Demystifying the Holding of Purchase Price On Stakeholders Basis

The bone of contention between parties when selling or purchasing any piece of land is to whom the Purchase Price (deposit and/or balance) shall be paid pending transfer of the property into the purchaser’s name.

A vendor’s main concern is to ensure that transfer of title to the purchaser does not commence without proof of readily available funds to settle the purchase price, while a purchaser’s main concern is to ensure that the purchase price does not fall into the hands of the vendor, before transfer of title takes place. The role of a stakeholder is critical in addressing these concerns.

Who or what is a stakeholder?

A stakeholder is a person whose duty is to hold money in his hands not for one or other of the parties (vendor or purchaser) to a transaction, but for both, until some event occurs upon the happening of which it becomes his duty to hand over the money to one or other of the parties, [for example] to the vendor if the sale goes through or to the purchaser if it does not. Pending that event, he must hold onto the money and must not release it to any of the parties without the consent of the other or as per the terms of the agreement.
It is clear, therefore, that an advocate, as stakeholder for both vendor and purchaser, cannot pay the money to either party until the contract proceeds to completion, or it comes to an end through rescission or otherwise, or the deposit is forfeited by the vendor in accordance with the terms of the agreement.
A stakeholder is almost like a middleman because he holds the money for both parties. It is common practice to have the deposit paid to the vendor’s Advocate in their capacity either of agent for the vendor or stakeholder. In either case the money is the client’s money and must be placed in a client account. An advocate who holds a deposit as stakeholder is obliged to pay it over to a new stakeholder if he is instructed by both the vendor and the purchaser.
This position is disadvantageous for the vendor, who cannot use the money without permission from the purchaser. But it is advantageous for the purchaser who can be assured that the money is safe in the hands of the conveyancing solicitor and can be recovered in the event of a vendor’s default.

Legal Provisions

The Land Act and The Land Registration Act do not make provision for the holding of any amount payable towards the purchase price on stakeholder basis. The Law Society Conditions of Sale 1989 edition however makes provisions for how the deposit and balance of the purchase price should be held.
The Law Society Conditions of Sale (the Conditions”) are a creature of the Law Society of Kenya. They were introduced mainly to aid in the conveyancing process by giving a guide that lawyers can use when drafting contracts for the sale and purchase of land. The conditions however can be specifically included or excluded from the contract as parties deem. Being a guideline parties can utilize the conditions to draft a contract for sale and purchase.
Condition 3 states that “The purchaser shall, on or before entering into the contract, pay to the vendor’s advocate or the estate agent negotiating the sale on behalf of the vendor as stakeholder such a sum as will, together with any preliminary deposit paid to the vendor or such agent, amount to ten (10) per centum of the purchase money (excluding any separate price to be paid for moveables, livestock, chattels, fittings and other separate items).”
Condition 4(b) goes further to describe how the balance of the purchase price shall be paid and how it shall be treated. It states that “upon completion, the purchaser shall pay the purchase money to the vendor’s advocate who shall hold the same as stakeholder until registration of the conveyance.”

It is noteworthy that the above mentioned Law Society Conditions of Sale 1989 edition are in the process of being amended. The proposed Law Society Conditions of Sale 2015 provided under condition 5.2.1 state that the Purchase Price or any part thereof including the deposit is to be held by the vendor’s Advocate or auctioneer (in the case of auctions) as stakeholder and if demanded by any party in an interest earning account and the principal and Accrued Interest will be dealt with in the manner set out in the conditions and the agreement. It is clear that the proposed conditions and the 1989 conditions provide for the same thing and that is to hold the purchase price on stakeholder basis.

Disclaimer: This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing in this article is intended to guaranty, warrant, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall they be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.

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