18 December 2023 | www.wka.co.ke | +254 798 035 580 | #Edition 17-Subscribe to our weekly newsletters: info@wka.co.ke
Many are times when Kenyans obtain loans from banks and other financial institutions by executing a #legalcharge (commonly known as collateral) on their property, especially land, as security. However, these charged properties usually end up being auctioned due to the #chargor’s (#borrower’s) default of the terms of payment. The question that arises is, do the banks follow the legal procedure when exercising their #statutorypowerofsale?
On 28th April 2022, the Court of Appeal pronounced a landmark verdict in the case of Basil Criticos v National Bank of Kenya Limited (Civil Appeal No.80 of 2017), where it awarded damages of Kshs.2,284,101,000 (KES 2.2B) to Basil Criticos for the unauthorized, improper, and irregular sale of the property LR No. 5865/2, together with interest at court rates thereon from the date of judgment until payment in full.
The Appellate Court relied on the provision of Section 99(4) of the Land Act, 2012 which provides that “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 is a clear indication that the #justicesystem is against 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 #chargedproperty by the lender:
- #Statutorynotices must be issued;
- #Noticeofsale must also be issued;
- A #certifiedlandvaluer must conduct a proper valuation of the property;
- The property must not be sold below the 75% of the ad valorem (market) value;
- The surplus amount obtained after the sale of land must be remitted back to the chargor (borrower); and
- The statutory power of sale must be conducted by the lender in good faith (chargee’s #dutyofcare).
PRIOR TO the verdict of the Court of Appeal, the dispute had been determined by the High Court (HCCC 132 of 2009). Below is an extensive elaboration of the dispute:
HIGH COURT: IN BRIEF
HCCC 132 OF 2009 BETWEEN NATIONAL BANK OF KENYA LTD v AGRO DEVELOPMENT COMPANY LTD & 2 others
Basil Criticos was a co-owner of Property LR. No. 5865/2 measuring 15,994.5 acres with #MamaNginaKenyatta as tenants in common. Between 1990- 1991, a Limited Liability Company known as Agro Development Company Limited (“the chargor”) in which Basil was a director and shareholder borrowed the sum of Kshs.20,000,000 with an #interestrate of 19% per annum from Kenya National Capital Corporation Limited (KENYAC) now known as National Bank of Kenya (“the chargee/ borrower”).
On 29th January 1991, Basil in his capacity as a #guarantor executed a legal charge over the land L.R. No. 5865/2, I.R No. 2097 (“the Charged Property”). This legal charge was to act as #security of the money due. Upon #default in the repayment of the loan by the chargor, the bank sold the charged property for a sum of Kshs.55,000,000 in 2007. After the sale of the charged property, the full amount of the loan together with the interest was not recovered fully as the bank claimed that the chargor still owed it Kshs.106,635,945. This was because the bank had increased its interest rates from 19% per annum to 35% per month upon the chargor’s default (420% per annum). The Bank sought prayers from the High Court to order the chargor to repay the remainder which was Kshs.106,635,945 as at February, 2009.
In a counterclaim, Basil Criticos claimed that his liability as a guarantor was limited to Kshs.20,000,000 and he was discharged from the same after the charged property was sold for Ksh.55,000,000. Further, he claimed that the surplus amount of Kshs.35,000,000 after the sale of the property at Kshs.55,000,000 ought to have been returned to him as his liability under the charge had been fully repaid after the sale of the charged property.
Basil Criticos further called a land valuer as an expert witness who testified and produced reports that the bank had sold the charged property contrary to the true #marketvalue of the charged property which was worth Ksh.3,028,890,000. The valuer’s report showed that there were developments on the land, including a sisal plantation, quarry and road networks.
Basil Criticos sought prayers from the High Court to order the bank to pay him damages of Kshs.3,028,890,000 for the losses incurred by him for selling the charged property under the value estimated by an expert and also, sought an order for the bank to refund the surplus amount of Kshs.35,000,000 to him after the sale of the charged property.
