Category: Articles

Key Insight: Kenyan courts are decisively pushing back against exploitativelending—whether by regulated banks or private individuals. Two recent decisions drawclear boundaries around contractual enforcement, especially where oppressive interestrates are involved.

In Stanbic Bank Kenya Ltd v. Santowels Ltd, the Supreme Court of Kenya interpretedSection 44 of the Banking Act to require prior regulatory approval before banks canincrease lending rates. Stanbic’s unilateral adjustments, made without approval, were foundunlawful. The Court affirmed a KShs. 10.4 million award to the borrower, reflecting excessinterest charged.

In contrast, Kanwal Sarjit Singh Dhiman v. Keshavji Jivraj Shah addressed an informal loanagreement between individuals. The respondent advanced KShs. 7 million at 36% interestcompounded quarterly—terms which could have ballooned a KShs. 4 million balance toKShs. 69 billion. The Court of Appeal declared the contract void for unconscionability,cancelling a title transferred under a now-vacated ex parte judgment.

Similarities:

• Both decisions invalidated interest claims for violating either statutory approval mechanisms (Stanbic) or equitable limits on fairness (Dhiman).
• Each court required restitution only of the original principal or actual sums received, reinforcing the doctrine of unjust enrichment.
• Both courts established that courts will intervene when contractual terms “shock the conscience,” even if executed with formal compliance.

Key Distinctions:

• Stanbic involved a licensed financial institution; Dhiman involved private lending.
• The former hinged on regulatory compliance; the latter on equitable scrutiny.
• While Stanbic was resolved under the Banking Act, Dhiman rested on equity and contract doctrine.

Implications for Lenders and Borrowers:
These decisions collectively send a powerful message:

• Banks must comply with Section 44 before varying interest.
• Private lenders cannot hide behind freedom of contract where terms are manifestly oppressive.
• Courts will restore equity—even where statutory rules are silent—where borrowers face unjust burdens.

In Harcharan Singh Sehmi & Another v. Tarabana Company Ltd & Others, SC Petition No.E033 of 2023, the Supreme Court of Kenya delivered a landmark decision affirming that the doctrine of bona fide purchaser cannot cure the illegality of a defective root title. The matter revolved around leasehold land in Ngara, Nairobi, initially allocated to the Sehmis in 1968.Despite their timely application for lease renewal prior to the lease’s expiry in 2001, the land was irregularly reallocated in 2009 to a third party and ultimately sold to Tarabana Co. Ltd.

The Sehmis’ continued occupation, coupled with formal communication seeking lease extension, formed the crux of their legitimate expectation. The court found that the National Land Commission and the Chief Land Registrar had failed to act within the bounds of fair administrative action by not processing or communicating on the renewal request. Consequently, the subsequent eviction of the Sehmis in 2014 and the registration of a new title to Tarabana were deemed unlawful.

The Supreme Court held that:

• A certificate of title is not absolute proof of ownership where the root title was acquired unlawfully;
• Legitimate expectation arises when procedural steps toward renewal are taken and ignored by authorities;
• Due diligence must extend to verifying the legal history of the land, not merely inspecting the title.

This decision reinforces the principle that public land must be administered fairly, transparently, and in accordance with constitutional values. For property buyers and investors, the case is a cautionary tale: registration does not guarantee immunity from scrutiny where the foundation is defective.

The dispute in Kwanza Estates Ltd v. Jomo Kenyatta University of Agriculture and Technology (JKUAT) revolved around early lease termination by the tenant during the pandemic. JKUAT vacated the leased premises and invoked doctrines of frustration and impossibility due to changes in law and government policies affecting student enrolment.

Despite the hardships, the Supreme Court held that:

• Frustration applies only where performance is rendered impossible or radically different;
• A tenant’s relocation to another premises within the same town negates claims of
  impossibility;
• The phrase “or sooner determination” in the lease was ambiguous and did not constitute a
  termination clause;
• Lack of an express break clause renders unilateral termination a breach of contract.

While the Court acknowledged that compelling a tenant to stay against its will would beunreasonable, it also found that rent could not be claimed for the full remaining term.Instead, it awarded rent for a reasonable period—three months—to allow the landlord timeto find a replacement tenant.

