CHARGES

Definitions
Distinctions
Terminologies
Further and Second Charges
Duties and Responsibilities of Lender/Borrowers Advocate
Form of charges
Remedies of the Chargee/Chargor
Reconveyances/Reassignments and Discharges 1
 Definition
• S2 LA, S 3 RLA- an interest in land securing the
payment of money or money’s worth or the
fulfilment of any condition and includes a sub-
charge and the instrument creating a charge.

• Simply put- security for loan with an

undertaking for repayment. It confers certain
rights to the Chargee from the Chargor

2
 Charge

• S65 &84 RLA- charge operates as security but

not a transfer S65(4). It was the only form of
security.

• S 80(1) LA- Charge to operate as security only

and not as a transfer of any interest or rights
in land
3
 Definition: Mortgage
• ITPA defines a mortgage as

– “the transfer of an interest in specific immovable

property for the purpose of securing the payment
of money advanced or to be advanced by way of
loan, an existing or future debt or the
performance of an engagement which may give
rise to a pecuniary liability”

4
 Nature of Mortgage
• Conveyance or transfer of interest in land or
other properties; this could be legal or
equitable interest depending on the mode of
creating the mortgage or the nature of the
interest that the mortgagor has in the
property

• Consideration from the mortgagee to

mortgagor in terms of loan
5
 Distinction
• Mortgage- conveyance or assignment of land
with proviso for reconveyance or reassignment
• Charge-confers rights to chargee to enable him
recover money plus interest. RLA S 3, LA S2 No
transfer but security exists. It is only an
encumbrance on the title
• S 65(4) RLA a charge shall not operate as a
transfer but shall have the effect as security only.
• Charge is regarded as a species of a mortgage

6
 Types of Charges
• LA recognizes
– Formal charge: S79 (5) LA, prescribed instrument
in prescribed register
– Informal charge: S79(6) LA:
• written or witnessed undertaking from chargor
accepted by chargee with intention to charge
• Deposit of certificate of title or lease document or any
evidence of ownership or any undertaking observed by
custom
– S26 LRA certificate of title is conclusive evidence
of proprietorship (this was the position with RTA)
7
 Further –vs- Second Charge (S57LRA)
• Further- additional facility by the same lender
to the same borrower on the security of the
same property
• Second –a separate charge over the same
property to a different lender.
• S 2 LA defines a charge to include a subcharge
– A chargee may charge the rights it has under the
charge therefore create a charge out of a charge in
order to raise money as an alternative to assigning
the debt. The subchargee has the double security of
the original chargor and the original chargee.
8
Basic requirements of a Charge
– There must be a Chargor
– Name and description of lender
– Description of property
– Amount advanced
– Acknowledgement of receipt of loan
– Covenant to repay principal & interest
– Special conditions (if any)
– A Charging clause

9
 Basic Requirements of a Charge
• S 80(3) LA every charge instrument to
contain:-

– The terms and conditions of sale

– An explanation of the consequences of default
– The reliefs that the chargee is entitled to including
the right of sale.

10
 Institutions
• Central Bank- licences banks and acts as a
banker of the banks. Regulation is under the
Central Bank Act (Cap 491)
• Banks, financial institutions and mortgage
institutions
• National Housing Corporation eg the tenant
purchase scheme.
• Employees housing scheme

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 DUTIES OF ADVOCATES

• Process of securitization starts with

application by borrower for a loan

• Lender will ensure that due diligence is carried

out- ie credit assessment of borrower and
evaluation of property (this is an internal
process, if approached advise the bank to seek
help of other professionals such as valuers etc)

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 Duties of Chargee’s Advocates
• The bank will then involve its Advocates once it has
prepared and secured the execution of the offer letter
by both parties

• The following details are contained in the offer letter

– Details of the parties- full names and addresses(borrower,
lender, guarantor)
– Amount to be lent/borrowed and amount to be secured
by the property
– Repayment period and repayment mode(monthly,
quarterly
– Particulars of property to be charged(title no or land
reference no.
– Details of intended security(informal or formal charge)

