Real Estate Joint Ventures: Landowners and Financiers

Jan 8, 2021 | Law, Our Highlights

Real Estate business in Kenya has resulted in impressive properties across the country’s major cities. These eye-candy Real Estate projects come at very high costs that most property owners cannot raise due to the land’s value not matching the funds required for Project Financing. As a result, most landowners decide to engage in a partnership with a Financier. On the other hand, the Financiers’ target specific development properties, making these collaborations quite rampant across the country.

To form the relationship, the two parties – landowner and financier – always consider engaging through a Joint Venture that comes with special incentives that are likely to blind landowners throughout the negotiation phase of the intended development project. In typical instances, the property owner might be paid money as part of the property’s value and be allowed to own part of the properties to be developed – with or without rights to the management of the project.

The project’s success is based on many factors, which makes it quite crucial for the landowner to be quite involved to avoid possible Civil or Criminal proceedings that are likely to follow should the project “fail.”

Landowner and Financier Joint Ventures focus on the estimated returns of investment by selling the various units that will be developed. As a result, the Joint Venture will initiate the ground-breaking with a marketing team that will invite different buyers to take advantage of the early bird prices, which most buyers will make the set deposits followed by instalments to complete the set purchase price.

The off-plan process is only as good as it sounds if the final output is available as advertised to the buyers. However, if not, it exposes the landowner – of course, including the financier – to unimaginable risks, which include the possibility of finishing the project will always devalue the land; the possibility of criminal cases being instituted against the landowner who might have only earned a token as an incentive to have the piece of land put into such questionable development process.

On the other hand, the financier, who might have sourced funds from a third-party in Europe or North America – who is asking for 2% – 3% interest above the principal amount -, would have met his respective contractual obligations and never to be seen again.

The landowner needs to be cautious on how the terms of the relationship starting from the negotiations, including control of the funds, management, and voting rights/ powers; drafting head of terms/term sheets; drafting of the Joint Venture Agreement; formation of the companies to manage the project; and tendering/procurement and payment for goods/ services.

The financier, regardless of their financial muscle, is always blinded as well to the point that the financier fails to conduct a thorough Property Due Diligence that touches on stabilization of laws – including social, political and economic factors; land ownership; available rights; property history; transfer models; subdivision or amalgamation (which affects the numbering hence “burying” public information pertaining possible disputes); case before the courts or quasi-judicial platforms like National Environmental Management Authority; land reports at Ardhi House; maps at Survey or issues raised by Kenya National Highways Authority, among others.

Parties to these types of transactions need a well-thought approach and meticulous representation due to the perilous environment that a conniving party is willing to toss the other to access the money for free or without putting effort into the project.

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