US agency in Sh620m test of new land laws

AUS government agency has launched an epic court battle in defence of its right to sell a multi-million shilling estate that is expected to test the new Land Act.

The legal battle is now centered on the law that requires lenders selling a defaulter’s property to do so at the highest market value and, upon receiving the sales proceeds, deduct the arrears and remit the rest to the property owner.

The US, through its private sector lending arm — The Overseas Private Investment Corporation (OPIC) — is seeking to auction partially done homes on a 20-acre piece of land for Sh620 million for default, but the property owner reckons the transaction undervalues the asset.

Jopa Villas, which owns the property, says a Chinese developer has agreed to buy the land at Sh45 million per acre, valuing the land at Sh900. The land owner is asking the US lender to cease the sale.

Now, OPIC is seeking to have Section 78 (1) of the recently-enacted land law declared unconstitutional. The law bars OPIC from disposing of the 20-acre piece of land on Mombasa Road unless certain conditions are met.

This section prohibits lenders from unilaterally selling property used to secure a loan in case of default.

Lenders are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.

In the court documents filed on July 26, the lenders’ lawyers, Kaplan & Stratton, say they have already entered into a Letter of Offer agreement with AMS Properties Ltd to purchase the land.

A letter by the receiver manager, Harveen Gadhoke of  consulting firm Deloitte, on May 16 this year accepted AMS’s offer of Sh620 million.

This amount would also include the 28 housing units that had been done almost to completion while another 20 were half done.

Jopa Villas, on the other hand, presented to court a Letter of Offer from a Chinese developer who had agreed to buy 15 of the 20 acres (land only) at Sh45 million an acre.

It reckons that OPIC’s attempt to sell the property to AMS Properties was below the market price and that they would lose millions of shillings in the process.

This legal battle is expected to test the new land law that has been termed friendly to borrowers who use their homes or land to secure loans.

Before enactment of the laws mid this year, there had been no legal guidance on how much lenders would recover from the sale of a collateralised asset, leaving helpless borrowers at the risk of losing their entire investment even after servicing part of the loan.

Banks have been seizing such collateral for sale without regard to any payments already made, sometimes amounting to as much as three quarters of the loan.In some instances, such distressed property has been sold at significantly higher prices with the borrower getting nothing.

The lenders are now required to actively find the highest price for a property that they are putting up for sale, even if it means approaching potential buyers.

The provisions will apply to both new and existing loan contracts and are aimed at protecting borrowers from the double loss they had suffered for failing to fully service a loan.

In the application filed by lawyers Kaplan & Stratton, the US lender is demanding $5 million (about Sh425 million) from Jopa Villas, a real estate developer.

This is inclusive of interest accrued from an advanced loan of $2.8 million (Sh238 million) in 2006. OPIC is the US government’s development finance institution, established in 1971.

It mobilises private capital to mainly help businesses gain a foothold in emerging markets like Kenya.

Jopa Villas belongs to Mr JP Njoroge, a real estate developer who was then based in the US.

The project, which was estimated to be worth $12 million  (about Sh1.02 billion), kicked off in Kenya in 2006. It aimed to build 370 housing units. 

It ground to a halt in 2008 after a financial disagreement between Jopa Villas and their contractor, forced the latter to abandon the project.

Documents show that by this time, all the 371 housing units had been booked by potential clients and their deposits paid.

The houses were either three or four bedrooms and cost between Sh3 million to Sh4 million, a value that is now in the region of Sh10 million to Sh12 million.

Today, most of the unfinished houses have been vandalised for stone and metal. The Saturday Nation team found Kleen Homes Security guards manning the property on behalf of the receiver managers.

In media interviews done in 2004, Mr Njoroge noted that his company, JNP Properties, operated a real estate empire in the Southwest states of the US with over 8,000 family units in Texas, Oklahoma, Georgia, Florida and Louisiana.

The company, he noted, had over 150 employee-s and was valued at about $450 million, making an annual turnover of $27 million. It is this success that he wanted to replicate in Kenya. Among the areas he wanted to focus on were Redhill, Outspan and even Spring Valley.

He was said to be constructing Tigoni Villas and Loresho Flats targeted at high net worth investors.