INTRODUCTION
As diverse as real estate transactions may be, so are the legal instruments for securing or consummating such transactions. Real estate transactions could be evidenced by contract of sale, deed of assignment or lease or sublease or tenancy agreement, or other suitable deeds or agreements, which a real estate lawyer will advise after taking into consideration the peculiarities of the transaction and governing law.
Whatever agreement a lawyer or party adopts for a real estate transaction, certain clauses are essential not only to protect the investment and avoid loss in case of defect in title or other defects that are prevalent in real estate transactions, but also to protect the parties from liabilities that may arise from improper consideration of all the relevant issues. Whatever the parties insert in their agreement will be construed when any dispute arises and nobody will be allowed to import into the agreement what is not contained in it.
In this article, we have highlighted some essential clauses that parties need to incorporate in their real estate transaction agreements.
1. Provision relating to Capacity of the Parties
Capacity is crucial to vesting or divesting of interest in real property. For example, the Court of Appeal in Federal Mortgage Bank Ltd. v. Omidiji held that a minor (i.e. person below the age of 21 years old) lacks capacity to buy or sell land in Nigeria unless he or she does so through a guardian.
Therefore, where the vendor or buyer of real property is a minor, the deed or agreement should state the capacity in which the transaction is being consummated to avoid the transaction from being voidable.
2. Provision relating to Consideration for the Real Property
This is one important clause parties must include in their agreement. A consideration clause states the amount a buyer has paid or will pay to the seller in respect of the purchased property.
If the agreed sum has been paid before execution of the agreement, then, the consideration clause should reflect that the seller acknowledges receipt of the amount paid by the buyer. The consideration clause should also set out the components of the consideration e.g., where applicable, the price of the property, the cost of drafting of agreement or solicitors’ fee, the survey fee, security fee, development fee, etc.
3. Provision for Service Charge, Land Use Charge, Taxes and dues
Parties are advised to agree on who has the duty to pay service charge, land use charge, taxes and dues that may be applicable or charged on the property.
For example, Section 9 (1) of the Land Use Charge Law of Lagos State provides that the owner of a property or an occupier of a lease of 10 years or above, anywhere in Lagos State, shall be liable to pay an annual land use charge to be assessed by the Collecting Authority.
In addition to the foregoing, Section 7 of the Lagos State Tenancy Law, 2011 imposes certain obligations on the tenant. It provides thus:
“Subject to any provision to the contrary in the tenancy agreement the tenant shall:
(1) …………………………………;
(2) Pay all existing and future rates and charges not payable by the landlord by law;
Also, real estate assets are subject to capital gain tax at 10% when disposed at a gain, except those assets that are specifically exempted by law.
Parties are at liberty and are, indeed, advised to set out in their real estate transaction contracts who between them should bear the responsibility to pay land use charge, capital gain tax or any other dues that may be chargeable by a government authority in respect of the property.
4. Indemnity Clauses
This remains one pivotal clause in every real estate contract. In simple terms, an indemnity clause seeks to reimburse either of the parties for any loss suffered by an innocent party but arising from fault of the other party. The purpose of including an indemnity clause in a real estate contract is to shift or allocate the probable risks or costs or loss suffered by a party to another party.
For example, an indemnity clause is very helpful where it is observed that a demised property may have a third party’s interest or there may be a likely breach of the covenants contained in the agreement.
It is against this backdrop that either of the parties should insist on an indemnity clause in order to protect his or her interest from any form of encumbrance or any losses arising from a breach of agreed covenants in respect of the property.
When a lawyer is acting for the Owner, below is a sample of Indemnity Clause that can be inserted in a real estate transaction contract to protect the owner-client:
The Purchaser shall indemnify the Owner in full and for all losses, costs, expenses or disadvantages suffered by reason of the Assignee’s breach of any the terms herein or by reason of its breach of any future regulation or order as shall be prescribed or issued by any competent authority in respect of the Property hereby sold.
When acting for the Purchaser, the Indemnity Clause could be drafted in the manner below to protect the purchaser-client:
That the Owner shall indemnify (and hereby indemnifies) the purchaser against any defect whatsoever in its title to the Property howsoever arising and at all times hereafter shall keep the purchaser indemnified against all actions, claims, demands, costs, losses and expenses which may be brought or made against the purchaser or which the purchaser may pay, sustain or incur as a result of or attributable to a defect in the owner’s title.
