Privity of Contract: Why You Should Think Twice Before Investing in Unsecured Land Deals

19th Feb 2025 12:29:40 Tibugwisa Damalie

Introduction: The Risky Land Investment Offer

A friend recently shared an investment opportunity—a chance to buy land at an attractive price through a subscription scheme. On the surface, it sounded like a great deal. But upon closer review, red flags emerged:

1? The land is mortgaged, meaning the title is still held by the bank.

2?The company selling the land is not the legal owner—they are merely trying to clear the mortgage with the hope of obtaining the title later.

3?As a buyer, I would not have access to the mortgage terms, nor could I enforce any rights against the seller if things went wrong.

This situation highlights a crucial legal principle: Privity of Contract—which states that only the parties to a contract can enforce it.

In this article, we’ll break down what Privity of Contract means, why it matters in business and real estate deals, and how to protect yourself from similar risky investment schemes.

Understanding Privity of Contract

The principle of Privity of Contract means that:

1. A contract only binds the people who signed it.
2. Third parties (people not part of the contract) cannot enforce rights or obligations under it.
3. If you are not a party to a contract, you cannot sue or be sued based on it.

 

Why Is This Important in Business and Investment?

Many investors assume that they automatically have enforceable rights because they have paid money. However, your rights may be extremely limited unless you are directly part of the agreement.

In the case of the mortgaged land investment scheme, investors might believe they are buying land—but legally, they are not in a direct contract with the bank or the landowner.

The Risks of Buying Land Through a Non-Owner (A Privity of Contract Problem)

If the company selling the land is not the legal owner, the risks for investors are high:

1. You Have No Direct Rights to the Land Title

• The title is held by the bank because the land is still mortgaged.

• If the company fails to clear the mortgage, the bank can auction the land, and investors will have no claim over it.

2. You Cannot Enforce the Mortgage Terms

Since you are not a party to the mortgage contract, you:

• Cannot demand transparency on how the mortgage is being cleared.
• Cannot hold the bank accountable if the company defaults.
• Cannot prevent the bank from repossessing the land.

 

3. You Risk Losing Your Money Without Owning Anything

• The company may fail to clear the mortgage, meaning the land will never be transferred.

• If the company collapses, your investment is lost, and you cannot claim the land or sue the bank for it.

4. The Vendor Has No Legal Obligation to Transfer the Land to You

• Since the vendor is not the landowner, they cannot legally guarantee a title transfer.

• Your contract is only with the vendor, not with the actual landowner or the bank.

Lessons for Business Owners and Investors: How to Avoid Privity of Contract Pitfalls

To avoid being trapped in a deal where you have no legal enforcement rights, follow these key steps:

1. Verify the Land Ownership and Encumbrances

1.  Check the Land Title at the Ministry of Lands to confirm who the legal owner is.

2. Ensure the land is free of mortgages and caveats before committing money.

3. If a bank holds the title, request proof that the mortgage will be cleared before any sale.

4. Demand a Direct Agreement with the Landowner

5. If you are paying for land, your contract should be with the actual landowner—not an intermediary.

1. Ensure the landowner signs the agreement and acknowledges the transaction.
2. If a company is selling on behalf of the owner, verify their legal authority (Power of Attorney).

 

6. Secure Your Interests with a Legally Enforceable Contract. If you must invest in a scheme where the land is still mortgaged, ensure your contract:

• Gives you direct rights to claim the land if the mortgage is cleared.
• Includes a refund clause if the land is not transferred within a specific timeframe.
• Has a dispute resolution mechanism (e.g., arbitration or court action).

 

4. Avoid Verbal Agreements—Get Everything in Writing

• Many land scams in Uganda happen because buyers rely on verbal promises instead of legally binding documents.
• Get written commitments from both the vendor and the landowner confirming the sale terms.

 

5. Involve a Lawyer Before Making Payments. A lawyer can review all contracts and mortgage documents to ensure you are protected.They will check for hidden risks and confirm whether you have enforceable rights.

Conclusion

Protect Yourself Before Investing

Privity of Contract is a powerful legal principle that can determine whether you have rights in a deal—or if you are just a powerless investor.

Before you subscribe to a land-buying scheme, joint business venture, or financial investment, ask yourself:

• Am I directly in a contract with the actual landowner or seller?
• Do I have enforceable rights if things go wrong?
• Is the land title free from mortgages and legal claims?
• Am I relying on verbal promises, or do I have a legally binding contract?

 

If the answer to any of these is uncertain, it’s time to rethink the deal. Don’t just trust—verify. Because in business, just like in law, if you are not part of the contract, you cannot enforce it.