The sun has set on year 2012, but for the real estate sector it will be memorable after new land laws were effected, creating instant winners and losers.
The Land Act, Land Registration Act and the National Land Commission Act were all assented to in 2012 to implement the 2009 National Land Policy.
This has proved a game-changer in the way real estate business will be conducted going forward, with key winners being mortgage buyers, spouses, lease-holders and other parties with ‘overriding interest’ on a property.
Lenders have since May 2012 taken issue with sections of the new laws which have exposed their soft underbellies. In subsequent credit officer surveys conducted by the Central Bank, lenders evidently tightened credit standards to real estate and construction sectors despite increased appetite for loans.
“Some banks expect the new land laws to adversely affect the performance of loans under building and construction as well as the real estate sectors,” CBK said in its third quarter Credit Officer Report.
“This is due to the envisaged lengthy and more complex credit appraisal procedures,” CBK explained. Apparently, appraisals for credit will now take longer, involving intensive due diligence processes on property owners.
This will increase costs for lenders, who also risk court cases where terms of charges (land and houses used as security for a loan) do not conform to sections of the new laws.
The Land Act 2012 clearly states that the law applies in retrospect on “all charges on land including any charge made before” it was effected.
Lenders will approach charges of matrimonial properties extra-cautiously since such will only be valid with evidence of spousal consent.
“The new laws have specifically provided for the rights of spouses in relation to matrimonial homes and property,” said June Rienye, the legal manager at Housing Finance.
“The consent of the spouse is required prior to the charging or transferring of the matrimonial property. This means that the spouse will at all times have a say in the property.”
A lender will also require a court order to “possess or sell land whose title documents have been deposited with the chargor (owner) under an informal charge”.
The law allows for an informal charge to be created where a chargee (lender) “accepts a written and witnessed undertaking from chargor” with clear intention of using land or interest on it as security for a loan.
The Act states that going forward, “a charge shall have effect as a security only and shall not operate as a transfer of any interests or rights in the land” from the owner to lender, though the latter has powers and remedies in case of default.
Every charge document must also contain terms and conditions of sale, an explanation of consequences of default, and reliefs entitled to a borrower including the right of sale.
“For borrowers, the new laws are alive to consumer protection rights and enhance these,” said Rienye. Lenders must notify borrowers at least 30 days prior to increasing or reducing the interest rate payable, where it was contractually agreed upon that the rate of interest is variable.
The notice must state the new rate “clearly and in a manner that can be readily understood”. Section 89 of the Land Act also prohibits any rule – written or unwritten – entitling a lender to foreclose the equity of redemption in charged land.
When a borrower defaults, the lender must serve notice in writing informing them what they must do to remedy the situation, and the time, not less than two months.
“The requirement that financiers cannot require borrowers to pay more than one month’s interest in lieu of notice means that some banks will no longer earn penalty interest of more than one month as they used to when a borrower redeemed their mortgages early or looked to transfer their loans to other institutions,” said Rienye.
For leased public land, the Act now gives pre-emptive rights to allocation to the immediate past holder of the leasehold interest, provided the lessee is a Kenyan citizen and the land is not required for public utility.
The National Land Commission must give priority to the lessee where land reverts back to the national or county government on expiry of a leasehold tenure.