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• Advise the bank
– On the appropriate security
• Informal(equitable) vs formal(legal) charge
• Proper investigation of title
• Confirm the capacity of chargor
– Company- confirm if memorandum and articles allow
for borrowing and charging
– If Trustees-confirm if trust deed allows for borrowing
and charging
• Draft Charge and send to borrower’s Advocates
for approval (mostly take it or leave it)
• Confirm execution and attestation- Is Advocate
qualified? Ndolo Ayah case

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• Engross the charge and send it for execution and attestation
• Ensure execution and attestation is done in accordance with the
law
• Dispatch document to the lender for execution and attestation
• Pay stamp duty (obtain from the borrower)
• Lodge for registration at lands registry and companies registry (if
it is a company within 42 days of registration of charge S 96, 97,
99 of Companies Act), Cooperative Societies- See Cooperative
Societies Act
• Forward the perfected documents to your client with a report on
the title confirming the registration
• Obtain loan proceeds from chargee for onward transmission to
the chargor
• Follow up on fee payment

15
 Duties of Borrower’s Advocate
• Discuss offer letter with borrower and advise on effect of
security
• Obtain all requisite consents, clearances from seller (usually
upon a professional undertaking for payment upon
registration)
• Obtain original title from seller (usually upon a professional
undertaking for payment upon registration)
• Obtain a professional undertaking from the lender’s
advocates that they will not use the title document for any
other purpose than for the transaction
• Approve the charge
• Explain the contents of the charge to your client and its effect
• Obtain adequate funds for stamp duty
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 Conflicts of interests
• Ethical and professional responsibility issues
may arise. Remember the general principle
that unless you cannot avoid it, you should
refrain from acting for both parties

• King Woolen Mills Ltd & Anor vs. M/S Kaplan

& Stratton [1993] LLR 2170 (CAK), (C.A 55/93)
• Uhuru Highway Development Ltd & others vs
Central Bank of Kenya Ltd & others (2), [2002]
2 EA 654.
17
• In Mortgage Express Limited V Bowerman &
Partners (1996) 2 ALL ER 836, It was held that
when you act for both borrower and lender, the
highest duty is to the lender

• Where 3rd parties are involved eg Spouse ensure

that they have obtained independent legal
advise. BBK PLC V O’brien (1994)1 AC 180- the
transaction can be challenged on this ground.

18
 Subsequent Charges/ priorities
• The process is the same with subsequent
charges.
• The rules on priorities organize interests in
ranking, so that each party can ascertain
which interests are prior and which are
subordinated to his or hers.
• The general rule is that the charge which is
first made is first paid or discharged. Priority is
conferred by registration. The first registered
charge has priority over all the others. S81 LA
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 Tacking
• The right of a secured lender to add further
monies to the security so that further monies
are also secured .

• The further advances are also tacked into the

original charge and have the same priority
over subsequent lenders only with their
consent see S 82 LA

20
 Case law
• Angwenyi & Ano V NIC Bank Ltd(2004) e KLR

– Charge created but loan was not disbursed, bank

sought to sell the property in satisfaction of a hire
purchase facility which was secured by vehicles
that were purchased. It was held that since loan
was not disbursed there was no consideration that
would entitle the bank to sell the property

21
• Labelle International Ltd & Ano. V Fidelity
Commercial Bank & Ano. (2003) 2 EA 541

– The Advocate who signed the attestation

certificate is not the one who witnessed the
chargors’ signatures. This was an RTA charge
which did not need to be attested. Application for
injunction was dismissed

22
• Anthony Anthanus Ngotho t/a Ngotho Architects
Vs NIC Bank Ltd HCCC No, 319 0f 2003

– Mortgage prepared by mortgagee’s advocates

exclusively. mortgagor had no counsel representation.
The Letter of offer was dated several months later
than mortgage
– It was held that the mortgage was validly executed
– The apparent defect on the mortgage (ie it was
created before the offer was accepted) is evidence of
a prima facie case.

