4.
0 CONTRACTUAL STAGE
THE CONTRACT:
Creation or transfer of an interest in land is often preceded by a contract i.e. a
contract for the sale of land usually precedes the conveyance of the interest in land
to the Purchaser. Similarly, a contract for Lease may be made first, and then
followed on a later date by a formal grant of the terms of years in the form of a
Lease. Also, an owner of land may contract to create an interest in it, such as an
easement or a charge, the actual creation of the interest then follows later.
Largely, contract for sale of an interest in land is governed by the general principles
of the law of contract i.e. there must be offer, acceptance, consideration, and the
parties must have intended to create legal relations.
As we shall see, what distinguishes contracts over land from other contracts,
are the formalities required for the land contracts. Due to the value attached to
land and its peculiarity, contract for sale of land is subject to more stringent
conditions.
Section 3 (3) of the Law of Contract Act provides that no suit shall be brought
upon a contract for disposition of an interest in land unless the contract upon which
the suit is founded is in writing, signed by all the parties thereto; and the signature
of each party signing has been attested by a witness who is present when the
contract was signed by such party.
However, the foregoing requirements do not apply to a contract made in the course
of a public auction by an auctioneer. It also does not affect the creation of a
resulting, implied or constructive trust (which does not have to be in writing but a
creation of equity to prevent situations where deserving parties are deprived of
their land).
The requirement for writing was endorsed in the ease of Dorris Morgan –Vs- F.
Stubenistsky [1977] eKLR, where though a note was signed, it was devoid of the
essential terms and was also ambiguous as to who was the tenant, the agreement to
take up the lease in question having been made to the Landlord by the husband and
the note having been signed by the wife. The Court held that there was no agreement
in writing duly signed by the party to be to be charged in accordance with Section 3
(3) of the Law of Contracts Act, and such there was no enforceable contract
between the parties.
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Section 3 (3) of the Law of Contract Act, has been replicated in Section 38 of the
Land Act.
Before parties enter into a valid contract, the parties would normally negotiate the
terms of the contract. It is therefore common practice in a land sale transaction
for parties to agree on a price “subject to contract.” In that a letter of offer could
be made by either party to the other party, subject to the contract.
The rationale is that the buyer should be free from a binding commitment until he
has had the opportunity of obtaining legal and other advice, arranging his finance
and making the necessary inspections, searches and enquiries. The danger is that the
Purchaser may be “gazumped” i.e. the Vendor may withdraw from the bargain or
threaten to do so, in the expectation of receiving a higher price (or Vendor
gazundered by the Purchaser).
The effect of the phrase “subject to contract” is that there is no contract. Either
party is free to repudiate the bargain until a formal contract has been drawn. In
order to prevent gazumping or gazundering, the parties may enter in a lock-out
agreement, which in effect prohibits either party from negotiation with third
parties for a certain period.
However, the lock-out agreement may have limitations in that either may not
negotiate with third parties but at the same time refuse to take further
negotiations from the other party, until the lock-out period is exhausted.
The contract for sale of land is usually contained in an Agreement for Sale. As long
as the Agreement complies with the minimum requirements, like writing, signing/
execution, or attestation, the parties are free to negotiate the terms of contract,
and put them in a written form.
Standard formats of contract for Sale of Land have been developed over time.
Traditionally that format is what is normally called the LSK conditions of Sale. The
latest one is that of 2015, and it provides a template that guide the conveyancer in
the terms or conditions to be contained in a Sale Agreement, though the conveyancer
is not bound to fully follow the terms and condition therein. It is merely a guide (get
a copy of the Conditions of sale 2015).
The conditions of sale 2015 is accompanied with an agreement for sale layout. Let
us look at the salient features of a Sale Agreement. A simplified format of a Sale
Agreement would contain the following clauses or information:
1. Commencement:
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This contains the nature of the document, date and parties to the transaction. The
nature of the document is the Agreement for Sale. The date would be the date the
Agreement is entered. Parties would be the Vendor and the Purchaser, and their
addresses. The usual practice is to provide a cover page which also contains this
information.
2. The Interpretation/definitions clause:
This contains definitions of certain terms in the Agreement.
3. The Recital Clause:
This is the descriptive part which usually begins with ‘WHEREAS’. It states the
nature of the proprietors interest in the land, whether freehold/absolute/estate in
fee simple, or leasehold, and a history of the property (i.e. events which may have
taken place to the property prior to Sale e.g. subdivision etc).
If the property is sold together with fittings, it needs to be stated. Fittings include
hanging paintings, carpets, curtains, refrigerators, beds, televisions, etc that are
not permanently affixed (attached) to the property/land.
Unless otherwise stated, property is not sold together with fittings. However,
fixtures are deemed to be sold together with the property. Fixtures are items
permanently attached (affixed) to the property e.g. built in wardrobes, bathroom
suites (sinks/baths/toilets), plugs, wall paintings, light fitments, etc. It also states
what the parties have agreed to do i.e. Sale/Purchase of land.
4. The Consideration Clause:
This sets out the amount of purchase price and mode of payment. Usually, a deposit
of 10% of the purchase, on execution of the agreement. Unless otherwise agreed,
the deposit is paid to the Vendor’s Advocates to hold as a stakeholder, pending
completion (i.e. a stakeholder holds for both of the parties and releases the money
depending on the outcome of the transaction, so that if the sale goes through,
releases the money to the Vendor, but if the sale fails, releases the money to the
purchaser).
