WHAT IS THE LAWFUL PROCEDURE FOR A LENDER TO SELL YOUR PROPERTY IN CASE YOU DEFAULT IN LOAN PAYMENTS?

Many Kenyans obtain loans from banks and other financial institutions by executing a legal charge (commonly known as collateral) on their property, particularly land, as security. However, these charged properties often end up being auctioned due to the chargor’s (borrower’s) default on payment terms. The question arises: do banks follow the legal procedure when exercising their statutory power of sale?

On April 28, 2022, the Court of Appeal delivered a landmark verdict in the case of Basil Criticos v. National Bank of Kenya Limited (Civil Appeal No. 80 of 2017), awarding Kshs. 2,284,101,000 (KES 2.2B) to Basil Criticos for the unauthorized, improper, and irregular sale of property LR No. 5865/2, along with interest from the date of judgment until full payment.

The Appellate Court relied on Section 99(4) of the Land Act, 2012, which states: “A person prejudiced by an unauthorized, improper, or irregular exercise of the power of sale shall have a remedy in damages against the person exercising that power.”

This case clearly indicates that the justice system opposes the oppressive behavior of lenders, especially banks, when enforcing loan securities under the statutory power of sale. The law dictates that prior to the sale of the charged property, the lender must:

• Issue statutory notices
• Issue a notice of sale
• Ensure a certified land valuer conducts a proper valuation of the property
• Sell the property for no less than 75% of its market value
• Remit any surplus amount obtained after the sale back to the chargor (borrower)
• Conduct the sale in good faith, adhering to the chargee’s duty of care

The Case of Basil Criticos: High Court Proceedings

In High Court Case HCCC 132 of 2009, National Bank of Kenya Ltd v. Agro Development Company Ltd & 2 others, Basil Criticos, co-owner of property LR. No. 5865/2 with Mama Ngina Kenyatta, served as a guarantor for a loan of Kshs. 20,000,000 borrowed by Agro Development Company Limited. The loan, initially charged at an interest rate of 19% per annum, saw a default, leading to the sale of the charged property for Kshs. 55,000,000 in 2007. Despite the sale, the bank claimed an outstanding amount of Kshs. 106,635,945, due to an increased interest rate of 35% per month (420% per annum).

Basil Criticos counterclaimed, asserting his liability as a guarantor was limited to Kshs. 20,000,000 and should have been discharged post-sale. He further argued that the property was sold below its market value, estimated at Kshs. 3,028,890,000, and sought damages for the undervaluation.

The High Court ruled against Criticos, upholding the bank’s claim and dismissing his counterclaim. Dissatisfied, Criticos appealed the decision.

Court of Appeal Ruling

In Civil Appeal No. 80 of 2017, the Court of Appeal overturned the High Court’s judgment. The appellate judges determined:

1. Liability of the Guarantor: The court held that Criticos’ liability as a guarantor was limited to the guaranteed sum. Upon the sale of the charged property, his liability should have been discharged.
2. Property Sold at Undervalue: The court accepted the valuer’s report, indicating the property was sold below market value.
3. Entitlement to Damages: The court awarded Criticos Kshs. 2,228,101,000 in damages for the loss incurred due to the undervaluation.

Supreme Court Proceedings

The National Bank of Kenya filed an application in the Supreme Court to review the Court of Appeal’s decision. The application was dismissed, with the Supreme Court affirming the Appellate Court’s ruling.

Proper Exercise of Statutory Power of Sale

The statutory power of sale is governed by the Land Act, No. 6 of 2012. Key requirements include:

• Issuing a statutory notice within one month of the chargor’s default (Section 90)
• Serving a notice to sell and waiting at least 40 days before selling the property (Section 96)
• Engaging a certified land valuer to ensure the property is sold at a fair market price (Section 97)
• Conducting the sale by public auction or private contract, ensuring public advertisement and compliance with auction regulations (Section 98)

For a detailed understanding of the statutory power of sale and legal assistance on compliance or other legal issues, please contact us at info@wka.co.ke or visit www.wka.co.ke. You can also reach us at +254 798 03 580. Our Nairobi Hub is located at Parklands, Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road.

Authors:
William Karoki – Partner
Florence Mwende – Associate