Developer's legal battle with bank that could see 100 owners lose homes

A view of phase one of the houses constructed by Edermann Property Limited in Athi River. [File, Standard]

Some 100 homeowners at Great Wall risk losing their units as the developer battles in court to prevent them from being auctioned.

Erdemann Property Limited, the developer, is contending with a potential auction of around 100 units at Great Wall, Athi River, over a loan balance of Sh1.9 billion.

The loan balance dates back to 2015 when Erdemann Property Limited secured a facility of Sh1.3 billion from KCB Bank during the construction of 2,190 units.

Part of the agreement outlined in a letter of offer from KCB Bank was that Edermann Property Limited would relinquish 100 units as security.

Edermann Property Limited proceeded to construct 600 units and, as per the agreement, handed over 100 units to KCB Bank.

However, for some reason, as detailed in court documents, when selling the remaining 500 units, Erdemann Property Limited’s sales department included the additional 100 units.

It is these 100 units’ owners who now risk losing their homes.

The court documents, which informed a hearing on April 9, 2024, indicate that Erdemann acknowledged the mistake and proposed how to rectify it.

“That the Appellant acknowledged the mistake and offered alternative security to the Respondent,” the court documents read.

The auction of the property has already been advertised in the dailies, making the owners jittery and prompting Erdemann to share an update of the case with them and the court proceedings so far.

“We call for calm even at the advent of the said auction and assure you we are in control of the situation and are prepared to stop the auction,” reads the email in part, as seen by The Standard.

The email further explains the genesis of the matter, indicating that a swap of security of equal worth was offered by the developer, but there was no response.

“We, therefore, read malice on their part,” reads the email.

The auction, according to a notice published in the dailies, is scheduled for Tuesday, April 23, and targets two and three-bedroom units.

“Our subjects are 100 apartments split into 95 two-bedroom (master ensuite) apartments,” reads the notice by Garam Investments Auctioneers dated April 8, 2024.

It adds  that the units will be sold individually.

“The title is a leasehold interest. There are secure car parking facilities for the residents and visitors. All main services are connected to the property,” the notice says.

Sometime in August 2017, when the developer was putting up the 2,190 units on L.R. No. 27317/1, it applied for a facility of Sh1.3 billion to aid the construction. KCB Bank responded positively on September 27, 2017, agreeing to offer the said amount.

Erdemann Property Limited offered River Estate project in Ngara, erected on title Non L.R. 202852 L.R. 209/22016, which is partially developed and now valued at Sh5 billion as security.

Additionally, the developer offered a Deed of Assignment of project receivables of the Great Wall Gardens arising from the sale of phase II, which involved 100 apartment units on L.R. 27317/2 in Athi River. Erdemann went ahead and constructed 600 units on the said land and had 100 attached as security as agreed.

From the court documents, the rain started beating Erdemann Property Limited when the Covid pandemic struck in 2020.

“The Appellant was forced to take radical measures, including closing down all its sites and reducing the presence of employees in various offices. The economy was heavily disrupted, and the uptake of the apartment units drastically slowed down,” reads an affidavit prepared by Erdemann Property Limited attorney Prof Tom Ojienda.

The affidavit goes on to state that sometime in 2019, Erdemann Property Limited advertised for the sale of some units on L.R. 27317/2 in Athi River, which is the same estate where the 100 units charged as security are.

“Unfortunately, during reconciliation of its accounts, the Appellant discovered that the sales department also sold the charged units alongside 500 others that it had placed on offer,” the documents read.

But when Erdemann Property Limited realized the mistake, they reached out to KCB Bank to offer alternative security. A suggestion was made to substitute the 100 units with L.R. Number MN/1/1515 Shanzu Mombasa, whose market value was in excess of Sh500 million.

“This marked the beginning of the Appellant’s problems with the Respondent,” the documents state. “The Respondent ignored the Appellant’s letter and request and instead issued the Appellant with a notification listing it with the credit reference bureau through a letter dated June 17, 2021.”

The documents further state that the lender started issuing threats and ultimatums later and insisted on terms as agreed back in 2019. A payment of Sh1.9 billion, being the outstanding balance, was demanded on December 15, 2021, within 30 days.

“The Appellant suggested to the Respondent that either it retains the suit property as the sole security since it was valued at a market value of Sh3.5 billion against the outstanding balance of about Sh1.9 billion or that the Respondent substitute the 100 apartment units on L.R. No 27317/2 Athi River with L.R.Number MN/1/1515 Shanzu, Mombasa, whose value was in excess of Sh500 million,” reads the affidavit.

The principal amount of the loan was Sh2.14 billion, and the developer has so far paid Sh645 million. The challenge with payments has been informed by depressed market conditions and the fact that they were negatively listed on CRB, which affects their cash flows.

Sometime in July 2019, KCB Bank amalgamated all the existing terms of the loan with Erdemann Property Limited.

Erdemann Property Limited details that the High Court decision of December 15, 2023, which was in favor of KCB Bank, failed to acknowledge the fact that the land on which the Great Wall apartments sit is still registered to them.

This then means Erdemann Property Limited can file a case on behalf of the 100 homeowners, which was the grounds on which the High Court dismissed their case.

“The court held that the Appellant lacked locas standi to sue on behalf of the 100 innocent investors who purchased the (100) apartment units on L.R. No 27317/2 in Athi River and the 281 people who bought units from the suit property,” reads the affidavit.

The documents state that the learned judge gravely erred in law and fact by strictly adhering to procedural law over substantive justice and totally ignoring public interest and, especially the interest of over 381 innocent investors.

“This could irreparably cause harm to the innocent third parties. This would also irreparably injure the reputation and standing of the Appellant, which would be viewed as engaging in a pyramid scheme if it fails to deliver the houses to innocent purchasers for value,” the court documents plead.

The current case filed on January 26, 2014, is in the Court of Appeal.