In Simiyu v Housing Finance Company of Kenya (High Court Civil Case 937 of 2001) the High Court of Kenya considered the effect of inadequate, or lack of, service of a statutory notice and notification of sale in respect of a sale by public auction of charged land registered under the Registered Land Act (Cap 300, Laws of Kenya) pursuant to a bank's statutory power of sale.
Housing Finance Company of Kenya (HFCK) advanced monies to the plaintiff secured by a charge over the plaintiff's land. The plaintiff defaulted in her repayment obligations and consequently HFCK instructed a firm of auctioneers to sell the land by public auction in exercise of its statutory power of sale.
The plaintiff filed suit seeking a declaration that HFCK's sale of her land by public auction was irregular and unlawful, and therefore null and void. The plaintiff also filed an interlocutory application seeking a temporary injunction restraining the defendants (HFCK and the firm of auctioneers) from dealing in any manner with the land. The plaintiff relied on grounds which included that (i) no statutory notice or notification of sale had been served on the plaintiff as required under the Registered Land Act (Cap 300) and the Auctioneers Rules 1996 respectively; and (ii) the land was sold at a gross undervalue.
In its defence, HFCK contended that:
- the plaintiff was in default of her repayment obligations and the right to sell the land in exercise of HFCK's statutory power of sale had been triggered;
- valid notices had been served on the plaintiff;
- the plaintiff's equity of redemption was extinguished when the sale by public auction was concluded; and
- the purchaser at the public auction, being an innocent purchaser for value without notice, was not bound to inquire whether the statutory power of sale had arisen or whether there were any irregularities in the exercise of the statutory power of sale.
It emerged at the hearing that the statutory notice sent to the plaintiff by registered post was sent to an incorrect address. Similarly, the notification of sale was also sent to the wrong address.
The court held that under the Registered Land Act:
"The chargee has no lawful power to sell charged land for default in payment of the charged debt unless and until the chargor has been served with a notice in writing demanding the payment of such debt and the chargor has failed to comply within three months of the date of service of that notice. The irregularities on the exercise of the statutory power of sale which are remediable in damages do not comprehend failure to serve an adequate statutory notice."
The court also held that the statutory notice must give the chargor a period of not less than three months (from the date of service of the notice) within which to redeem the charged land upon payment of the secured obligations. Further, once an auctioneer has been instructed to sell the charged land, he should serve the chargor with a notification of sale giving no less than 45 days within which the chargor can redeem the charged land upon payment of the secured obligations.
On the ground that no statutory notice or notification of sale had been served, the sale was declared illegal and as such the plaintiff was granted the temporary injunction as requested.
The findings appears to be inconsistent with Section 77(3) of the Registered Land Act, which provides that a person who suffers damage by an irregular exercise of the power of sale shall have his remedy in damages only against the person exercising the power of sale. The upshot of this decision is that the protection which Section 77(3) extends to purchasers at public auction sales has been significantly eroded. It has become even more difficult for a bank to conclude a public auction sale in exercise of its statutory power of sale, as prospective purchasers will not have the assurance that the sale cannot be challenged or set aside in future by the previous owner (chargor).
This decision further limits the benefits of a non-court based enforcement remedy (the statutory power of sale) which is cheap and relatively easy to follow. A purchaser will now have to satisfy himself that all the pre-sale procedures and notices have been properly concluded and issued. A well-advised purchaser may also demand that the selling bank provide an indemnity against loss in the event that the sale is set aside. If this were to happen, then a bank would be obliged to continue carrying certain contingent obligations in respect of the debt notwithstanding the sale of the charged property.
For further information on this topic please contact Karim Anjarwalla or Sonal Sejpal at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337625) or by fax (+254 2 337620) or by email ([email protected] or [email protected]).