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Bank cannot auction your house at a loss

By Harold Ayodo | February 2nd 2017

My dad took a loan from a commercial bank with our family home as the security five years ago. He was steadily repaying the loans in installments until he fell sick and has now been bedridden for six months. We have been receiving letters from the lender, which we have also been responding to – requesting for grace periods, hoping that he will be back on his feet. Unfortunately, the last letter we received stated that the bank is considering other means – including invoking the powers of statutory auction – to sell the property and recover their money. Does this mean that we will walk out of our house penniless should we not pay up?

Nick, Nakuru

Banks are required to follow up on defaulters through legal means. However, auctioning property of defaulters at throw-away prices is illegal, according to the Land Act 2012.

According to the law, commercial banks are compelled to sell property of a defaulter at the highest market value. Before the passing of the law, there were cases of the financial lenders auctioning property below 29 per cent of their market value.

In daily practice, lenders preferred to dispose of property at public auctions because they sold like hot cakes. Traditionally, there were no legal requirements that the lenders recover specific amounts
from auctions of defaulters’ property.

But now, property that fails to register a specific market value cannot be sold for a song therefore making it harder for lenders to recover debts. Lenders are barred from selling property below 75 per cent of the prevailing market price.

A valuation must be undertaken or else the bank, mortgage firm
or financial institution will have broken the law.

The intention of this law is that the bank sells the property at the highest market value to settle outstanding balance and the defaulter pockets the balance.

Furthermore, tenants will also not be waking up to auctioneers on their doorsteps after their landlord defaulted on loans. The law now requires that banks involve tenants, spouses and other guarantors
before selling off property that was used as security for a loan.

However, even before the passing of the new law, some banks opted for out of court settlements before selling property of defaulters.

For instance, Barclays Bank of Kenya not long ago advertised the sale of the prestigious Hillcrest Group of Schools associated with former politician Kenneth Matiba.

The bank and the Matiba family reached an out of court settlement to sell the institutions, which were under receivership over a Sh620 million debt.

In 2001, the bank had unsuccessfully tried to sell Matiba’s five-star hotels that included Jadini, Africana and Safari Beach over a Sh1.8 billion debt.

But the process stopped after the family lodged an appeal with Barclays Plc — the mother company of Barclays Kenya Limited even as the matter turned political.

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