23
 Implied Terms S 88LA
1. to pay principle money on day appointed in charge and interest at
rates agreed upon
2. Pay all rates, charges, rent, taxes and other outgoings
3. Repair and keep in repair all buildings and other improvements
4. Insure
5. Use land in a sustainable manner
6. Not to lease or sublease for more than a year without consent of
chargee
7. Not to transfer, assign or lease without written consent of chargee
8. If a lease; to pay rent perform and observe covenants in the lease
9. If a second or subsequent charge, to pay interest on each prior
charge when they fall due
10. In 2, 3, 4, 5 and 8 chargee may pay on behalf of chargor and
include the amount so paid in principal amount

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Form and Content of a Formal Charge

• Commencement date
• The Parties
• Principal amount
• Recitals- the following facts are recited
– The borrower’s title
– Agreement to lend/borrow
– Agreement to create a legal charge

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 Content
• Testatum (NOW THIS CHARGE WITNESSES)
– Covenant to pay
– Interest
– Secured obligations- aggregate principal amount, all
interest from time due, all costs, taxes, liabilities,
charges and expenses incurred by the bank from time
to time in relation to the charge
– Charging clause.... Charge the premises as continuing
security for the payment and discharge in full of the
secured obligations
– Chargors covenants
– Events of default
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– Bank’s remedies
• Serve notice as per Section 90 LA and if the Chargor
does not comply(S90 (3)LA:
– Sue the chargor for any money due under the charge
– Appoint a receiver of income of the premises
– Lease or sublease the premises
– Enter into possession of the premises
– Sell the premises
– Statutory power of sale
• Before sale-
– serve 40 day notice
– Value the premises
– Prioritization of application of proceeds from sale ie rates,
rent, taxes, discharge of prior charge, all costs and reasonable
expenses, discharge of principal amount, payment of
subsequent charges
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– Further advances (S 82 LA)
• To rank in priority to any subsequent charge
– Right of consolidation- (S 83 LA)
• Chargee may consolidate
– Application of monies- to satisfy the debt
– Indemnity- chargor to indemnify chargee/receiver
– Power of attorney- chargor appoints the chargee
to be attorney of chargor
– Discharge- upon payment of final balance
– Matters to be noted in the register- the banks
rights of tacking and consolidation
– Governing law
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 Attestation and execution
• S 38 LA
– Contract for the disposition of an interest in land must
be:
• In writing
• Signed by all parties thereto
• Attested by a witness who was present when it was signed
– This section should be read together with S 44(1) LRA
which provides that every instrument affecting the
disposition of land must be executed by each of the
parties consenting to it.
– S44(2) LRA- execution should consist of the person
executing the instrument appending his or her
signature or affixing his or her thumbprint or other
mark as evidence of personal acceptance 29
 – S44(3)Execution of the instrument by a Corporate
body, association, cooperative society or any other
organization should be effected in the presence of an
advocate, a magistrate, judge or a notary public
– S45(1)LRA a person executing the instrument is
required to appear before the registrar, public officer
or any other person prescribed and be accompanied
by a credible witness for purposes of establishing
identity unless his identity is known to the Registrar or
prescribed officer. The Registrar or public officer must
identify the person executing the instrument and
ascertain whether the person freely and voluntarily
executed the instrument and shall complete a
certificate to that effect. (S45(2)LRA)
• S56(1)LRA requires that for charges the chargor
must acknowledge that he understands the effect
of s 90 of the LA which among other things
provides for the remedies of the chargee.
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Signed by the Chargor
xxxxxxxxxxxxxxxxxx
In the presence of
................................................
Advocate’s signature
I, yyyyyyyyyyyyyyyyyyyyy, an advocate
of the High Court of Kenya who
witnessed the execution of this Charge,
CERTIFY that the above named chargor
appeared before me on the ....day of
....2012 and(being known to me/being
identified to me by sssssssssss
acknowledge the above signature or
mark to be his/hers and that he/she
had freely and voluntarily executed this
instrument and understood its contents
ID No:................................
PIN No...............................
.................................................
Chargor’s Signature
I, the above named chargor acknowledge
that i understand the effect of Section 90
of the Land Act (the Act) and the Chargee’s
remedies under this charge and I hereby
agree that the Chargee’s rights under
Sections 82 and 83 of the Act and
restrictions under Section 87 of the Act and
Section 59 of the Land Registration Act be
noted against the above title.
.................................
Chargor’s signature 31
Signed by ppppppppppp
The duly constituted Attorney of the chargee
Under and by virtue of a Power of Attorney registered at the Lands
Titles Registry as number................and at the Registry of
Documents at Nairobi as Number......
In the presence of
......................
Advocate

I,CERTIFY that the above duly constituted Attorney of the Chargee,

appeared before me on the ....day of ....2012 and(being known to
me/being identified to me by sssssssssss acknowledge the above
signature or mark to be his/hers and that he/she had freely and
voluntarily executed this instrument and understood its contents.

