How Developers Should Exit Real Estate Projects
The real estate sector has been the key to wealth creation for some of the tycoons of the world. It is therefore not surprising that Kenya has also seen, more so in the last decade, massive investment due to the perceived high return.
Kenya is also estimated to have an annual housing deficit of around two million residential homes, which arguably argues for large-scale residential developments as a lucrative sector for investors seeking high returns.
However, like any other good investment, careful planning of a developer’s exit is key to addressing significant legal and management issues that could potentially dilute a developer’s return, even more so, in large-scale residential developments. and staggered.
The primary goal of most development projects (especially those that are for sale) is to maximize return on capital through a clean and quick exit. However, for most developers, the reality is that there is usually a time lag between project completion and the sale of all development units.
Because of this mismatch, developers are typically “forced” to retain ownership of common areas and management control of the development until the last unit is sold. At this stage, the owners are not involved in making decisions about how the service fee is collected or used and in the general management of the domain.
As a result, the mismanagement of service fees and mismanagement of development have become a major source of friction between developers and owners.
This practice of developers retaining management control of a development is expected to change once the new Sectional Properties Act 2020 (the Act) comes into full force.
Where a development is not exempt from the Act, they are required to appoint a board of directors of the Company within 90 days from the date 50% of the units are sold or within 180 days from from the date the first unit is sold, whichever comes first. .
However, before the tide turns completely in favor of owners taking on the responsibility of the owners’ management company (MC), a developer must take it upon themselves to ensure that they are ready to hand over the baton when the day comes.
How then can a developer prepare for such a transfer and mitigate liability?
As a starting point, the developer should formally create the MC and become the “initial board”. At this stage, the developer will play a dual role: first, to operate the MC and second, to develop and market the project.
This dual role creates a conflict of interest as the developer bears all associated liability and potential liability of an MC administrator for acts performed or omitted.
It is therefore advisable from the outset that a developer creates a clear separation of roles by ensuring that all contracts with third parties relating to development management are entered into by the MC, not the developer and preferably, all operations are carried out by a third-party management company, under the supervision of the developer.
It is also expected that once the last unit is sold, the developer will hand over the management of the MC to the owners.
Often, separate owners will own their individual units and manage common areas (such as gardens, elevators, pavilions, elevators, etc.) jointly through the MC. The first step should be to integrate all owners as members of the MC, either by transfer or by allocation of shares.
Once the owners become members of the MC, form a board of directors controlled by the unit owners, which can take over the management functions of the promoter.
On the other hand, the new board controlled by the owners should, before taking office in the MC, independently or through its lawyer, retain the services of an independent auditor to examine the books and records of the MC while under developer control. This would assure the new board of owners that the promoter acted correctly while in control of the MC.
It is also expected that for the proper functioning of a development, each owner of a development is required to pay a service fee, which is used to fund the operation of the MC and the maintenance of common areas. To achieve proper accountability and avoid service fee disputes, separating service fee funds from other promoter funds is a critical step in a promoter’s preparation for transfer.
Upon transfer, the promoter must account for the service fees paid and transfer all unspent and anticipated service fees to the owners. Reconciliation can be complex, particularly for large developments, and so a developer should ensure that MC Service Fee and Service Fee deposit bank accounts are established from the outset.
Beyond the measures outlined, developers should consider obtaining adequate directors’ and officers’ liability insurance to protect against any directors’ or officers’ liability that may be held against them for acts done or omitted during their tenure. tenure as directors and officers of the MC.
Amrit is a partner in the real estate and finance practice at DLA Piper Africa, IKM Advocates Maureen is a senior partner in the same practice