Introduction
Where putting up property as security is required, land has been the most preferred asset to back up a loan facility. Upon default on the loan, the lenders will make recourse to the property in a manner well circumscribed in law.
Here, we highlight the debt recovery and collection options for creditors, focusing on avenues available to a secured creditor under loan secured by land. It is recognized that a good understanding of the debt recovery process aids the lender as well as the borrower or owner of the charged land when the lender calls in the security.
The Law
In Kenya, the Land Act 2012 is the main statute that governs the process of debt recovery where land is put up as security. The Act uses certain terms to describe the transaction. The ‘Charge’ means an interest, as well as the instrument creating an interest, in land or a lease securing the payment of money or money’s worth or the fulfillment of a condition. The “Chargor” is a borrower or person who, for advance of money or money’s worth or fulfilment of a condition, agrees to place security of a charge of his land or lease. The “Chargee” means the entity in whose favour a charge is executed, securing the fulfillment of a condition or the repayment of the money advanced to the borrower and secured under the charge, commonly the lending banks or financial institutions.
Under Section 90 (3) of the Land Act, the chargee, or the creditor secured in land, has the following remedies:
- Suing the chargor for any money due and owing under the charge;
- Appointing a receiver of the income of the charged land;
- Leasing the charged land, or if the charge is of a lease, subleasing the land;
- Entering into possession of the charged land; and
- Selling the charged land;
These remedies are available once there has been default for one month and the chargor has been served with a ninety (90) days’ statutory notice specifying default, how the same should be rectified, the consequences of failure to rectify and the chargor’s right to seek court relief against certain remedies.
Suit for recovery of money due under the charge
This denotes the chargee’s court action for money secured under the charge. Section 91 (1) of the Land Act provides that the chargee may sue for the money secured by the charge only if:
- The chargor is personally bound to repay the money;
- Where the security is rendered insufficient by any cause other than the wrongful act of the chargor or chargee, and the chargee has given the chargor a reasonable opportunity to provide additional sufficient security and the chargor has failed to provide that additional security; and
- Where the chargee is deprived of the whole or part of the security through or in consequence of, a wrongful act or default of the chargor.
Appointment of a Receiver
Under Section 92 of the Land Act, the chargee may also appoint a receiver of the income of the charged land. The chargee must serve a notice in prescribed form upon the chargor signifying of its intention to appoint a receiver, and such appointment shall only take place after thirty (30) days have elapsed after service of the notice. A receiver shall be deemed to be the agent of the chargor, and who shall be solely responsible for the acts and defaults of the receiver.
The duty of the receiver shall be to demand and recover all the income in the name of the chargor, and shall apply all money received as per the order of priority of payments provided for under section 92 (8) of the Land Act, namely, first, rents, rates, charges, taxes and other outgoings for the charged property; second, all annual sums or other payments, and the interest on all principal sums, having priority to the charge; third, the receiver’s commission and expenses; fourth, reasonable expenses incurred by the receiver such as insurance premiums and costs of repairs on the property directed in writing by the charge; fifth, repayment of money paid or advanced to meet reasonable expenses for the four previous items above together with interest at rate secured by charge; sixth, interest on any principal sum secured by the charge; seventh, the principal sum secured by the charge, and; eight, residue, if any, to the chargor or other person entitled to the charged land.
Leasing the Charged Land
The chargee may convey the charged land to a third party for a specified term and a specified rent. The chargee is empowered under Section 93 of the Land Act to lease the charged land. The chargee who pursues this option must have appointed a Receiver under Section 92, and will be empowered to execute any instrument required to execute the lease in the place of the chargor. The lease granted by the chargee must take effect not later than six (6) months after execution, shall be for a term not exceeding fifteen (15) years or the length of the term of the charge (whichever is shorter) and must contain a declaration that the chargee has appointed a receiver. Before granting the lease, the chargee shall serve a notice on the chargor and shall not proceed with the granting or execution of the lease until thirty (30) days have elapsed from the service of that notice.
Taking Possession of the Charged Land
A chargee can enter into possession of the charged land, in pursuit of recoveries of amounts due under the loan. Section 94 (1) of the Land Act requires the chargee to serve upon the chargor a notice in prescribed form of intention to enter, signifying the chargee’s intention to enter into possession of the whole or part of the charged land at a date that is at least one month from the date of the service of the notice and after obtaining a court order. A chargee in possession is entitled to manage and collect rent and profits from the land.
Selling the Charged Land
Under this option, the chargee puts up the charged land for sale in order to recover the moneys or the debt owed to the lender by the borrower. This power is given to the chargee bySection 96 (1) of the Land Act.
In exercising this power of sale, after the ninety (90) days’ notice aforesaid, the chargee is required to serve on the chargor a forty (40) days’ notice to sell in the prescribed form. Consequently, the charger may instruct an auctioneer who will give the requisite forty (45) days’ redemption notice before proceeding to advertise and sell the property.
This is the most common remedy pursued by lenders holding land as security.