Secured lending

Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?

The main type of security instrument in Kenya available to lenders over real estate is a legal charge that grants the lender real estate collateral and does not constitute a conveyance of the real estate to the lender. The charge can be either formal or informal.

A formal charge must be in writing and registered. A chargee shall not be entitled to exercise the remedies in the charge unless it is registered.

An informal charge is created where a charge is in writing but not registered, or by deposit of documents evidencing title to the land.

Other types of security instruments available to lenders include a deed of assignment of rental income and an all-asset debenture over the assets of the borrower where the borrower is a corporation. The methods of enforcement for each security instrument differ based on the rights in the instrument and the provisions of law.

Typical providers of real estate financing are financial institutions including banks, cooperative societies, debt financiers and Sacco (a savings and credit cooperative society) societies. The financiers may fund real estate at any stage of property development for any properties.

Leasehold financing

Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?

Ground lease financing is not ordinarily available in Kenya. Where there is a ground or head lessor, the lender will procure that such lessor grants his or her consent to the lending (however, this does not prejudice the rights of the head or ground lessor). Additionally, the lender will require the borrower to comply with all the terms of the head lessor.

Form of security

What is the method of creating and perfecting a security interest in real estate?

To create a security interest, the borrower makes an application to the lender for a loan and offers the property as security. The lender then performs due diligence over the property and the borrower.

The lender also undertakes a valuation to determine the value of the property. Once satisfied, the borrower is issued with a letter of offer setting out the terms on which the facility is to be given. A lawyer is then instructed to create a security instrument. In creating the instrument, the lawyer ought to incorporate certain standard provisions under the Land Act.

Perfection of security entails the registration of the security in favour of the lender at the applicable land registry. Prior to booking the security instrument for registration, the instrument must be assessed for stamp duty, stamp duty paid and the document stamped. Additionally, the consent and clearances required in respect of a property disposal as provided in question 28 must be procured beforehand and presented together with the security instrument at registration.

Where the borrower is a company, the instrument must also be registered at the companies’ registry, and where the collateral constitutes movable property, a notice must be filed at the collateral registry.


Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?

Third-party real estate valuations and appraisals are required by lenders. Prior to approving a facility, lenders will require the borrower to contract the services of a land valuer, from a panel of valuers approved by the lender, to conduct the valuation.

Under the Valuers Act (Cap 532), a valuer/appraiser must be:

  • a holder of a bachelor’s degree or diploma from a recognised university or college;
  • registered as a valuer and issued with a certificate of registration;
  • a full member of the Institution of Surveyors of Kenya; and
  • a member of the Valuers Registration Board.
Legal requirements

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

Lenders in other jurisdictions ordinarily give loans to borrowers in Kenya. Such lenders do not require any special licences or qualifications. There is, however, an obligation on the lender to pay withholding tax at the rate of 15 per cent on interest (unless there is a double tax agreement in place).

The taxes payable in recording a security instrument is stamp duty, typically computed at 0.1 per cent of the value of the security. A registration fee of 500 shillings is also payable on booking the instrument for registration.

A transfer of charge can transfer a security instrument and is exempt from stamp duty. The debt can also be assigned.

Loan interest rates

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?

The Banking Act (Cap 488) sets the maximum interest rate on loans at 4 per cent above the Central Bank of Kenya’s rate. Lender costs are not generally interpreted as interest in computing the total interest payable.

The Act expressly prohibits persons from entering into agreements or arrangements to borrow or lend at an interest rate in excess of that prescribed by law. A financial institution that contravenes the provisions on interest capping commits an offence. On conviction it is liable for a fine or, if in default, the chief executive officer is liable to imprisonment for a term of no less than one year.

The application of the provision on interest capping is restricted to banks and financial institutions licensed under the Banking Act. This effectively excludes foreign banks and financial institutions and other lenders in Kenya not licensed under the Banking Act.

When a loan becomes non-performing, the maximum amount that a bank can recover from a debtor is the sum of:

  • the principal owing;
  • interest as contractually agreed between the debtor and bank, not exceeding the principal owing when the loan became non-performing; and
  • expenses incurred in the recovery of any amounts owed by the debtor.
Loan default and enforcement

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

The Land Act 2012 and the Land Registration Act 2012 govern enforcement of charges over land. Where a chargor is in default of its obligations to a chargee for more than 30 days, the chargee is required to serve notice upon the chargor to remedy the default. If the chargor does not remedy the default within 90 days from the date of service, the chargee may:

  • sue the borrower for any money due and owing under the charge;
  • appoint a receiver of the income of the charged property;
  • lease or sub-lease the charged property;
  • enter into possession of the charged property; and
  • sell the charged property.