..................................
Bank official’s signature

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 Retrospective Effect
• Part VII of the LA S 78(1)- has a retrospective
effect that provides that provisions of Part VII
shall apply to all charges including any charge
made before the coming to effect of the LA

• Retrospectivity of this Part may be challenged

as being unconstitutional See Art. 116 (2)

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 Variation of Interest
• S 84 LA introduces an onerous provision that
where it is contractually agreed that the rate
of interest is variable, the chargee must serve
a written notice to the chargor

– Giving the chargor 30 days notice of the

reduction or increase in the rate of ineterst
– Stating clearly and in a manner likely to be
understood the new rate of interest.

34
 Fraud, Dishonesty And
Misinterpretation Of Prior Chargee

• S81(4) LA any misleading, false information by

a prior chargor to a subsequent lender leading
to creation of a subsequent charge will result
in the subsequent chargee getting priority in
the exercise of its rights over the property.

35
 Spousal Consent
• S79 (3) LA provides that a charge of matrimonial
home shall be valid only if any document or form
used in applying for the charge or used to grant
the charge is signed by the chargor and any
spouse of the chargor living in that matrimonial
home or there is evidence that it has been
assented to by all such persons.
• A matrimonial home is defined under S 2 to
mean” any property that is owned or leased by
one or both spouses and occupied by the spouses
as their family home”
• This provision should be read together with S 28
of LRA-overriding interests and S 93(3) of LRA
36
• S93(3) LRA provides that where a spouse who holds
land or a dwelling house in his or her name individually
wishes to give a charge over that land or dwelling
house, the lender shall be under a duty to inquire the
borrower as to whether his or her spouses has/have
consented to the charge.
• Where a lender wishes to take a charge over property
owned by an individual, the bank must make inquiries
regarding the marital status of the potential chargor
and also if the property is occupied as a matrimonial
home. The bank should also make inquiries through
the valuer
• If the spouse misleads a lender as to whether his or
her spouse has consented to the charge, the charge
becomes voidable at the option of the spouse or
spouses who have not consented to the disposition
37
 Spousal Overriding Interest Over
Matrimonial Property
• Spousal rights over matrimonial property have now being
included as an overriding interest subsisting over registered land
whether or not those interests are noted on the register. S 28
LRA
• Though not defined matrimonial property encompasses more
than the matrimonial home described in S 79(3) LA defined in S2
LA
• This is the doctrine of spouse deemed ownership- Are you
married? question will now feature in land transactions S93(2)-
Rights of spouse who only makes a contribution recognized
though not registered
• Though the term ‘spouse’ has not been defined, the definition
can be inferred from the term marriage S 2 LA- a civil, customary
or religious marriage. What about marriage by presumption?
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 REMEDIES
Chargor’s right
to redeem

Lender’s
Notice
remedies

39
 Equity of Redemption
• Equitable doctrine that there should be no fetter
or clog on the chargor’s equity of redemption-
any provision which purports to limit, postpone
or exclude the chargor’s equity of redemption is
prohibited. The right to redeem is absolute
• S 89 LA
• Lord Parker in Krelinger V new Patagonia Meat
and Cold Storage Co (1914)AC 25 at 48- “.....the
equity which arises on the failure to exercise the
contractual right cannot be fettered or clogged by
any stipulation contained in the mortgage or
entered into as part of the mortgage transaction”
40
• On or before legal or CDR the chargor has the
contractual right of redemption
• If the legal or CDR date passed without payment, the
mortgagor obtained an equity of redemption. In
Saleh V Eljofry (1950)24 KLR it was held that the
mortgagor’s equity of redemption was a necessary
incident of every mortgage and failure to repay on
the CDR did not debar the mortgagor from his right
of redemption
• In Industrial and Commercial Development
Corporation V Kariuki & Anor (1977) KLR 52.- the
court stated that the right of redemption subsists
until the transfer is registered.
41
Nookes V Rice (1902) AC 24- mortgage had a stipulation that
the mortgagor would only sell liquor provided by mortgagee.
The mortgagor sought release from this clause on
repayment-the court held that this was a clog to the equity
of redemption

