• Banks feel that certain sections of the land laws are granting their customers the power to recover assets auctioned by a financial institution due to a default

Bankers and other financial institutions want land laws amended to avoid what they term a logistical nightmare in auctioning off property used to secure loans.

The changes, which have been in the pipeline for a while, have acquired a sense of urgency following a recent ruling by the High Court barring Equity Bank from auctioning off property to recover money loaned to a defaulter.

“The banking industry has noted several material inconsistencies and has sought the intervention of the Attorney-General by proposing amendments to the laws,” Kenya Bankers Association Director of Communications Nuru Mugambi told the Sunday Nation.

The umbrella body has proposed amendments to the legislation owing to what it terms as legal limitations arising from the Land Act, Land Registration Act and the National Land Commission Act.

Last month Equity Bank became the first bank to fall foul of the Land Act 2012 after it was barred from selling land valued at Sh43.2 million belonging to businessman David Gitome Kuhiguka to recover a loan of Sh6 million. (READ: Court stops bank from auctioning defaulter’s land)

Mr Justice Jonathan Havelock stopped the public sale of the property, saying Equity Bank had failed to comply with Section 97(2) of the Land Act that came into force in May 2012. The Act makes it mandatory for the lender to give a loan defaulter at least 90 additional days to redeem the outstanding amount after the expiry of a sale notice.

The Land Act 2012 also requires a financial institution to carry out a new valuation before it executes its mandate of sale to determine the current market price.

The judge said the intended sale was illegal since the value of the property had appreciated due to its location, and Equity had not carried out a fresh valuation.

Banks feel that certain sections of the land laws are granting their customers the power to recover assets auctioned by a financial institution due to a default.

“It is our view that such agreements should be governed by the contract signed between the two parties and not be defined by legislation,” Ms Mugambi added.

In a bid to protect defaulters from being condemned to financial destitution, the law makes it illegal for commercial banks to auction property for less than 75 per cent of its prevailing market price.

This, according to experts, is to ensure property is sold at the highest market value to settle outstanding debts and that the loan defaulter pckets the difference.

“A valuation must be undertaken to come up with a valid report, which will make it harder for lenders to recover debts,” observed Harold Ayodo, an Advocate of the High Court.

DRASTICALLY LIMITED POWERS

According to Mr Ayodo, commercial banks must familiarise themselves with the new laws because they have drastically limited their powers.

The bankers also want an amendment to Section 79 (3) of the Land Act that provides that spousal consent be obtained when auctioning off matrimonial property.

They argue that the law itself is vague on what matrimonial property is and how the same is to be treated if the parties are married but live separately, just as it is not clear for cases of civil or polygamous marriages.

The Land Act also requires that banks involve tenants, spouses and other guarantors before selling off the property that was used as collateral for a loan, a requirement that Mr Ayodo believes may see banks shying away from title deeds as collateral.

“This will indeed be a nightmare, especially in the case of spousal consent since Kenya does not have a marriage registry with a list of spouses where an official search can be conducted to prove ownership, particularly for customary marriages where certificates are not issued,” he notes.

A polygamous man is required to obtain consent from all his wives before using a title deed as collateral. Any transactions done without the consent of all spouses are illegal and have no basis under the Act.

Previously, it was possible for borrowers to take loans using title deeds as collateral with girlfriends only for their legal wife to suffer the consequences.

“It puts to end cases where husbands clandestinely sold off matrimonial property using fake wives without the knowledge of their real spouse” the property lawyer said.

NEW ERA

Mr Lucas Musyoki, a conveyance and commercial lawyer with Kang’oli & Company Advocates, said that in as much as the new law is a challenge to banks, it heralds a new era of equity to both parties.

He says the Act provides logistical challenges to banks in cases where parties separate, when it is upon the bank to trace the other spouses who had given consent to sell the property and serve them.

“But I think it protects both parties; the only thing they need to do is to follow the law to the letter as they transact.”

As in the case of Equity Bank versus David Gitome,  whose property the lender had valued at Sh43.2 million, Judge Havelock said the value of the property in and around Nairobi in the current property market boom could well be much higher.

But Mr Musyoki says the Act is not clear on who a spouse is or what pieces of land would require spousal consent to sell in the case where someone hold direct title to several freehold parcels when the law says spousal consent it necessary to sell any of them.

“Maybe most of them are for business, and the law is not clear on that,” he said.

However, the umbrella body is banking on the credit information sharing initiative, which has introduced character-based lending as an alternative to credit providers to shift from security-based lending that includes property as collateral.

Under the Credit Information Sharing Regulations 2013, banks will be able to share comprehensive data on a customer’s credit history, and CBK-licensed Credit Reference Bureaus can develop risk assessment products for banks to better price loans.