Banks holding thousands of title deeds as collateral for loans have been thrown into a panic after a landmark Supreme Court ruling that handed back to the public a parcel of land that had changed hands several times from the late President Daniel arap Moi since 1989.
The country’s apex court in April said not even the passage of over 30 years could stop grabbed public land that had undergone multiple successions in private hands reverting back to the public.
The ruling, which also raised the bar on the level of due diligence required from buyers and the need to comply with the land acquisition process, looks set to impact banks holding such title deeds as securities for loans worth billions of shillings.
The bench of five judges of the Supreme Court said the land in Mombasa having been irregularly obtained by Mr Moi meant the former President, now deceased, could not pass any valid title deed to any subsequent buyer and that all other successions that followed were illegal.
“Essentially, the Supreme Court is placing the burden of searching the entire history of the land on the buyer,” said Kimani Njane, a corporate and commercial lawyer who is also a partner at Mboya Wangong’u & Waiyaki Advocates.
“The buyer is now expected to investigate the title beginning from the initial allocation of the land, regardless of the situation at the lands registry and regardless of the length of history of transfers of the subject land.”
In a similar case in Kakamega last week, three Court of Appeal judges sitting in Kisumu ruled that a public primary school land which was grabbed, allocated to third parties and sold to Yako and Khetia supermarkets be returned to the school.
Ibrahim Mwathane, the chairperson of the Land Development and Governance Institute, says the ruling in the Moi-linked land carries far-reaching implications for investments since many of the now-developed plots derived from government land in the 1980s and 1990s in Kenya’s major urban areas may have suffered similar process gaps.
“Based on this precedent, their titles, some of which have been used as collateral to loans, could be similarly challenged and cancelled,” said Mr Mwathane.
Commercial banks’ loan book stood at Sh3.85 trillion at the end of March, with part of it secured by customer assets such as land, developed properties and motor vehicles.
Now legal experts say the Supreme Court ruling means banks may want to carry out a fresh search on the title deeds they are holding on as security to cut their risks.
“Banks should conduct due diligence on their collaterals afresh to ascertain the legitimacy of their interest in the land,” said Mr Njane.
“Where banks might have granted loans on the premise of questionable titles, they could seek to amend the terms of their security agreement. Alternatively, they can recover the loaned amounts through litigation by citing misrepresentation on the part of the chargors.”
Mr Njane, however, warned that suing customers for alleged misrepresentation of ownership of the property in order to obtain loans may not hold if such customers prove they did not have knowledge of questionable ownership at the time of using the asset as collateral.
The Supreme Court ruled the provisions under Article 40 of the Constitution entitling every person to the right to property do not extend to any property that has been found to have been unlawfully acquired.
“Having found that the first registered owner (Moi) did not acquire title regularly, the ownership of the suit property by Dina Management Ltd thereafter cannot, therefore, be protected under Article 40 of the Constitution. The root of the title having been challenged, Dina could not benefit from the doctrine of bona fide purchaser,” the court said.
Muthomi Thiankolu, an advocate of the High Court and legal scholar, said with the decision, one cannot afford to be lethargic in due diligence on the basis that he is an innocent purchaser for value.
“What the court said is that you cannot ignore red flags and later claim that you are a buyer for value,” Dr Thiankolu said.
While nullifying the title deed to Dina Management, the apex court ruled that there were no documents to support the allocation of the land to Mr Moi.
The documents included the letter of application by Mr Moi addressed to the Commissioner of Lands seeking to be allocated the suit land and a part development plan (PDP) showing the suit property in relation to the neighbouring parcels of land.
“We hasten to add that, the suit property, by its very nature being a beach property, was always bound to be attractive and lucrative. Dina ought to have been more cautious in undertaking its due diligence,” said the judges.
Ibrahim Kitoo, an advocate, and Karitha Mwendwa, a law student at Strathmore University, argued in an opinion article in the Business Daily last week that the decision means the bar on due diligence and the need for compliance with the land acquisition process has been raised a notch.
“The due diligence may include but is not limited to requesting for allotment letter, undertaking routine land searches in the land registry, cross-checking with the Ndungu Report on illegal/irregular public land allocations, and engaging a land surveyor,” the duo wrote.