There have been several reports in the mainstream media about property owners risking auction over unpaid loans used to invest in real estate. Many defaulters had constructed cosy residential apartments, hoping to generate rental income to service their loans, a plan that fell through following the recent credit crunch across the country.
Some have received letters from lenders demanding repayment, with the latest communications indicating that lenders are considering other means of recovering their money, including invoking statutory powers to auction the property. Does this mean investors could walk away penniless if lenders follow through with these threats and sell at throw-away prices? - Tasha, Nairobi
Banks are required to follow up on defaulters through legal means. However, auctioning a defaulter’s property at throw-away prices is illegal under the Land Act 2012.
The law mandates that commercial banks must sell a defaulter’s property at the highest market value. Before the enactment of this law, some lenders auctioned property at less than 29 per cent of its market value. In practice, lenders preferred public auctions, as properties sold quickly.
Traditionally, there were no legal requirements to recover specific amounts from the sale of a defaulter’s property. Under the current law, however, property that fails to register a specific market value cannot be sold cheaply, making it harder for lenders to recover debts. Lenders are prohibited from selling property below 75 per cent of its prevailing market price.
A professional valuation must be conducted; otherwise, the bank, mortgage firm or financial institution would be in breach of the law. The legislation ensures banks sell property at the highest possible market value to settle the outstanding balance, allowing the defaulter to retain any surplus.
Additionally, tenants are protected and will not suddenly find auctioneers at their doorsteps if their landlord defaults on a loan. The law requires banks to involve tenants, spouses, and other guarantors before selling property used as security for a loan.
Even before the new law, some banks opted for out-of-court settlements before selling a defaulter’s property. For example, Barclays Bank of Kenya recently 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.
In 2001, the bank had attempted unsuccessfully to sell Matiba’s five-star hotels, including Jadini, Africana and Safari Beach, over a Sh1.8 billion debt. The process was halted after the family lodged an appeal with Barclays Plc. - Ayodo, Advocate of the High Court