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 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 the property. To ensure the seller is in compliance with any restrictions and the terms and conditions under which the property is held. A simple search is not enough.

Why it Doesn’t End at a Search

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.

Steps to Conduct Property Due Diligence

Conduct a Search

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.

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 been breached.

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:

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;

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.

There are no squatters or any persons in occupation of a property, structures or other encroachments on a property;

There is an unrestricted right of access to and from a property