5. Specific Covenants to Set out in Real Estate Transaction Contract
Virtually every real estate transaction is expected to contain some specific covenants to which the parties have held themselves to be bound. The covenants constitute the body or operative parts of any real estate agreement.
For example, a typical tenancy agreement will contain the following standard covenants:
- covenants to pay rent,
- covenants not to sub-let or assign the demised premises without the consent of the landlord,
- covenant not to derogate from the grant,
- Covenant to grant quiet enjoyment of the premises, etc
It is worthy of note that most of these express terms have now been implied under several states Tenancy Law but it is advisable for parties to set out in clear terms how they wish to be bound in respect of those aspects of their contractual relationship.
The implication is that where the parties fail to provide such express covenants, the law shall imply same into the tenancy agreement. For example, Section 7 of the Lagos State Tenancy Law, 2011 imposes certain obligations on the tenant. It provides thus:
“Subject to any provision to the contrary in the tenancy agreement the tenant shall:
(1) Pay the rents at the times and in the manner stated;
(2) Pay all existing and future rates and charges not payable by the landlord by law;
(3) Keep the premises in good and tenantable repair, reasonable wear and tear excepted;
(4) Permit the landlord and his agents during the tenancy at all reasonable hours in the daytime after previous written notice, to view the condition of the premises and to effect, repairs in necessary parts of the building;
(5) Not make any alterations or additions to the premises without the written consent of the landlord;
(6) Not assign or sublet any part of the premises without the written consent of the landlord; and
(7) Notify the landlord where structural or substantial damage has occurred to any part of the premises as soon as practicable.”
Consequently, in the absence of express provisions in the agreement, parties will be bound by the implied provisions of the law. It is therefore commercially prudent for any intending party to a real estate transaction to ensure that the agreement contains covenants that spell out the obligations of the parties to the transaction.
6. Provision for Pre-Judgment Interest Rates in Case of Default or Breach
In litigation over real estate contracts, there are two types of interests that a court can award. The pre-judgement interest and post-judgement interest. There is a clear difference between an award of interest pre-judgment, where a plaintiff must specifically claim such interest, plead it in his pleadings and prove it during trial, unlike the award of interest on a judgment-debt, which is purely based on statutory provision, and can only be awarded because there are provisions to that effect in the law or rules of court.
According to the Supreme Court of Nigeria in Skymit Motors Ltd. v. U.B.A. Plc (2021) 5 NWLR (Pt. 1768) 123, apre-judgment was defined as simply a judgment reached before evidence is available. According to the apex court, if a claim is for money, the claimant may claim interest up until the date the judgment is given, and that is pre-judgment interest.
Whilst it is usual to find clear provisions for refund of money had and received or damages in the event of breach of a real estate transaction contract, parties rarely remember to determine the interest rate that should apply to a defaulting party. If the parties’ agreement does not provide for a pre-judgment interest, the court will not award such interest during litigation.
In C.R.S.W.B. v. N.C. Eng. Ltd. (2006) 13 NWLR (Pt. 998) 589 at page 614, the Court of Appeal held thatpre-judgment interest cannot be awarded as a matter of course. The Court went further to hold that such interest is awarded where the successful party has discharged the onus of strict proof in that regard. “In the instant case, the 1st and 2nd respondents did not depose to facts as to how the rate of pre-judgment interest they claimed was reached; that is, whether by agreement, custom or usage and/or the statutory backing for the interest so claimed. In the circumstance, the 1st and 2nd respondents ‘ claim for pre-judgment interest failed as there was no evidence backing it.”
7. Dispute Resolution Clause
It is proper to have provisions to govern potential dispute between transaction parties even when parties strongly feel that dispute can never arise. Thus, parties should agree on the means of settling their disputes when any arises.
It is advised that parties should provide for amicable settlement through mediation or negotiation meeting and thereafter, if the matter is unresolved, parties should resort to Arbitration. Litigation is time-consuming and involves huge expenditure and may never engender any reconciliatory end for both parties.