This case underscores the need for well-drafted lease agreements with clear termination clauses. Commercial tenants cannot simply walk away from obligations by citing external challenges, unless the contract or the law expressly permits such relief.

The Court of Appeal’s ruling in Tabitha Wathoya Ndirigiri v. Mohamed Mutuku Mutisya Nzioka & 4 Others illustrates a critical point in property law: fraud, once proved, nullifies subsequent claims—even from alleged innocent purchasers. The dispute arose from a partnership where each of three parties owned a 33.33% stake. While the appellant was unwell, her co-partners orchestrated a sale and transfer of the partnership property using forged signatures.

Crucially, the second respondent had already been criminally convicted for the forgery, but the High Court dismissed this as inadequate proof of fraud. The Court of Appeal disagreed. It reaffirmed that criminal convictions tied to the same transaction are strong evidence of fraud and should not be ignored in civil proceedings.

The purported “innocent” fifth respondent claimed to have bought the property without
knowledge of the dispute. However, the court noted several red flags:

• The appellant had registered a caveat prior to the sale;
• The property was visibly dilapidated at the time of purchase;
• No adequate due diligence was demonstrated by the buyer;
• The buyer failed to explain how he came to know the property was for sale or how he
  engaged the vendors.

The Court held that had proper inquiries been made, the purchaser would have discovered the ongoing litigation and ownership dispute. Thus, he could not be considered a bona fide purchaser without notice.

This case serves as a strong precedent: anyone acquiring real estate must thoroughly investigate title history, pending caveats, and ongoing litigation. Ignorance is not a shield where evidence of irregularity is readily available.

Our firm recently advised the United Nations Federal Credit Union on the implications ofnotices issued by Nairobi City County threatening auction of properties over unpaid landrates. The key legal question was whether the County could enforce payment throughauction where the property is already charged to a third party.

The answer lies in Section 19 of the Rating Act, which allows county governments toregister a statutory charge for unpaid land rates—such charge taking priority over all otherencumbrances. Section 28(g) of the Land Registration Act confirms this priority status byclassifying such charges as overriding interests.

However, the County must follow due process:

• Issue formal demands and notices under Section 17 of the Rating Act;
• Allow the property owner an opportunity to pay or object;
• Seek court orders before enforcing sale under Section 96 and 101 of the Land Act;
• Serve notices on all interested parties, including lenders and chargees.

The courts have consistently upheld this enforcement framework in cases like Mwai Ltd v. Municipal Council of Mombasa and Dileep Patel v. Municipal Council of Nakuru.

For lenders and financiers, this highlights the importance of:

• Insisting on land rate clearance certificates before advancing loans;
• Registering charges properly to receive notices under Section 96(3) of the Land Act;
• Monitoring compliance by borrowers to avoid risk of enforcement by rating authorities.

While the County’s right to recover rates is constitutionally and statutorily grounded, it
must be exercised fairly, transparently, and in strict conformity with the law.

In Stanbic Bank Kenya Ltd v. Santowels Ltd, the Supreme Court finally resolved a long-standing question in banking law: does Section 44 of the Banking Act apply to interestrates? The answer is yes.

Between 1993 and 1997, Stanbic granted loan facilities to Santowels and unilaterally variedinterest rates, notifying the borrower post-facto. Years later, an audit revealed that Stanbichad overcharged interest—both against contractual terms and the prevailing CBKrate—leading to litigation.

The High Court ruled that the rate increases were unlawful. The Court of Appeal upheld thisposition, correcting the computation of the award. On appeal to the Supreme Court, Stanbicsought to argue that interest rates were deregulated following the repeal of Section 39 ofthe CBK Act.

The Supreme Court held that:

• The term “rate of banking” in Section 44 of the Banking Act includes interest rates on loans
  and facilities;
• Even after the repeal of capping laws, Section 44 remains intact and mandates regulatory
  oversight;
• The Central Bank Governor, delegated by the Cabinet Secretary, retains authority to
  approve rate increases;
• Freedom of contract remains valid—but within the framework of statutory oversight.

The court awarded KShs. 10.4 million to Santowels, marking a pivotal moment in consumer protection within the financial sector. Moving forward, financial institutions must secure regulatory clearance before modifying lending terms. This ruling is binding and represents good precedent for fair banking practices.