How does a Kshs. 110 million property get sold for Kshs. 30 million at a forced sale auction and the law considers it legal?
That is the riddle that landed at the doorstep of the Machakos High Court, pitting a borrower, guarantor and lender in what was an interesting legal battle that many lenders should now take very seriously.
The Setup: A Guarantor, Loan Default, and a Sudden Sale
Let us unpack this.
In 2015, a borrower secured a Kshs. 30 million facility from a local lender. In doing so, the guarantor offered up his land situated in Mavoko as collateral, then valued at Kshs. 110 million.
Fast forward to 2023; the borrower defaulted, the statutory notices for a forced sale were validly issued, and the lender proceeded to auction the land at a forced value of Kshs. 30 million; evidently more than twenty percent less of its market value at the point of financing.
Quite understandably, the guarantor was livid. Convinced that land values should always rise, the guarantor sued the lender and the borrower, alleging: –
- The lender violated its duty of care to the guarantor.
- The property was sold at a gross undervalue.
- The sale is abused as being tainted by fraud, and
- The sale should be declared null and void with full compensation of Kshs. 80 million plus additional damages to the guarantor.
The Lender’s Defence: We Followed the Law
The lender countered the guarantor’s claims with two updated and independent valuation reports that were done a year prior to the date of the forced sale.
While both reports were prepared by independent valuers, they both had similarities showing the land value had plummeted from Kshs. 110 million, Kshs. 50 million and finally to Kshs. 30 million.
This decline in value was largely attributed to rampant sand harvesting, flood-prone topography, and even the economic impact of the COVID-19 pandemic, facts that the guarantor declined to disclose to the Court.
What was the result? The High Court affirmed the lender’s narrative.
The Verdict: Lenders Win When They Follow the Playbook
The High Court dismissed the guarantor’s claim for equitable relief on the finding that: –
“The Plaintiff failed to establish a prima facie case. No evidence of fraud was presented. The valuation relied on was outdated. The Bank’s exercise of the statutory power of sale complied with the law.”
Importantly, once the auction hammer fell, the equity of redemption was extinguished, and the guarantor could no longer seek to reverse the sale.
Therefore, while the guarantor felt shortchanged by the lender’s forced sale of the property, the Court took a clear stance: alleging undervaluation is not enough; proof is required.
Process is Power
The Court’s finding was not just a win for the lender but forms a practical blueprint for any institution navigating the complexities of loan recovery, particularly in volatile markets. While the assumption is that property values always rise, this case proved otherwise: land collaterals can and do devalue.
Lenders must therefore go beyond the typical routine in realizing land collateral. Engage multiple independent valuers (where possible), demand logical, well-reasoned justifications for forced sale value figures, and ensure valuations are not just simply “desktop valuations” but reflect actual site conditions, especially where degradation or environmental factors are at play.
Rallying Call for All Lenders
If this case offers anything substantive to learn from, it is not to take third party valuations as the gospel truth. Take time to scrutinize them, critique them and put valuers to the test within the strict bounds of the law.
In the world of credit enforcement, the real collateral is not your security; it is your compliance.
Written by: Ian Nyanchoga