However, in situations where the deposit is paid to the Vendor’s Advocate, before a
binding agreement is entered, the Advocate holds the money as a trustee for the
Purchaser, pending the entering into a binding agreement (consent of Purchaser
required before dealing in the same).
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Unless otherwise agreed, the balance of the Purchase price is payable within 14 days
of registration of transfer in the name of the Purchaser, but not later than the
completion date.
5. Completion Clause:
This is the clause which stipulates the period within which the parties should have
performed her obligations. Unless otherwise agreed, completion period is usually 90
days from the date of the agreement. On or before completion, certain documents
(known as completion documents) ought to be delivered by the Vendor’s Advocates
to the Purchaser’s Advocates.
The completion documents are usually released by the Vendor’s Advocates in
exchange for an undertaking from the Purchaser’s or financiers Advocates
(depending on whether it is a cash or financed Purchaser, and if the undertaking is
acceptable).
The completion documents would usually include the documents that are necessary
to effect a transfer of the property into the name of the purchaser being the title,
clearances, consents, discharge in triplicate (if applicable) duly executed transfer
(in triplicate), copies of I.D. and KRA PINS, 3coloured passport-size photographs,
spousal consent. The Purchaser’s Advocate may also call for nil statements and
receipts for payment of electricity and water (if applicable).
6. Matters affecting the property:
This is where it is stated whether the property subject to any easements, covenants,
rights, restrictions etc as contained in the title, which may limit or restrict or set
out rights that the owner has in the title and to which the sale/transfer is subject.
Usually, the property is sold free from any encumbrances like charges, so that if
there is a charge registered against the property, the same ought to be discharged
first.
7. Possession Clause:
This the clause which stipulates the nature of possession to be granted and at what
point. Usually, the Purchaser is granted vacant possession, unless otherwise stated,
where for example the Purchaser is to take over existing tenants. Possession is
normally granted on or before completion (i.e. before or on the completion date)
unless otherwise agreed.
8. Penalties/remedies for breach:
The one which sets out the penalties against the party in breach or remedies
available to the innocent party. Prior to availing himself to the remedies, the innocent
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party ought to serve a 21 days completion notice on the party in breach. If the
Purchaser is in breach, the Vendor may extend time for completion by the Purchase,
or rescind by written notice the agreement upon which the purchaser shall forfeit
the 10% deposit as liquidated damages.
If the Vendor is in breach, the Purchaser may extend time for completion, or rescind
the Agreement by written notice, upon which he demands an immediate full refund
deposit. We shall later see other remedies available in conveyancing.
9. Incorporation of Law Society Conditions of Sale:
Here, the parties may incorporate the LSK conditions of sale, as long as the same
are not varied or inconsistent with the conditions of agreement. Parties may
specifically pick out certain terms in the LSK Conditions, and vary them.
10. Costs:
Here, the parties state who is responsible for payment of legal fees and other costs
like Stamp Duty and Transfer costs. Usually, each party pays his own Advocate’s
costs, while as we shall see the Purchaser pays Stamp Duty and Transfer Costs.
11. Miscellaneous Clause:
This clause contains sub – clauses like “No Waivers’, cumulative remedies,
severability and enduring nature of contract. On no waiver, where a party delays or
fails to enforce a right or seek remedy, he is not precluded from doing so later.
On cumulative remedies, it means that no other remedies available in law, are
excluded. On severability, where some clauses are not enforceable for illegality or
other reason, the remaining clauses are not affected and remain valid. On enduring
nature of contract, despite completion, the agreement shall continue to be in force,
for as long as necessary for mutual reliance on the provisions of the Agreement.
12. Notices Clause:
This is the one which stipulates the manner, form and period of notice to either in
respect of the transaction. It may provide that a written notice be served by
registered post on the last known address of the parties, the notice being of a period
of 14 days.
13. Jurisdiction Clause:
One which stipulates the laws governing the transaction (e.g. Kenyan Laws) and the
place of adjudication of disputes (say Kenyan Courts).
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14. The Testimonium Clause:
Which starts with ‘IN WITNESS WHEREOF’ ….and which links the preceding parts
of the Agreement with the execution/ signatures clause.
15. The Execution Clause:
Where the parties sign or seal the agreement. As per Section 44 of the Land
Registration Act, all the parties consenting to an instrument affecting disposition of
land (including a Sale Agreement) shall execute by way of a signature, thumbprint or
other mark.
If execution is by a corporate body, association, cooperative society or any other
organization, execution is done in the presence of an Advocate, Magistrate, Judge
or Notary Public, (who as we shall must see and complete a Certificate of
Attestation).
16. Attestation/Verification Clause:
This is where the witness signs in witness to the execution, and gives a certificate
of attestation or verification. Section 45 of the LRA provides that a person
executing an instrument shall appear before the Land Registrar, Public Officer, or
other person (including a judge/magistrate, Registrar or Deputy Registrar of the
High Court, Registrar-General or his deputy or assistant, an Administrative Officer,
Superintendent of Prisons, Advocate or Bank Official) - in the Rules/Regulations not
in the Substantive Act.
In the appearing before the prescribed person, the party executing must be
accompanied by a credible witness for the purpose of establishing identity unless
the party is known to the prescribed person. The prescribed person/official has to
identify the party and ascertain whether the party freely and voluntarily executed
the instrument, and complete a certificate to that effect.
We shall later look at situations where verification may be dispensed with by the
Land Registrar in respect of registrable instruments (agreements are not
registrable instruments).
Property can be bought in the form of shares in a company or cooperative society,
or even by way of auction – here, certain terms will vary.
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