Postpone the right to redeem for 20 years Fairclough V Swan

Bakery Co. Ltd 1(1912) AC 565- it was held that this clause
was invalid and the borrower had a right to redeem at an
earlier date

Mortgage conferred on mortgagee option to buy the

property-This was held to be against doctrine of equity of
redemption- Samuel V Jarah Timber & Wood Paving
Corporation Ltd (1904)AC 323.

Clause which allowed mortgagor a limited period of

redemption was void.

42
 Notice
• Under S 56(2) LRA, where the date of payment of the money
secured by a charge has not been specified or has passed
without demand being made, the money becomes payable 3
months after service of a written notice of demand by
chargee to chargor

• Under S 90(1) of LA where a default in payment has continued

for more than a month, the chargee may issue a statutory
notice. This means that under S 90(1) LA the notice will run
for 3 months .

43
• Notice should inform the chargor S90(2) LA
– The nature and extent of default
– If default is non-payment of money, the amount that
must be paid to rectify the default and the time by
which the payment in default must be completed (this
should not be less than 3 months)
– If default consists of non observance of covenants,
what the chargor must do or not do to rectify the
default and the time for rectification should not be
less than 2 months
– A statement that is the default is not rectified within
the time specified, the chargee will exercise any of its
remedies provided in the Act
– The right of the chargor to apply to court for relief
against those remedies
44
 Remedies
• S90(3) if the Chargor does not comply within two months after service of
notice, the Chargee may

– Sue the Chargor for money due and owing under the charge
– Appoint a receiver of the income of the charged land
– Lease the charged land, or if the charge is of a lease sublease the land
– Enter into possession of the charged land
– Sell the charged land

• Reference to 2 months in s90(3) is onerous since s 90(2) provides that the

chargor should be given at least 3 months within which to rectify the
default

• S90(5) form of Statutory Notice to be prescribed by the Cabinet Secretary

in consultation with the Commission.
45
 1. Action for money
• S91 LA- Chargee can sue for money secured if:

– Chargor is personally bound to repay

– The security is rendered insufficient (not by
chargee or chargor’s fault) and chargee has given
chargor opportunity to provide additional security
– The chargee is deprived of the whole or part of
the security through a wrongful act or default of
the chargor

46
 2. Appointment of Receiver
• S92 LA
• After notice under section 90 (1) the chargee
has to wait a further 30 days before
appointing one
• Advantages- bank does not have the
administrative burden of realization of
security, the receiver’s costs are recouped
from the assets of the chargor-not more that
5% of money received S92(7) LA
• See priority of payment of money received by
receiver- S90(8) LA
47
 3. Leasing
• S93- follows the appointment of receiver
– Lease can only be granted after 30 days upon expiry of
notice
– To take effect in possession not later than 6 months
after its date
– Reserve the best rent
– Not more that 15 years or length on term of charge
whichever is shorter
– Contain reasonable terms and conditions having the
interests of the chargor
– Contain a declaration of appointment of receiver by
chargee

48
 Possession
• S94 upon expiry of notice, the chargee can
serve notice to enter and take possession at
least one month after service of notice
• Entry must be peaceful. Entry is achieved by
taking the management of the property.
• Banks usually avoid this due to the
administrative inconveniences involved and
because they will be held liable for damage to
property and account for profits and rents
49
 4. Chargee’s Power of Sale
• S96(1) LA
• S 96 (2) Before exercising the power to sell the chargee
must serve a notice to sell of at least 40 days
• Copy of notice to sell to be served on
– Commission
– Holder of the land out of which the lease has been granted
if charged land is a leasehold
– Spouse of chargor
– Co-owner of chargor
– Any other chargee
– guarantor
– Any other person with right to enter on and use the land
or natural resources in it
– Any other person to be prescribed by regulations
50
 – Required of service on all this people makes the
process tedious and longer

