The Teleposta Question and the Future of Secured Lending in Kenya

Introduction

The pending Supreme Court appeal in Teleposta Pension Scheme Trustees Registered matter will become one of the most consequential decisions in the banking sector. At its core lies a fundamental question: can a purchaser acquire a valid title through a chargee’s statutory power of sale where the charger’s title was itself illegally or fraudulently acquired?

Factual Background of the dispute

The dispute concerns land parcel known as L.R. No. 209/13238 located in Nairobi. The suit property which was initially used by a state corporation was later allotted to a private company, Park Avenue Investments. Trust Bank later charged the suit property after advancing a loan to Park Avenue Investments. Upon default, the bank exercised its statutory power of sale, and the property was sold to Intercountries Importers and Exporters Limited.

Court of Appeal’s decision

In 2024, the Court of Appeal held that the initial allotment of the suit property to Park Avenue Investments was irregular because the land was still vested in a public entity for a public purpose and thus unavailable for alienation. As a result, Park Avenue had no valid title to charge to the bank and the bank had nothing to sell. The Court found that the subsequent charge and sale could not confer valid ownership upon Intercountries. The decision effectively treated the charge and the ensuing public auction as nullities.

Implications of the Court of Appeal’s decision and ensuing criticism

The reasoning of the Court of Appeal effectively extinguishes the doctrine of bona fide purchaser for value in a wide range of transactions involving chargee’s statutory power of sale. It places a huge burden on banks and potential purchasers where statutory power of sale crystallize to investigate the historical allocation of a property to ascertain the validity of the root of the title. However, the decision has been criticized on the ground that application of principles in Dina and Sehmi have swung the pendulum too far, creating significant uncertainty in secured lending and property transactions.

Anticipating the Apex Court’s pronouncement

The Supreme Court is now expected to determine the extent to which the principles established in Dina Management Limited v County Government of Mombasa and Sehmi & Another v Tarabana Company Limited apply to sales conducted pursuant to a chargee’s statutory power of sale. It will also be called upon to clarify the scope of protections afforded under Section 99 of the Land Act to purchasers at public auctions. In other words, the Apex Court is expected to determine whether a purchaser from a chargee can be fixed with constructive notice of a fundamental defect in the root of title that occurred decades prior.

The broader legal issue is straightforward. Suppose a person appears before a bank claiming ownership of land and uses that land as security for a loan. If it later emerges that the title was illegally obtained, should the bank and an innocent purchaser at a public auction lose the protection ordinarily afforded to commercial transactions? 

The answer carries significant implications for Kenya’s lending sector. First, if the Supreme Court upholds the Court of Appeal’s reasoning, banks will likely be required to undertake enhanced due diligence before accepting land as security. Financial institutions may be required to investigate the historical root of title, allocation records, planning approvals, and the circumstances under which the land was first alienated. However, wouldn’t this be a welcome move in light of the growing concerns of inconsistencies in records held by chargees from those held at the land registries?

Secondly, the decision may increase the cost of credit. Enhanced investigations require additional legal and compliance costs, which are ultimately passed on to borrowers. Banks may also become more reluctant to secure loans through titles due to the complex web of due diligence requirements especially where the root of the title is seemingly less than straightforward. On the other hand, in light of existing precedence, doesn’t the consequential cost of securitization, sale and purchase of charged property whose title is later found to be illegitimate far outweigh any transactional costs incurred on thorough due diligence?

As precedence will confirm, it is the parties to the commercial transactions that are left to battle it out to establish the legitimacy of their titles in court. Even as the courts work to clear this legal conundrum the parties find themselves in, another question is in the offing; what level of responsibility does the Registrar shoulder when it is established that the records availed to the chargee and thereafter to these financial institutions by the lands registry do not reflect the true picture of the validity of the title in these transactions? 

Conclusion

Ultimately, the Teleposta appeal presents the Supreme Court with the delicate task of balancing two competing imperatives: the protection of property rights and the preservation of commercial certainty. Whatever the outcome, the decision will likely redefine the standard of due diligence expected of banks when creating charges over land and will shape the future of secured lending in Kenya for years to come.

How we can help:

1. Advisory on the legal and commercial implications of charging of property to secure facilities from financial institutions 
2. Rendering advice on the statutory requirements and process of charging a property to a financial institution
3. Assist in conducting due diligence on the titles during the securitization process to establish the root of the title
4. Litigation of matters involving proprietary rights to land