There are no hard-and-fast rules regarding the exercise of one remedy at a time or preferring one over the other, but the lender is restricted to the remedies availed in law and in the security instrument.

When selling the chargor’s property, the lender must serve the charged with a 40-day notice period, in addition to the notice above.

Lenders are encouraged to exercise all other remedies before suing the borrower for monies owed, and courts may stay proceedings for recovery of monies until the chargee has exhausted all other remedies available to it.

Loan deficiency claims

Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?

A lender is allowed to recover the difference between the sale value/recovered amount and the loan balance. This may be done by filing a claim in court claiming the balance as a civil debt or by enforcing against any other securities held in respect of the debt, such as guarantees.

In filing a claim to recover the deficiency, the same must be filed within six years of when the cause of action arose (ie, from when the initial demand was issued). The time may be extended if there are intervening factors.

There are no prescriptions in law detailing the amount and method of calculation of the deficiency, as long as it is evidenced that the lender, in calculating the amount due, complied with the law and the contractual terms, and acted reasonably in disposing.

Protection of collateral

What actions can a lender take to protect its collateral until it has possession of the property?

A lender may appoint a receiver of the income of the charged land or lease the charged land prior to taking possession of the charged land.

A lender may also take possession of the charged land. The right is, however, only exercisable through a court order. A chargor in possession has additional obligations, including:

  • managing the charged land and taking its profits, and being accountable to the chargor for all amounts received;
  • paying the principal the loan, land rent and land rates;
  • keeping and repairing the buildings on the property;
  • renewing a lease previously granted by the chargor but not granting a lease over the charged land;
  • ensuring that appropriate insurance is taken;
  • using the land in a sustainable manner; and
  • performing and complying with the obligations and covenants of the lease, where the interest is leasehold.

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?

A charge over immovable property does not provide for recourse other than through the collateral. An all-asset debenture, however, provides for recourse through all the assets of the borrower. To have better recourse, a lender may require the borrower to create additional securities such as guarantees, assignment of rental income and third-party charges, among others.

Cash management and reserves

Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?

Cash management and reserves are not ordinarily required in Kenya.

Credit enhancements

What other types of credit enhancements are common? What about forms of guarantee?

The more common forms of credit enhancement include issuing letters of credit, posting collateral, increasing cash reserves and taking insurance on payments, among others.

Guarantees for ‘bad boy’ acts are not common; rather, lenders will require personal guarantees for a limited amount or the whole of the debt.

Loan covenants

What covenants are commonly required by the lender in loan documents?

The covenants common in loan documents relating to property include:

  • continuing security clauses and further advance covenants;
  • a charging clause and an agreement on the amount ultimately recoverable;
  • covenants to pay and perform;
  • restrictions and further assurance;
  • covenants on the use and maintenance of the property;
  • the date of redemption covenants;
  • negative pledge not to create other interests over the property without the consent of the lender;
  • restrictions on disposal of the asset charged;
  • covenants on tacking and consolidation clauses;
  • clauses on the remedies available to the lender;
  • clause on remedies available to the charge; and
  • retention of title covenants.

There is no differentiation between covenants for freehold and leasehold financing.

Financial covenants

What are typical financial covenants required by lenders?

At the point of applying for financing, a financier assesses the lending on a loan-to-value ratio; however, as a financial covenant, financiers are often concerned with debt-to-service ratios, leverage ratios and the compliance by the borrower with financial reporting requirements.

Lenders may, as a further measure, require the borrower to undertake regular appraisals and valuations of the borrower or the collateral.

Secured movable (personal) property

What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?

A security right over movable property must:

  • be in writing and signed by the grantor;
  • identify the secured creditor and grantor;
  • describe the secured obligation (except in the case of an agreement that provides for the outright transfer of a receivable); and
  • describe the collateral.

In perfecting the same, the instrument must be stamped and a notice of the creation of a security right over movable property registered at the collateral registry (an online registry) and any other registry required for the specific property. A control agreement is not required to perfect the security.

Single purpose entity (SPE)

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?

Kenyan lenders do not ordinarily require a borrower to be an SPE. Most borrowers, especially in real estate, will ordinarily create an SPE for each asset or project in order to ring-fence their risks. In granting facilities, lenders will insist on lending to the parent entity, with the assets of the SPE forming part of the collateral.