Payment defaults can result in property loss

By Harold Ayodo

Some real estate investors lose millions of shillings when property transactions are not concluded. Property transactions that are not cash sales require prospective purchasers to pay deposits to secure the property, after which both parties negotiate payment of the balance.

Most homeowners, especially middle-income earners, prefer purchasing property in instalments. The down-payments often act as security for completion of payment that binds both parties. Deposits can be of any amount not less than 10 per cent of the purchase price as stipulated in the Law Society of Kenya Conditions of Sale 1989. The amount of deposit to be paid cannot be implied and must be directly expressed in the sale contract.

Most sale agreements prepared by conveyancers (property lawyers) have a deposit clause stating the exact amount in both words and figures for clarity. Parties in a contract may agree that the advocate representing the seller holds the deposit as an agent but to the order of both the buyer and seller.

Forfeiture

The conveyancer may either pay the seller the deposit after the sale is completed or return to the buyer if the seller fails on his part of the bargain. Safety of the down payment is the responsibility of the lawyer who is liable if deposited in a bank that goes under.

Several would-be investors lose their down payments after failing to settle instalments for reasons like retrenchment and bankruptcy. Legal experts concur that banker’s cheques be used to pay deposits which, if dishonoured, would treat the contract as renounced.

Payment of deposits is not a guarantee that the prospective buyer has gained both ownership and rights over the property. Most conveyancers representing sellers of property include forfeiture clauses when drafting sale agreements to the benefit of their clients.

Forfeiture means to surrender acts for the benefit of the seller should the buyer fail to honour payment in instalments as stated in the contract. A prospective investor who paid a deposit of Sh1 million for a home valued at Sh10 million loses her down payment if she defaults as per the forfeiture clause. The section, which could be excluded in some sale agreements, is to compensate the seller for the breach of contract.

Default clauses

It, however, becomes tricky in a property transaction where the purchaser defaults but the forfeiture clause was not included in the contract. The clause could be completely excluded from the property contract if the purchaser prefers to pay in cash. Most contracts provide preferred terms of payment.

The forfeiture clause must be expressly stated and included whether the surrender of the deposit will include interest earned on the deposit. Some lawyers representing sellers include default clauses in contracts, which state interests (on market rates) to be paid for non-payment of instalments. The interest rate could be deducted in the purchase money if the seller delays the contract. This must be stipulated in the contract.

There are property transactions where it is agreed that interest is charged on the balance when the purchaser delays completion. There are also agreements where interest is charged in favour of the buyer if either the seller or his/her lawyer delays the transaction.

Where there is default the balance will continue being held by the purchaser’s advocates until the vendor is ready to complete.

The writer is a lawyer and journalist with The Standard Group