Legal and other issues from failed build and sell property deals
The implosion of one of the three high-rise buildings under construction, at Gerrard, Ikoyi, 360 Degrees Towers, owned by Fourscore Homes Limited, has raised several legal questions which need to be addressed in the aftermath of the unfortunate event. Lessons must be learned and corrective measures put in place to avoid such repetition. The questions that will be discussed in this article are robust and will go beyond the immediate issues that may have arisen. It is vital for construction companies/developers to adopt some of the policies suggested in this article, to protect buyers.
Necessary questions that should arise in property transactions and action points to note
What guarantees should be given to a prospective buyer who pays upfront in full or in part for an apartment(s)? Who should the purchase price be paid to?
The funds paid by every buyer should go into an escrow account. The developer company should only be entitled to use 1/3rd of the payments by the buyers, for the construction. The rest of the payments made should be kept in an interest-bearing account. If the building under construction suffers a disaster, the remaining funds paid by the buyers should be refunded.
The construction should not exceed an agreed period plus a contingency period. If the construction exceeds the stipulated period, the developer should be penalized.
For buyers who pay in part, there should be no increase in the purchase price or demand for interest if the delay is from the developer.
What should be the status of the developer company and what should be its state of affairs at the Corporate Affairs Commission?
Currently, the Corporate Affairs Commission registers companies but fails to properly regulate, monitor, or review the status of the companies.
Developer companies henceforth should have a paid-up share capital that matches their level of investment.
Developer companies should also submit sufficient evidence on the professional background of their directors to the CAC.
What should be the extent of due diligence conducted by all parties?
Buyers need to do a review of the title documents presented by the developer company. Buyers also have to investigate the status of the developer company at the Corporate Affairs Commission and find out whether the paid-up capital and assets are sufficient to satisfy any liabilities that may arise.
Developer companies also have to investigate the professional backgrounds, criminal records, and financial capability of prospective buyers.
Is the property subleased or purchased outright and has the title been perfected?
When a property is subleased, the property owner (the sublessor) grants another (the sublessee), the exclusive right to use the property for a specified period, at an agreed rent. However, when a property is out rightly sold, the property owner (the assignor) transfers completely his proprietary interest over the property to another (the assignee).
For the title transferred in a lease or outright sale (assignment) to be perfected, the transaction must be registered, stamp duties paid and Governor’s consent obtained.
What documents should be given to the buyer(s) after an exchange of the contract?
Duly executed copies of the contract of sale
An indemnity agreement
An insurance agreement
An approval in principle from the Lagos State Government
Lagos State Ministry of Physical Planning and Urban Development (LSMPPUD) – (Permit Authority) to each buyer
What instrument should be used for the transfer of legal title to each buyer since they own one or more flats separately?
Approval in principle issued by the State Government.
Deed of partition
A copy of the title document.
How will the Deed of Partition give them a legal right to transfer? Is there a nexus between the landowner and the developer company?
A deed of partition is a legal instrument used to divide a property into separate portions, among different people, according to the shares to which each of them is entitled to in law. After the deed of partition is executed, it must be registered at the land registry to secure the interest of the buyers of the property.
Where the landowner subleases the land (construction site) to the developer company for a term of years, the developer company will sub-under lease the built apartments to its buyers. However, where the landowner out rightly sells the land to the developer company, then the developer company reserves the right to outrightly sell the built apartments to buyers or sublease to them.
What type of insurance should the developer company have before selling any property?
The government should ensure that builders belong to organizations that set standards like the National Home Building Council (NHBC) in the United Kingdom.
The NHBC registers builders and provides insurance covers for the homes they build. The NHBC, however, prescribes standards for the design and construction of the homes and will only insure a home that is in compliance with the standards. The Council of Registered Builders of Nigeria (CORBON) does not have these kinds of powers.
Insurance companies should be able to provide a warranty for up to 10 years. The Developer(s) should pay an appropriate premium and evidence should be available to the buyer.
What kind of indemnity agreement should be provided in favour of the buyer?
There should be a standard indemnity agreement signed by each buyer with the developer company. The indemnity agreement should contain the following conditions, but should not be limited to them;
That the developer company will employ experienced professionals to oversee the construction process.
That the developer company will use materials that are of international standard for the construction
That the developer company will refund in full, the amount paid by the investor/buyer if the property is not developed to the agreed standard or within the agreed time frame.
Should there be any personal guarantees given and signed by each director of the developer company?
To secure the trust of investors/buyers, who would be parting with their money in good faith, the directors of a developer company should give a personal guarantee to the investors/buyers, agreeing to refund a portion of their investment in the construction project or the full amount in the event of disaster or default on the part of the developer company.
What should be the role of the regulators – The Lagos State Ministry of Physical Planning and Urban Development (LSMPPUD)
According to the provisions of the Land Use Act 1978, all land in the territory of a state is vested in the governor of the state and shall be held in trust and administered for the use and common benefit of all Nigerians. This means that the involvement of the government in construction projects (especially those involving high-rise buildings) should be more significant.
The government should pay a portion of the cost of insuring the construction project. Ensuring the project should not be left to the developers/builders alone. Upon completion of the project, the government would be allowed to recover the amount it paid towards the insurance cover. If this is done, the relevant agencies of government would be more committed to ensuring that there are no errors/defects in the construction process and developers comply with laid down regulations.
The threshold for approval of construction projects should be improved. The bar has to be raised and more stringent conditions should be applied to ensure consistency across the board.
Building plans and the details of all professionals involved in every construction project should be approved. The professional team of every construction company should consist of quantity surveyors, architects, structural engineers, and developers.
What system of checks and balances should be put in place to check the activities of developer companies?
A board should be set up by the government to monitor the level of compliance of the professional teams of the developer companies. This should be the standard but particularly applied to high-rise buildings. The board, in carrying its duties, should do well to observe the following practices;
Carry out periodic inspections throughout the construction period and ensure that the reports of the inspections are published and available to investors/buyers.
Ensure that sanctions are enforced across the board and there is no compromise in the system.
Stop construction projects from proceeding when there are errors/defects in the projects and the defects are not corrected.
Ensure that any defaulting developer company faces legal proceedings after several warnings, and imposes stringent sanctions including possible revocation of its Certificate of Occupancy or Governor’s Consent to Deed of Assignment.
Another layer of inspection should be created, independent of government agencies. A body headed by a professional in the private sector (with relevant experience in the construction industry) should be created, called the Regulatory Ombudsman. A team will be created by him/her, will report the findings of their inspection and publish them after periodic inspections. The buyers/investors will have the right to make complaints to the Regulatory Ombudsman if any of the steps in the construction process has been compromised or ignored.
These checks and balances will ensure that government reports are accurate and credible and developer companies are more compliant.
In the event of the death of the Promoter/Managing Director/CEO of a developer company, how can buyers satisfy their claims against the company when the construction project fails?
The position of the law is that a company is a going concern and the death of the Managing Director/CEO of the company should not preclude the claims of buyers against it.
To ensure there is a realistic prospect of buyers recovering their money when a construction project fails and the MD/CEO of the developer company is dead, the following measures should be present;
The developer company should have sufficient assets to pay up liabilities that may arise.
The Paid-up share capital of the developer company should be significant enough to match the level of its investment.
The personal guarantee of the directors should be called in when the need arises.
In conclusion, the failure of off-plan, build and sell construction projects can be avoided once the right preventive measures are put in place. However, all stakeholders in society have a role to play in ensuring that such unfortunate events are a thing of the past.
Fawehinmi, Principal Partner of Obafunke Akinkugbe & Co, a law firm