Bank phone call that destroyed Tuju’s Sh1.5bn empire

It started with a phone call and ended with a cry for help. Raphael Tuju, broadcaster-turned-politician and a self-made millionaire, had received a call from an East African Development Bank (EADB) official to upgrade his Dari Restaurant in Karen to have a five-star facility. 

After he lost the Rarieda parliamentary seat in 2007, Mr Tuju, now the secretary-general of the ruling Jubilee Party, went into real estate.

When EADB approached him, word in town was that Mr Tuju was eyeing a pristine 20-acre property owned by Mr Peter Paterson, the son of a colonial era settler who set roots here in 1925.

Mr Paterson, who was born on the property, but never married, wanted to sell it to someone who would maintain its flora and fauna. He had rejected several other offers for the property in Tree Lane, Karen.

Mr Tuju was known in the neighbourhood for maintaining Dari as an eco-park themed restaurant and conference centre.

Luxury hotel

Then the call came after a Kenyan diplomat broke the news to the EADB official that the former lawmaker was looking for a bank to finance a mega-project. Mr Tuju was hoping to join the exclusive club of luxury hotel owners.

The seller was asking for $9.3 million (Sh930 million) for a property that had been valued by Knight Frank at Sh1.3 billion.

What Mr Tuju did not know – and came to learn the hard way – was that EADB enjoys absolute immunity from judicial proceedings in relation to disputes arising from the exercise of its lending power. This had been upheld by the Tanzanian Court of Appeal, which argued that the bank is a creature of sovereign states that determine its legal status, capacity, privilege and immunity as per Article 44 of the EADB Act.

In a 2014 case between The Creative House and EADB, it was also held that “the court is prevented from altering the sovereign will of states as expressed in the EADB Charter – particularly when that will has been given full effect and reinforced by a Kenyan statute”.

Dari Restaurant, sitting on seven acres in the wooded Karen, was to be transformed to look like the Victorian-themed Windsor, the golf resort owned by the family of former Cabinet minister John Michuki, or Hemingways – the five-star luxury boutique hotel on Mbagathi Ridge, Nairobi, owned by Mr Richard Evans and overlooking Ngong Hills. Or as they said in the application papers, like Sultan Sands Resort Island in Zanzibar.

The Tree Lane property, as it is known in court records, also offers a panoramic view of the peaks of Ngong Hills.

Escrow account

Early enough, Mr Tuju had agreed with the bank that they would have an escrow account and that they would develop and sell housing units to recover the initial costs. There would be villas for sale and retirement hostels. They all seemed to agree that money generated from the sale of the villas would be enough to pay the loans and build more units.

Dari, which is 13.2 kilometres from the city centre, and in the middle of an indigenous forest with luscious flowers, was to undergo a complete makeover by expanding its business to the nearby Tree Lane property.

There was already a boutique business and 14 accommodation units on the 20-acre farm.

To secure the loan, Dari Ltd – a company owned by Mr Tuju, his son Mano and two daughters Yma and Alma – placed the restaurant and its developments as collateral until the completion of acquisition of the project site.

An independent review of Dari Restaurant was requested from KPMG by Ms Vivienne Yeda, the EADB director-general.

On the proposed project, there was an additional residential building with 14 rooms, plus cottages. Even before the project started, Mr Tuju was excited that Dari had accommodation. He wanted to add 36 cottages.

There was also a proposal to build a destination spa and a gated community comprising 30 three-bedroom retirement homes. It was thought that the sale of these houses and the income from the accommodation, spa and restaurant would be enough to repay the loan.

Sh4.7m deposit

But to take the project for approval to the board, he was asked to deposit Sh4.7 million with the bank. The board approved the project, which was to include money for buying the land, and building villas and retirement homes.

A KPMG report indicated that the funds would be released in two phases — $9.3 million for purchase of the property and Sh294 million for renovation and construction.

To get the loan, Mr Tuju offered Dari’s seven acres and his residential home on Mwitu Road, also in Karen, as collateral.

Knight Frank had valued Dari at Sh540 million. EADB would also hold as collateral the project’s 20 acres.

“In an area that has few indigenous Kenyans, the bank will be supporting a local investor in demonstrating their commitment towards environmental conservation through expansion of their world class eco-friendly business model, which will compete favourably with and complement existing colonial era and foreign-owned establishments,” a report sent to the bank read.