Hence, a dispute resolution clause providing for arbitration after breakdown of settlement is a preferred choice to litigation or non-provision for dispute resolution medium in a contract.
Below is an example of dispute resolution clause:
- In the event of any dispute arising out of or in connection with this Agreement, parties shall apply their best endeavors to resolve the matter amicably by mutual negotiation, at least, during three (3) settlement meetings.
- Where the parties are unable to resolve any dispute after three (3) settlement meetings, the matter shall be referred to arbitration by a sole arbitrator to be appointed by …………… (e.g. the Lagos Multi-Door Courthouse or Lagos Court of Arbitration).
- The award of the sole arbitrator shall be final and both parties shall bear the costs of the arbitration proceedings.
- The arbitration shall hold in ………….. (e.g. Lagos or Abuja) in accordance with the extant Arbitration Law of the forum.
Please note that settlement meetings may be held physically or virtually. Also, the number of settlement meetings may be reduced to one or two depending on the nature of transaction and how much time is of the essence.
8. Insurance Clause
Insurance clauses are considered essential to certain real estate contracts. With respect to leases and contract of sale, it may be commercially expedient for the contracting parties to insert an insurance clause in the agreement with a view to protecting the property against fire or any other peril beyond the control of the parties. An insurance clause will usually state who is to insure, the type of insurance procured, premium payable, the insurance company etc.
A typical insurance clause could be as follows:
“The Part A shall insure the property with a reputable insurance company registered in Nigeria against loss caused by fire, flood and other usual peril for the cost of reinstatement, and the insurance policy shall be assigned to the Purchaser at completion:
PROVIDED THAT where reinstatement is not possible, the insurance money shall be shared between the parties pro rata the deposit paid by the Party B.
9. Provisions relating to Custody and Safe Keeping of Title Documents
In respect of partitioned property which is covered by a single title document, for example, a certificate of occupancy that covers several plots of land or an erected building comprising block of flats, It is important for the parties to ensure that there is an “Acknowledgment of Custody and Safe keeping of the Title Documents” clause in the transaction contract.
Th provision relating to custody and safe-keeping of title documents is usually tenable under a typical Deed of Assignment where the owner transfers his entire interest in respect of a part and not the whole of the property. The buyer of a part of the property should insist on a clause relating to custody and safe-keeping of title documents to secure his (purchaser’s) right to the title deeds; such that whenever he (purchaser) needs the title documents, the seller shall oblige him with a copy or the original; and the seller should covenants with the purchaser to guarantee the safe keeping of the title document(s).
10. Anti-Money Laundering Provisions
Real estate is one of the most attractive targets for money launderers because of its potential for enabling large cash transactions. The Economic and Financial Commission (“EFCC”) and the Special Control Unit against Money Laundering (“SCUML”) are monitoring closely real estate transactions to identify and arrest illicit funds and proceeds of crimes.
It is therefore important that real estate transaction parties should protect themselves with necessary anti-money laundering clauses in their contracts. In order to protect the company from being exposed to potential charge for receipt of illicit funds or proceed of crimes from buyers or investors, it is commercially prudent for the company to insert anti-money laundering clause in the contract.
The Anti-Money laundering clause could be couched thus:
- The Company shall not be liable for any damages at tort or under criminal code and laws of the federation for such deposits from any Investor which is illegal or questionable.
- The Investor assures the Company that the funds used for this investment is not proceed of crime and warrants that he will indemnify the Company for any loss or damage suffered by the Company or its staff arising any criminal investigations, prosecution by a law enforcement agency or civil claims by a third party arising from the source or means or nature of the Investor’s funds for this Investment.
11. Clauses Relating to Post-Dated Cheques
In whatever transaction that requires a party to issue a post-dated cheque, it is important for the party issuing the post-dated cheque to take precautionary measure to protect itself against potential charge for issuing dud cheques if those cheques are dishonoured when presented.
CONCLUSION
The list of key provisions or clauses to insert in a real estate transaction contract is not exhaustive and will largely vary and depend on the nature of transaction.
We have compiled the above based on our experience in advising and supporting individual and corporate clients in real estate transactions.
The above is not legal advice and does not create lawyer-client relationship between us and readers.
If you have specific questions, please email us via admin@koriatlaw.com or call us 09067842241.
