditions on which the title is held have not breached.

3. Conduct a Due Diligence Survey

It is prudent to have a land survey 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 ascertains the following key issues:

  1. The beacons for a property are in place and the boundaries as identified by the beacons correspond to the Registry Index Maps (RIM) of the property;
  1. 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;
  1. There are no squatters or any persons in occupation of a property, structures or other encroachments on a property;
  1. There is an unrestricted right of access to and from a property.

READ ALSO: A Beginner’s Guide and Legal Process to Buying Land In Kenya

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 has disputes or is subject to challenge. Buyers should engage professionals who are able to comb through these databases to ensure that they do not buy properties that are listed under the Ndung’u Report.

This is part one of due diligence when conducting property transactions in Kenya. Look out for our next article, which will cover specific issues that come up during a due diligence exercise. 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 author is  Divinah Ongaki, Managing Partner at Agema Analysts-Mombasa Office. Divinah is an Advocate of the High Court of Kenya, has been practicing law for over seven years in Kenya. She has worked for the best firms and as an in-house counsel for some of the best companies in Kenya. Her expertise span various practice groups under Kenyan law such as real estate and finance, corporate law & M&A, IP law and Labour Law.

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Divinah Ongaki - Contributor at BuyRentKenya
Managing Partner – Mombasa Office
Agema Analysts
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