Why developers are shunning tenant purchase scheme model

How to foreclose units under the tenant purchase scheme (TPS) is among the regulatory gaps that may discourage developers from maximising this home ownership model.

A detailed analysis by a consortium of players in the housing sector notes that while there are guidelines on how foreclosure is done for units developed by the National Housing Corporation (NHC), there is no clear pathway for the private sector. 

Additionally, while the National Housing Policy does recognise TPS as a model that can achieve equity in housing, consumer protection is not necessarily guaranteed.

TPS, unlike mortgage which is the mainstream way of financing a home, allows tenants to purchase desired units by paying monthly rent which could be slightly above or exactly the market rates that go towards clearing the balance. This is usually after paying an initial deposit.

Payment methods

The analysis is by Financial Sector Deepening (FSD) Kenya which contracted Liaison Capital (a real estate investment trust instrument manager), Raisin Capital (financial model consultant), KN Law (legal advisors), Altair Ltd (international tenant purchase scheme advisors) and Stima Investment Cooperative (developer) to review the TPS frameworks in the country.

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One of the documents, Developing a Tenant Purchase Scheme Frameworks notes that while TPS programmes usually provide an alternative mode of payment, developers prefer other payment methods such as cash or mortgage as they facilitate a quick exit.

These methods also save developers the operating costs that come with the administration of TPS.

The analysis notes no overarching legislative or regulatory framework governing TPS programmes in Kenya. “The schemes are primarily governed by the terms set out in the contract between the parties,” it states. 

While various laws like the Constitution of Kenya spell out the right to housing in Article 43(1)(b), the Contracts Act, and the Land Act and Land Registration, there are still gaps to encourage more players. 

For example, the analysis notes that the Housing Act, where the National Housing Corporation is anchored, empowers this State agency to repossess a unit in instances of default without obtaining an order or judgment for possession in court. 

“The option to resume possession without court orders, through the use of force, is not available to a private TPS provider,” it reads. “A private TPS provider may however seek damages and mesne profits.” The FSD analysis cites that the existing TPS programmes in Kenya adopt the interest-only rent model where the developer acts as financier granting a loan to the tenant purchaser for the balance.

The balance is then payable in instalments, typically monthly. “This model keeps the contract documentation simple and no additional costs are charged except service charge that is payable for the operation and maintenance of the common facilities,” it says. 

The monthly rental income, in addition to the interest costs, may include costs such as insurance costs and management fees or these may be charged separately.  The consortium has proposed several policy recommendations to support increased adoption of the TPS model,  particularly by players in the private sector, and provide oversight to protect consumers to ensure tenant purchase agreements remain equitable to aspiring homeowners. 

These include fast-tracking the enactment of the Housing Bill, 2021, which will play a critical role in enhancing the legal and regulatory framework governing TPS programmes.

Private developers

The consortium says the Bill among others provides for the registration and regulation of housing developers. “This will enhance consumer confidence in TPS programmes undertaken by private developers,” reads the policy recommendations in part. 

The Bill also provides for a house data bank which will in turn be an important tool for scheme providers. 

The consortium further proposes the provision of a framework applicable, where a tenant purchase institution can sell a unit to another party on rescission of the agreement.

This framework should also protect the initial tenant purchaser. 

“To achieve a balance, these provisions may only be triggered once the tenant purchaser has achieved a certain threshold in payment e.g. 75 per cent of the purchase price,” the recommendations read. “This enables a tenant purchaser who is unable to service the payments for reasons out of their control to enjoy the benefit of the equity built over the years.”

The Landlord and Tenant Bill, 2021, should also be fast-tracked.

It is noted that while this particular Bill would not be appropriate for regulating the relationship between a tenant purchaser and a tenant purchase institution under the interest-only rent model, provisions of the bill such as limitations on rent increases and a dispute resolution mechanism for dealing with such matters would be beneficial to a rent to own model where the tenant purchases an option to buy in future. 

“These provisions would provide necessary protections to such tenants,” it adds.  “It would also be useful that the definition of tenancies under this Bill be amended to exclude a tenant purchaser – tenant purchase institution relationship in the same way a mortgage-mortgagor relationship is excluded.”

The National Housing policy identifies the TPS model as a tool to achieve equity in society, a recommendation has been made to the government to consider subsidies.