It is the duty of banks and other lenders to ascertain whether a property offered as collateral for a loan is matrimonial, a High Court judge has ruled.
Justice Joel Ngugi noted that without formal consent from one spouse, lenders are obliged to establish the status of property registered in the name of the other partner before agreeing to charge it.
Financial institutions, he ruled, must perform their due diligence to confirm the unregistered equitable rights of the other spouse, and failure to do so makes the charge invalid.
“Where a bank fails to carry out reasonable due diligence or otherwise acts negligently or fraudulently in not discovering or averting its mind to the unregistered equitable interest of a party to a parcel of land, any charge registered in favour of the bank is invalid,” Justice Ngugi noted.
Sh5 million loan
The court made the ruling in a case where a woman sought compensation after Barclays bank auctioned her matrimonial home in a bid to recover Sh5 million loaned to her husband without her knowledge.
The man had used the title deed for the land where the house sat without her consent.
In the case, filed in 2009, high school teacher Lucy Muthoni Njihia told the court that she married agriculturalist Charles Njihia in 1976 and they both embarked on building a home in Nakuru.
The couple took out loans from Barclays and Housing Finance Company of Kenya. The land was registered in Mr Njihia’s name.
The couple lived together happily and had five children, court documents show.
But on December 11, 1998, Mr Njihia secretly took a Sh5 million loan from Barclays and failed to repay it fully, prompting the bank to seek to auction the home in 2009.
To save her home, Ms Muthoni rushed to court seeking to halt the auction pending the hearing of a case she had filed.
But the bank obtained an eviction order from a magistrate’s court in 2011 and the property was sold by auction. The eviction was halfway through when an Environment and Land Court judge quashed the orders.
Ms Muthoni had sought Sh22.3 million in compensation for loss and damages caused by the auctioneers.
Justice Ngugi found the bank liable for the losses because it had failed to ascertain Ms Muthoni’s rights and equitable interests. He ordered the lender to pay Sh2 million in damages.