The High Court held that Basil Criticos had not been discharged as the chargor (Agro-Development Company Ltd) was still owing Kshs.106,635,945 and counting, and therefore he could not validly claim to be entitled to a surplus of Kshs.35,000,000. The Court further disregarded the prayer of damages for selling the property below the market value.
Aggrieved by the entire Judgment, Basil Criticos, the Guarantor, filed Civil Appeal No. 60 of 2017.
CIVIL APPEAL NO. 80 OF 2017 BETWEEN BASIL CRITICOS AND NATIONAL BANK OF KENYA LTD (2022)
After hearing the parties, the Court of Appeal delivered a judgment on 28th April 2022 where Justices R. N. Nambuye, W. Karanja, and P.O. Kiage allowed the appeal and overturned the judgment of the High Court.
The Appellate Court outlined the following issues for determination:
- what was the nature and extent of the appellant’s liability under the charge and the guarantee?
- was the suit property sold at an undervalue?
- was the appellant entitled to an award of damages for loss of income/profits?
On the issue of the nature and extent of the Appellant’s liability under the charge and the guarantee, the Court held that where a guarantee limits the guarantor’s liability to a fixed sum, the guarantor will be liable to the extent of the guaranteed sum only and not the entire debt. Further, a guarantor’s liability is secondary to that of the principal debtor. Consequently, the Appellant’s liability rested with the guarantee only. Therefore, after the bank sold the charged property, Basil ought to have been #discharged from his liability as the guarantor. Further, the Court found it unconscionable and morally wrong that the bank would raise the interest rate from 19% per annum to the impossibly high rate of 35% per month, amounting to 420% per annum.
On the issue of whether the Charged Property was sold at an undervalue, the Court relied on the land valuer’s expert opinion to render its verdict. The valuer had prepared a detailed report entailing the values of the buildings, land, sisal, quarry and road network within the suit property, cumulatively totalling to Kshs.3,028,890,000. The bank did not provide any substantial rebuttal to that expert opinion and therefore, the Appellate court was persuaded by the appellant’s contention that the suit property was sold at an undervalue.
Finally, on the issue of whether the appellant was entitled to an award of damages for loss of income/profits, the court based its findings on the pronouncement by the Apex Court in Attorney General v Zinj Ltd, where it held that the appellant having been deprived of his property was entitled to the proven value of his property as #specialdamages. The Appellate court further recognized that the valuer’s report had been prepared 2 years after the #depravatorysale, and thereby determined a reasonable and fair value of Kshs.2,228,101,000 as special damages.
SHORTLY AFTER the Appellate Court’s verdict, the bank filed an Application in the Supreme Court:
SUPREME COURT: IN BRIEF
APPLICATION NO.14 (E023) of 2022; NATIONAL BANK OF KENYA LIMITED (as the successor in Business of Kenya National Corporation Limited) and KENYA NATIONAL CAPITAL CORPORATION LIMITED vs BASIL CRITICOS
The Application sought an order reviewing and setting aside the Ruling of the Court of Appeal. The Applicants claimed that the intended appeal raised the following matters of general public importance:
- Conflicting case law from the Court of Appeal as to whether a guarantor is discharged upon payment of the principal amount and is therefore not liable for interest, costs and other charges;
- The applicability of continuing guarantee clauses in Kenya extending obligations of a guarantor so long as the principal borrower has any obligation to the creditor under the charge;
- The valuation date of the charged property for purposes of exercising the statutory power of sale as to whether a chargee is bound by a valuation procured before exercising the right of sale or well after the fact in assessment of damages; and
- The Court of Appeal’s residual jurisdiction to stay execution of its own orders.
