Due diligence in commercial property transactions: Avoiding costly mistakes
By: Pawi Sylvian Fortune
Introduction
The acquisition of real estate, whether undertaken for commercial or residential purposes, presents a landscape potentially riddled with the risks of incomplete and deliberately concealed information. These oversights, often subtle yet consequential, can precipitate significant and unforeseen financial burdens upon the acquiring party.[i] The prevalence of fraudulent land transactions represents a significant challenge within the Kenyan property market. Regrettably, numerous citizens become victims of deceptive practices perpetrated by unethical actors. A primary tactic in these schemes involves the unauthorized sale of real property by individuals who do not possess a legitimate title,[ii] ultimately leading unsuspecting purchasers to invest their funds in properties for which legal ownership cannot be transferred, as only a valid titleholder possesses the lawful authority to convey ownership. In this context, the Land Registration Act of Kenya offers safeguards to legitimate titleholders, shielding them from challenges arising from fraudulently obtained titles,[iii] thereby leaving the defrauded purchaser to bear the financial consequences.
Due diligence and the concept of an innocent purchaser.
To safeguard potential property purchasers against these deceptive practices, the legal system has established a requirement for due diligence to be carried out before any property transaction is finalised.[iv] Due diligence refers to a critical and in-depth investigation with a central focus on establishing the unquestionable validity of the property’s title and any associated encumbrances.[v] This process necessitates a rigorous examination of the property intended for sale to confirm legal ownership and trace its history, ensuring there are no claims or irregularities that could jeopardize the buyer’s investment. By rigorously scrutinising the title, potential purchasers aim to secure their rights and avoid future disputes arising from ownership challenges.
Initially, the legal system showed more leniency towards those who became victims of fraudulent land transactions, often referred to as innocent purchasers, acquiring land under the false impression of a valid title. The sole requirement was for the purchaser to verify ownership at the Land Registry.[vi] These innocent purchasers were required to prove they acted in good faith, without prior knowledge of any adverse claims or title defects. This principle is mirrored in Section 26 of the Land Registration Act, which generally guarantees the indefeasibility of a registered proprietor’s title, with specific exceptions for the proprietor’s own fraud, misrepresentation, or acquisition through illegal, unprocedural, or corrupt means. Nevertheless, this system inadvertently created a vulnerability for legitimate property owners. Fraudsters occasionally conspired with registry personnel to falsify records, meaning that innocent purchasers, in attempting to confirm ownership, would sometimes find the fraudsters falsely registered as the rightful owners. As a result, rightful owners faced a tense situation and the burden of unnecessary litigation to establish their title, while the courts were placed in a difficult position of balancing the competing rights of the original owner and the innocent purchaser.
However, the Supreme Court’s decision in Dina Management Limited v County Government of Mombasa & 5 others(Dina Management) reversed the prior legal stance, exemplified by cases such as David Peterson Kiengo & 2 others v Kariuki Thuo. Previously, reliance on the registered proprietor’s title was considered sufficient for purchasers. However, the Dina Management decision established a new requirement: purchasers must now investigate the title’s origin to ensure the initial allocation was lawful, formal, and unencumbered by unregistered issues.[vii] This judgment significantly increases the onus on purchasers to conduct comprehensive due diligence, extending beyond a simple registry search into the property’s historical legality. Consequently, unlike the previous legal protection afforded to innocent purchasers relying solely on the register, such protection is now contingent on demonstrating that thorough due diligence was undertaken and that any subsequent defects were not reasonably discoverable.
The importance of due diligence
Due diligence is crucial as it facilitates informed decision-making and safeguards parties involved in transactions through the verification of key transaction details and potential risks.[viii] This vital process enables the purchaser to ascertain the seller’s legitimacy and ownership, identify any existing encumbrances or legal disputes, and thoroughly trace the title’s history to ensure its lawful and proper initial allocation, a principle increasingly emphasised by legal precedents.[ix] Furthermore, due diligence encompasses the confirmation of adherence to relevant zoning regulations, land-use policies, and building codes, as well as the evaluation of potential environmental risks[x] and the nature of the peripheral infrastructure. Ultimately, this rigorous undertaking serves as a fundamental protective measure. It secures the buyer’s investment by mitigating the risks of fraudulent activities and preventing unforeseen financial burdens. Furthermore, it ensures the acquisition of a clear and legally sound title, thereby averting future complications.
Conclusion
Given the inherent complexities and potential pitfalls in Kenyan commercial property transactions, particularly concerning title validity and regulatory compliance, proactive and expert due diligence is not merely advisable, but essential. Consequently, it is not only prudent but also wise that prospective real estate purchasers secure the services of a skilled legal professional to conduct comprehensive due diligence.
[i] Brett Sullivan, ‘The devil is in the details: Due diligence in commercial real estate transactions’ 33(2) Real Property Law (2016) 35.
[ii] Vivianne, ‘How to avoid common scams when buying land in Kenya’, Milescoop, 4 February 2025 -< https://milescoop.com/sblog?blog_id=228 > on 12 May 2025.
[iii] Land Registration Act (Cap 300 Laws of Kenya), Section 25 – 26.
[iv] Dina Management Limited v County Government of Mombasa and 5 others, Petition 8 (E010) of 2021 [2023], Supreme Court, para 112.
[v] ‘Mastering due diligence: A step-by-step guide to buying land in Kenya’, Fanaka -< https://fanaka.co.ke/mastering-due-diligence-a-step-by-step-guide-to-buying-land-in-kenya#:~:text=Before%20diving%20into%20any%20land,and%20security%20of%20your%20investment. >- on 12 May 2025.
[vi] David Peterson Kiengo & 2 others v Kariuki Thuo, High Court, Civil case 180 & 220 of 2011, [2012] eKLR.
[vii] Dina Management V County Government of Mombasa & 5 others, para 15.
[viii] ‘Importance of conducting a though due diligence’, AFSiC, Investing in Africa: Conference and Expo 2025 -< https://www.afsic.net/importance-of-conducting-thorough-due-diligence/#:~:text=Definition%20and%20Scope,efficiency%2C%20and%20even%20cultural%20compatibility. >- on 14 May 2025.
[ix] Dina Management v County Government of Mombasa & 5 others. See also Arthi Highway Developers Limited v West End Butchery Limited & 6 others, Civil Appeal 246 of 2013, [2015] KLR.
[x] Joseph Philip Forte, ‘Environmental due diligence: A guide to liability risk management in commercial real estate transactions’, 42(3) Real Property, Probate and Trust Journal (2007), pp 463, 480, 485.
