The exercise of the statutory power of sale remains one of the most heavily litigated areas in banking and land law in Kenya. Disputes frequently arise over compliance with statutory requirements, service of notices, valuation, and procedural fairness during realization of securities.
What is Statutory Power of Sale?
Statutory power of sale refers to the legal authority granted to a lender by statute to sell charged property upon the borrower’s default, without first seeking the intervention of the court.
This right enables the lender to realize the charged security in order to recover the outstanding debt. The legal foundation of this power is closely linked to the constitutional protection of the right to property.
Enabling Legal Framework
The statutory power of sale is principally governed by the following statutes:
- The Land Act, 2012
- The Auctioneers Act and Auctioneers Rules, 1997
Who Exercises the Statutory Power of Sale?
The statutory power of sale is exercised by a chargee, ordinarily a bank or financial institution that has advanced a loan secured by land.
When Does the Statutory Power of Sale Arise?
The statutory power of sale accrues once the borrower (chargor) defaults in fulfilling obligations under the charge instrument, including failure to repay the loan or perform contractual obligations stipulated in the charge.
Why is the Power Exercised?
The primary purpose of exercising the statutory power of sale is to enable the chargee to recover outstanding loan amounts advanced to the borrower.
Legal Basis: Section 96 of the Land Act, 2012
Section 96(1) of the Land Act provides that where a chargor remains in default after the expiry of the period given to remedy the breach under Section 90 notice, the chargee may proceed to exercise the power to sell the charged land.
STATUTORY NOTICES REQUIRED
Purpose of Statutory Notices
The purpose of statutory notices is to afford the borrower an opportunity to redeem the charged property by settling all outstanding liabilities.
A. Demand Notice under Section 90 of the Land Act
The first notice is the statutory demand notice issued under Section 90 of the Land Act.
Its purpose is to notify the borrower of the default and provide an opportunity to remedy the breach by paying the outstanding amount or complying with the terms of the charge.
Contents of the Section 90 Notice
- a) Nature and Extent of Default
The notice must state the nature and scope of the borrower’s default in clear and understandable terms. - b) Default Relating to Non-Payment
Where the default concerns non-payment of money, the notice must specify:
- the exact amount required to rectify the default; and
- the time within which payment must be made, being not less than ninety (90) days.
- c) Non-Monetary Default
Where the default concerns failure to perform an obligation under the charge, the notice must state:
- the action required to remedy the breach; and
- the period for rectification, which must be not less than two months after service.
- d) Consequences of Non-Compliance
The notice must warn the chargor that failure to rectify the default may result in the lender exercising its statutory power of sale. - e) Right to Court Relief
The right of the borrower to seek relief from the court against the intended exercise of the statutory power of sale.
B. Notice of Intention to Sell – Section 96 of the Land Act
If the borrower fails to comply with the Section 90 notice, the lender is required to issue a Notice of Intention to Sell under Section 96 of the Land Act.
At least forty (40) days notice.
Service of the Notice
The notice must also be served upon:
- the National Land Commission, where the charged land constitutes public land;
- any lessee or sub-lessee, where the land is leasehold property;
- the spouse of the chargor who gave consent to the charge;
- any co-owner of the property;
- any subsequent chargee or encumbrancer known to the lender;
- any guarantor of the loan facility;
- persons known to possess a legal right to occupy or use the property or its natural resources; and
- any other persons prescribed under applicable regulations.
C. Redemption Notice under Rule 15(d) of the Auctioneers Rules, 1997
Following issuance of the statutory notices, the lender instructs an auctioneer to commence realization.
The auctioneer issues a forty-five (45) day redemption notice, granting the borrower a final opportunity to redeem the property before sale.
DUTY OF CARE OF THE LENDER – SECTION 97 OF THE LAND ACT
The lender owes the borrower a statutory duty of care to obtain the best price reasonably obtainable at the time of sale.
To satisfy this obligation, the lender must do a valuation and undertake a forced sale valuation of the charged property prior to disposal.
The chargee should not dispose of the property at a value below 75% of the prevailing market value of comparable property in the open market. Disposal below this threshold may amount to sale at an undervalue. In such a case, the borrower may move to court seeking relief, including a declaration invalidating the sale.
WHETHER THE PURCHASER IS PROTECTED – SECTION 99 OF THE LAND ACT
A purchaser who acquires property through private treaty or public auction obtains a good title, provided the sale was conducted under the statutory power of sale.
The purchaser is protected by statute, and the chargor’s remedy ordinarily lies against the lender for damages.
CAN A LENDER PURCHASE THE PROPERTY? – SECTION 100
A lender may purchase the charged property by private treaty, but only after obtaining leave of the court.
However, where the property is sold through public auction, the chargee may bid without prior court approval, provided:
- the lender emerges as the highest bidder; and
- the bid meets or exceeds the reserve price.
CAN A LENDER PURCHASE THE PROPERTY? – SECTION 100
A lender may purchase the charged property by private treaty, but only after obtaining leave of the court.
However, where the property is sold through public auction, the chargee may bid without prior court approval, provided:
- the lender emerges as the highest bidder; and
- the bid meets or exceeds the reserve price.