It was also agreed that the loan would be used in two phases: to partly finance the acquisition of the hospitality business operations and assets on the site, and upon acquisition the two agreed that the loan would be used to finance the retirement homes and residential developments.

Down payment

In 2015, and after negotiating the deal, the bank asked Dari Ltd to put up $1 million (Sh100 million) towards the purchase of the land. This was 10 per cent of the down payment to the vendor.

The Sh100 million, Mr Tuju would later tell the court, was not part of the proposal, but a new condition. In the original proposal, the bank said it would pay the National Environment Management Authority (Nema) fees, architectural drawings and other incidentals, while the company was to meet the legal fees.

Mr Tuju told the court that due to currency shifts, the bank paid the vendor $9.1 million (Sh910 million) on July 29, 2015, meaning the project had already saved Sh20 million. This would later lead to a fallout, which has left Mr Tuju fighting for survival. A legal charge over the Tree Lane property in favour of the bank was executed and registered.

Initially, Dari had been told it would receive the Sh20 million to refurbish the building, but the bank later declined. Dari then wrote to the bank asking for the Sh294 million to start building the villas.

More collateral

But rather than release the money, the bank asked for more collateral. Mr Tuju told the court that EADB breached the agreement.

However, the bank told the court that Dari failed to pay “instalments of interest” and that by the second quarter of 2016, the loan was substantially in default.

Mr Tuju had brought to the attention of the bank that he owned a rental property in Upper Hill, which had 26 units sitting on 1.6 acres and bought them when Upper Hill was disregarded by developers. The property, built by a Jewish settler in the 1960s, was enough to cover the bank collateral alone.

“That is what the bank wanted,” he told the court.

The bank had also valued his seven-acre home in Karen.

“When we started discussing this project, Dari was only eight months old and I had to show my other properties to convince the bank that I was worth the Sh1 billion we were looking for,” he said.

That is how Mr Tuju’s other properties would end up as collateral — and as part of the agreement.

Thus, in the initial deal, Mr Tuju and EADB agreed that once his company gave security of Sh1 billion, the bank would release Sh1.5 billion. It is reflected as a ratio of 1:1.5 in the agreement.

Agricultural land

Then another problem emerged: The owner of the Tree Lane property had registered it as agricultural land and it was taking time to get the approval of the land board for a change of use. The board meets a few times a year.

Mr Tuju told the court that it’s when he asked for the Sh294 million to start building that the bank declined to release the money, and instead demanded more collateral.

“I saw malice”, the Jubilee secretary-general told the court.

He was, thus, asked to give the Upper Hill property as collateral or look for another bank. But the Upper Hill property was already charged to Bank of Africa, which when approached by Dari Ltd,  had agreed to finance the Tree Lane project if the EADB deal collapsed.

But EADB rejected that offer and demanded that Dari Ltd repays the entire loan and interest.

Under pressure to pay close to Sh1 billion, Mr Tuju was introduced to British firm Maxwell Stamps, which helps companies to restructure loans. Incidentally, he was introduced to the company by EADB official Jotham Muthoka.

By this time, the bank was demanding $9.1 million from Mr Tuju.

“A bank official told me that Upper Hill was more valuable. She told me: ‘Give us Upper Hill (as collateral) and forget about the 20 acres’,” he said.

EADB and Dari Ltd had opened an escrow account in which any money from the sale of the houses would be deposited. The Sh294 million was to be deposited here and whoever purchased a unit would pay into this account.

Transferred clients’ money

By the time the deal began going south, there was Sh21 million in the account from clients who had started to make off-plan booking. The bank then asked Dari for the Sh21 million in order to release the Sh294 million. In good faith, or perhaps in frustration, Dari Ltd transferred the clients’ money to the bank.

After getting the money, EADB said it would not release the Sh294 million until it received a new collateral. Three units had already been built and were in various stages of completion. There was a complete show house and five buyers had already paid deposits.

The arrival of Maxwell Stamp was supposed to unlock the stalemate; after all, the firm had been recommended by an EADB official. Maxwell Stamp approached KCB and it agreed to give Sh500 million as long as Dari Ltd entered into a pari passu deal. It meant the charge holders would have equivalent right over the asset on which charge is created. EADB rejected the agreement and filed a case in a UK court demanding Sh1.5 billion immediately — or what it calls notice of acceleration.

The notice was dated November 27, 2017.