• In summary the following notices must be

served;
– 3 months demand S 56(2) only if date of
repayment is not provided or demand is not made
on the repayment date.
– If default continues for at least 1 month serve 3
month notice under S 90(1) LA
– Forty days Notice under S 96(2) LA
– 45 days notice under the Auctioneers Act
51
 Power of Sale- Duties of Chargee
• Duty of care owed to chargor, guarantor any chargee under
subsequent charge- s 97(1) LA
• Chargee owes duty to chargor to obtain best price not more than
25% below market value (sale may be declared void) S97(3)
• Property must be valued prior to sale S97(2) LA to determine its
forced sale value.- The chargor may apply to court to declare sale
void if sold at a value that doesn’t meet this threshold.
• S99 LA confers protection on the purchaser if there has been
irregularity in the sale, he can claim damages against the person
exercising the power
• Sale to chargee upon court order
• S 79(9) LA a chargee shall not possess or sell land whose title
document has been deposited with the chargor under an informal
charge without an order of the Court NB the word ‘chargor’ here
should read ‘chargee 52
 Power of Sale Conditions- s98
• Sale
– may cover the whole or part of the land
– May be subject to or free of any charge or
encumbrance having priority to the chargee’s charge
– By way of subdivision
– By way of private contract at market value
– By way of public auction-with reserve price
– For a purchase price payable in one sum or by
instalments
– Subject to any other conditions of the chargee
• There are therefore more ways in which the sale
can be conducted.
53
 Relief
• S 103 to 106 LA chargor, spouse, guarantor,
lessee, trustee in bankruptcy may apply to
court for relief against the exercise by chargee
of any of these remedies (error refers to
remedies under s 85(3) (a) and (b))
• The Court has wide ranging powers including
widening the scope of orders by the court eg
to extend time for chargor to rectify default- s
102 LA
• Court has power to reopen charges secured
on a matrimonial home S105(1) and 106(2) LA
54
 Power to re-open charge secured
under matrimonial home
• Under S 105(1) LA Court has power to reopen charges
secured on a matrimonial home in the interest of doing
justice between the parties
• S106 LA Charges can be reopened in 3 instances, on an
application by:
– Chargor or chargee to enforce a charge or commence an
action under s 90
– Chargor for relief against exercise of any remedy by
chargee
– Registrar where there is evidence of unfair dealing by
chargee, or chargee is a corporate body that discriminates
against certain classes of chargors eg on basis of gender
55
 Re-opening of Charges
• The court may:
– Direct that the charge shall have effect subject to
certain modifications
– Require the chargee to repay the whole or part of
the sum paid by the chargor
– Require the chargee to compensate the chargor
– Direct the chargee which is a corporate body to
stop acting in a discriminatory manner.

56
 Discharge of charge

• Right to discharge in 2 forms:

– S 85(1) , S 102 LA
– S 85(3)

• S 85(2)

57
 Company Securities
• Securities given by companies sometimes
differ from those given by individuals.
– Company charges are subject to registration under
the Companies Act-S 96
– A company can create a floating charge over its
assets so that it remains free to deal with the
asset until specified events(eg appointment of
receiver) occur and the charge then crystallizes
over certain assets and becomes a fixed charge
– A company can create an irredeemable debenture
– Directors can act ultra vires their powers to
borrow
58
 Company Charges
• Definition in S 2 CA is vague “debenture”
– includes debenture stock, bonds and any other
securities of a company whether constituting a charge
on the assets of the company or not
• It is simply a document either creates a debt or
acknowledges it.
• Debentures can come as single or in a series
• S88 of the Companies Act deals with debentures
• Charges may be given by the company to secure
debentures
59
 Company Charges

Floating Charge
Fixed Charge While it creates an
When made, immediately immediate security, it
does not create an
attaches or fixes on the immediate encumbrance
ascertained property. The on the title until certain
right and ability of the events occur such as the
owner to continue to deal appointment of receiver
and the charge then
with it is immediately becomes fixed on the
encumbered listed assets-
crystallization

60