Greatwall Gardens
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Home buyers face dilemma as banks recall loans in real estate purchases

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 Sales promotion signage of the Greatwall Gardens apartments in Athi River on August 14, 2020. 

Photo credit: File | Nation Media Group

The planned sale of 78 two-bedroom apartments at Greatwall Gardens in Athi River has shone the spotlight on the predicament home buyers find themselves in as developers fight with banks over loans.

The units are part of the 100 homes eyed by KCB for sale after the developer- Erdemann Property Limited failed to convince the Court of Appeal last month, to temporarily stop the intended auction.: KCB Group has engaged the services of Garam Investments to auction the 78 apartments to recover a loan of Sh1.9 billion, Erdemann Property borrowed to construct the houses.

The auctioneer put an advertisement in the newspapers on May 6, inviting new buyers, but it was countered by the construction company, warning possible buyers to stay away.

Court documents show that the developer commenced the construction of the Greatwall Gardens 1 Project, consisting of 2,190 units, in October 2015.

It then borrowed a loan of Sh1.3 billion from KCB on August 28, 2017, for the project.

The property was charged as security together with another property known as the River Estate Project in Ngara, Nairobi, which is partially developed and estimated to be worth Sh5 billion.

Alternative security

The bank later amalgamated all the existing loans, which culminated in the creation of a charge for over 100 unsold units for Sh425.7 million.

In 2019, Erdemann said it advertised for sale some units on the property where the 100 units were charged but allegedly later realised that its sales department erroneously sold the charged units alongside 500 others it had placed on offer. It contended that it informed the bank through a letter on June 14, 2021.

Unable to meet its loan obligations, KCB then issued a demand on December 15, 2021, recalling a balance of Sh1.9 billion and putting up for sale the 100 housing units.

The property developer said it then offered an alternative security to KCB, being the retention of the suit property valued at Sh3.5 billion or in the alternative, the substitution of the 100 apartment units with another one in Shanzu Mombasa whose market value was more than Sh500 million.

Meanwhile, the homeowners have filed two cases in Machakos, one before the Environment and Land Court and another before the High Court, to stall the sale and rescue their houses.

The homeowners revealed that they purchased the units between December 2019 and January 2020 and the agreement they signed stipulated that upon payment of the purchase price together with the incidental costs, they would be discharged and the developer’s advocates were to procure the registration of the purchased units in their favour, within 360 days from the date of signing the agreements.

“We innocently purchased the suit units without notice and our interests should not be disregarded against the second defendant’s (KCB’s) intended exercise of its statutory right, which we pray it to be temporarily restrained,” one of the homeowners said in an affidavit.

The homeowners claim in the court papers that when they purchased the houses, they would be registered in their names after clearing the purchase price and other incidental costs, including stamp duty and advocates’ fees.

Although they acknowledge that there is a subsisting charge registered over the suit property, to secure the loan given to the construction company to develop the property, they were not aware of it until they were threatened with the sale.

“It is only upon inquiry of this dreadful newspaper advertisement that the applicants have been made aware that before the purchase, the second respondent (KCB) had caused a legal charge to be registered over the suit units to secure various credit facilities extended to the first respondent (Erdemann), that has since defaulted,” the homeowners submitted.

The appellate court rejected an earlier defence by Erdemann Property that the homeowners were innocent purchasers and that the units were sold to them by mistake.

Justices Gatembu Kairu, Jessie Lesiit, and Grace Ngenye Macharia ruled that there was no suggestion that the lender would not be able to compensate the property developer.

“Ultimately, we find that the application is unmeritorious. We hereby dismiss it with costs to the respondent (KCB),” said the judges.

While declining to stop the sale, the judges noted that the terms were to the effect that Erdemann would enter into various tenancy agreements with the tenants of the subject 100 units and that the rental income would be channelled to an escrow account.

A similar case played out in 2022 when Equity Bank battled with home buyers over plans to sell mansions belonging to real estate developer Suraya Property Group after the developer failed to pay a loan used to finance the construction of the houses in Kiambu. In a ruling, a bench of three judges of the appellate court ruled that Equity was a reputable bank and the developer could still recover the money, in case the developer’s appeal was successful.

The houses were constructed by China Wu-Yi and financed by Equity for more than Sh1 billion.

Muga Developers, a joint venture that developed the houses known as Fourways Junction, was placed under receivership in 2020 by Equity Bank and Muniu Thoithi and George Weru were appointed as administrators.

In the ruling, the court noted that Muga Developers did not demonstrate any efforts to repay the loan.

“First, the applicant, having offered the suit property as security, has become a commercial entity that can be compensated in monetary value.

“Secondly, if the applicant (Muga Developers) is successful in the appeal, he would be entitled to damages, and it is common knowledge that the first respondent is a reputable banking institution and would have no difficulties paying damages,” said the judges.

Equity informed the court that it had made unsuccessful attempts to recover the millions used to finance the housing scheme.

In 2020, 14 investors found themselves in a similar predicament when Transnational Bank sought to sell a one-acre parcel of land on Kiambu Road to recover a loan of more than Sh112 million.

Rights of investors

Then, Justice David Majanja dismissed the application by the 14 investors, saying they failed to provide sale agreements between them and the developer—Suraya Property Group, to help the court determine the nature of the proprietary interests in the property.

The judge further said the bank had charged the property, and its interest supersedes any other interest, including the rights of the investors.

“In the absence of these agreements, which form the basis of the contractual relationship, I cannot say the plaintiffs have established a prima facie case with a probability of success in relation to the registered interest of Transnational Bank,” said the judge.

The 14 investors rushed to court after the bank advertised for sale the property measuring 0.913 acres on Kiambu Road, near the Northern by-pass.

They had entered into a deal with Muga Developers and Suraya to purchase the apartments.

The developer intended to build a multi-story block of apartments, including 84 two-bedroom and 68 three-bedroom apartments, known as Classix.

The construction also included two basement parking spaces.

Equity had opposed the application, stating that Classix was indebted to it and that it commenced exercising its statutory power of sale by issuing a 90-day notice, as required by law.

The lender further said it was not privy to the alleged contractual relationship between the investors and Muga Developers, Suraya and its companies.

The bank contended that it acted in good faith and complied with the law in creating and realising its security and right over the property were superior to those of the investors.