Investor puts new land law to test in HF court row

A former bank manager is seeking to stop Housing Finance from selling his property below market value in a legal battle that puts newly-enacted land laws to test.

Samuel Mbugua, a former employee of National Bank of Kenya, has accused the mortgage firm of selling his asset worth Sh60 million for Sh25 million in breach of the property laws.

The law enacted in 2010 requires banks selling a defaulter’s property to do so at the highest possible market value, and upon receiving the sales proceeds deduct whatever the borrower owes and remit the rest to the property owner.

Previously, there has been no legal requirement on lenders to recover any amounts from the sale of a collateralised asset above the outstanding loan amounts, leaving helpless borrowers at the risk of losing their entire investment even after servicing part of the loan.

Mr Mbugua says in court documents that he borrowed Sh12 million from HF in 2011 and fell in arrears of Sh1.5 million against a loan balance of Sh13 million, adding that the mortgage firm failed to issue him a with 40- day notice for the sale of the charged Nakuru property.

He is also accusing the bank of refusing to accept a payment of Sh9.5 million in form of cash and bankers cheque on July 30, when the property was allegedly sold by Viewline Auctioneers.

“The defendant’s (HF) action is illegal and was meant to collude with the auctioneers to dispose of my property through a pre-arranged sham auction to a determined buyer,” said Mr Mbugua in court documents.

“The alleged auction of my property at the price is a void as it is less than 25 per cent of the market value. Section 97 (3b) of the Land Act No 6 of 2012 makes void such sale.”

Under the present laws, lenders will now have to serve the distressed borrowers with a 90-day notice of intent to sell the property, and a further 40 days before any contract is entered into by both parties that permits the bank to execute the disposal.

Mr Mbugua told the court that Housing Finance did meet this threshold. He says the company placed an auction notice in the Daily Nation of July 8 before proceeding to sell the property on July 30.

The property, which comprises a commercial building on a 0.2 hectares parcel of land in Nakuru, is said to have been bought by Mr Michael Muchiri Gaitho for Sh25 million.

On Friday, Lady Justice Hellen Omondi certified the case as urgent and asked Titus Koceyo, Mr Mbugua’s lawyer, to serve the HF and Mr Gaitho with court papers within seven days.

She asked HF and Mr Gaitho not to interfere with the property until the case is heard on September 24.

This could yield a landmark ruling that may dramatically impair the bankers’ total control of defaulter’s property used to secure loans.

Before the new Act came into force, banks had been seizing such borrowers’ collateral for sale without regard to any payments already made, sometimes amounting to as much as three quarters of the loan.

In some instances, such distressed property has been sold at significantly higher prices with the borrower getting nothing.

With the enactment of the laws, lenders are now required to actively find the highest price for a property that they are putting up for sale, even if it means approaching potential buyers.

Costs associated with getting the consent of all the interested parties before any disposal of property will also be borne by the lenders, potentially making it impossible for banks to sell matrimonial property to recover outstanding loans.

Banks are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.

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