The Supreme Court noted the case of Hermanus Phillipus Steyn vs Giovanni Gnecchi Ruscone to the effect that:
“For a case to be certified as one involving a matter of general public importance , the intending appellant must satisfy the court that the issue to be canvassed on appeal is one the determination of which transcends the circumstances of the particular case and has a significant bearing on the public interest…”
The Supreme Court opined that the Application lacked merit as the applicants had not highlighted any issues, the determination of which, would transcend the circumstances of the matter at hand so as to justify a review of the Court of Appeal’s Ruling. The Applicants had also, failed to raise any substantial question of law, the determination of which, would have a significant bearing on the public interest.
The Apex Court therefore upheld the verdict of the Court of Appeal, that the National Bank of Kenya should pay the former Member of Parliament in Taita Taveta (Basil Criticos) damages of 2.2 Billion Shillings.
This brings us to the discussion on what is the proper way of exercising the statutory power of sale?
- Section 90 of the Land Act, No.6 of 2012 (“Land Act”) requires a chargee to issue a #statutorynotice to the chargor within 1 month of the chargor’s default. If the chargor does not comply with the notice within 90 days, the chargee earns the statutory power of sale. However, where a chargee fails to issue the statutory notice, the omission forms a basis for the protest against the chargee’s power of sale.
- Section 96 of the Land Act provides that before sale of the charged land, the chargee is required to serve a #noticetosell to the chargor and wait for at least 40 days before selling (45 days under the Auctioneers Rules). Failure to issue such a notice and wait for 40 days is interpreted by courts as an #arbitraryact by the chargee to deny the chargor the #rightofredemption.
- The right of redemption is provided under section 102 of the Land Act where the chargor may #discharge the charge by paying to the chargee all money secured by the charge at the time of payment. Where a chargee fails to accept a discharge, such a deed forms the basis of a claim against it for #unproceduraland irregularpowerofsale.
- Section 97 of the Land Act requires that prior to exercising the statutory power of sale, the chargee should engage the services of a #certifiedlandvaluer. This is primarily because the chargee has a #dutyofcare under the Land Act and which duty demands that the charged property be sold at a reasonable and fair market price. If the price at which the charged land is sold is twenty-five per centum or below the market value at which comparable interests in land of the same character and quality are being sold in the open market—
- there shall be a rebuttable presumption that the chargee is in #breachoftheduty imposed by subsection (1); and
- the chargor whose charged land is being sold for that price may apply to a court for an order that the sale be declared #void.
- Section 98 of the Land Act provides that if a chargee or a receiver becomes entitled to exercise the power of sale, that sale may be—
- of the whole or part of the charged land;
- subject to or free of any charge or other encumbrance or charge having priority to the chargee’s charge;
- by way of subdivision or otherwise;
- by private contract at market value;
- public auction with reserve price;
- for a purchase price payable in one sum or by installments; or
- subject to any other conditions that the chargee shall think fit, having due regard to the duty imposed by section 97(1).
- If a sale is to proceed by public auction, it shall be the duty of the chargee to ensure that the sale is #publiclyadvertised in such a manner and form as to bring it to the attention of persons likely to be interested in bidding for the charged land and that the provisions relating to auctions and tenders for land are, as near as may be, followed in respect of that sale.
- In a sale by a private contract, the chargee shall be entitled to rely on a valuation carried out by a valuer who is registered with the #InstituteofSurveyorsofKenya and the report shall in the absence of a manifest error, be conclusive in relation to the market price provided that the valuation report shall at the time of sale be not more than six months old.
We hope this information helps understand the statutory power of sale. Please note that the contents of this newsletter are intended to provide a general guide to the subject matter. It should not be relied upon without legal advice on its contents.
Should you require further information or legal assistance on Compliance or any other legal issue, kindly feel free to contact us at info@wka.co.ke, www.wka.co.ke, +254 798 03 580, Nairobi Hub: Parklands, Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road.
Authors: William Karoki -Partner, Florence Mwende- Associate & Erick Chege-Legal Intern