Kithendu & another v Housing Finance Company Limited & another [2023] KEHC 27232 (KLR)

Kithendu & another v Housing Finance Company Limited & another (Civil Suit 75 of 2019) [2023] KEHC 27232 (KLR) (21 December 2023) (Judgment)

Neutral citation: [2023] KEHC 27232 (KLR)

Republic of Kenya

In the High Court at Mombasa

Civil Suit 75 of 2019

DKN Magare, J

December 21, 2023

Between

Johnson Matiti Kithendu

1st Plaintiff

Kalekya Ngui

2nd Plaintiff

and

Housing Finance Company Limited

1st Defendant

Titus Mutisya T/A Makuri Auctioneers

2nd Defendant

Judgment

1. In the Plaint dated 14th September 2019, the Plaintiffs pleaded among others that:i)The 1st Plaintiff applied for a loan from the 1st Defendant of Kshs. 16 Million which the 1st Defendant agreed and advanced sometimes in 2013. ii)The 1st Defendant secured the said loan through a charge dated 14th January 2013 against the Plaintiffs’ Title No. Kwale/Diani Beach Block/1164. iii)The 1st Plaintiff underwent financial constraints and could not consistently service the loan as a result of which the 1st Defendant allegedly issued two statutory notices 17th July 2015 and 16th November 2015 but which were received by the Plaintiffs later sometimes in 2017. iv)The 1st Plaintiff and the 1st Defendant entered into a further agreement dated 9th August 2016 through the 1St Defendant took over the process of subdivision of the suit premises into 10 units but which was delayed owing to delays in obtaining Government approval to subdivide the land.v)There was a further agreement dated 25th February 2019 between the 1st Plaintiff and the 1st Defendant in which the outstanding loan amount was agreed at Kshs. 15,300,000/=.vi)It was a term of the Agreement that the 1st Plaintiff would pay Kshs. 2 Million by 28th February 2019 and which was accordingly settled on 28th February 2019 and that the balance of Kshs. 13,300,000/= would be settled by 30th June 2019 and in default of which the Plaintiffs were to pay interest of 13% p.a until payment in full.vii)The Plaintiff averred that by 29th June 2019, they had paid a total of Kshs. 4 Million and the balance was Kshs. 11,567,325. 35. viii)Subsequently, the Plaintiffs paid a total of Kshs. 7 Million by July 2019 and by 15th August 2019, the total payments was Kshs. 9. 1 Million.ix)The Plaintiffs further aver that the 1st Defendant breached the agreement on 13% default interest and surcharged the Plaintiffs Kshs. 19,207,311. 06 as the outstanding loan amount as at 30th September 2019 when in fact the arrears ought to have been Kshs. 6,400,000 per the agreement of 25th February 2019. x)It was the Plaintiff’s case that the only statutory notices were issued in spmetimes on 14th July 2015 and 16th November 2015 and so the purported statutory power of sale was unprocedural and unlawful under Sections 90(1) and 96 of the Land Act, 2012 and contrary to the agreement of 25th February 2019.

2. The Plaintiffs thus prayed for the following reliefsa)A Declaration that the 1st Defendant ought to have issued the Plaintiffs with a fresh statutory notice under Section 96 of the Land Act, 2012 before instructing the 2nd Defendant on 28th Augst 2019 to auction Title No. Kwale/Diani Beach Block/1164b)A Declaration that the proposed sale of the suit premises is null and void.c)A permanent injunction to stop the Defendants and their agents from advertising for sale or dealing with the suit property.d)A Declaration that the amount payable by the Plaintiff is per the Agreement dated 25th February 2019 which is Kshs. 6,400,000 with interest of 13% p.a from 18th July 2019. e)An Order against the 1st Defendant to carry out a fresh valuation of the suit premises.f)Cost of the suit.

3. The 1st Defendant filed its Defence dated 17th December 2019 on 19th December 2019 in which it was inter alia pleaded as follows:i)Per the charge dated 14th January 2013, the monthly instalment was Kshs. 255,620 payable in 240 months.ii)The 1st Defendant issued the 90 days statutory notice dated 12th June 2014 and 40 days notice on 27th November 2014 and both were served upon the Plaintiffs by registered post.iii)The 1st Defendant issued fresh statutory notices on 14th July 2015, for 90 days and 16th November 2015 for 40 days and both were duly served by registered post.iv)The offer dated 9th August 2019 on subdivision of the suit property expressly stated that the Plaintiffs were under obligation to continue remitting monthly instalments of Kshs. 243,000 from 30th June 2016 but which they failed.v)That interest was payable at 13% p.a and the 1st Defendant was at liberty to reclaim the full debt.vi)As at 15th August 2019, the outstanding loan amount was Kshs. 18,672,497. 54.

4. At the hearing, the Plaintiff called one witness, PW1, Johnson Matiti Kithendu who testified and produced evidence in Court.

5. The witness relied on his witness statement filed on 16th September 2019 and a further witness statement filed on 9th February 2021 in evidence.

6. He also relied on Bundle of Documents dated 16th September 2019 and further Bundle of Documents dated 12th February 2021.

7. It was his case that the loan amount borrowed was Kshs. 16 Million and was payable by monthly installments of Kshs. 243,000.

8. It was his further case that on 30th August 2013, he lost his job and had difficulties servicing the loan thereafter.

9. He stated that he agreed with the 1st Defendant to subdivide the suit premises into 10 units but the process took longer than expected owing to delays in approval by the government for the subdivision to be done.

10. Further, he stated that the 1st Defendant never informed him that it would auction the suit premises.

11. The witness testified further that he agreed with the bank to pay Kshs. 15,300,000.

12. While referring to the agreement dated 25th February 2019, it was his case that the purpose of the agreement was to amicably resolve the dispute on loan repayment and failure to remit the amount by 30th June 2019 would attract interest at 13% per annum.

13. The witness further stated that he made the last payment to the 1st Defendant on 29th November 2019 for Kshs. 900,000 and on 30th November 2019 for Kshs. 1,592,000 but the 1st Defendant did not credit these payments to reduce the loan balance.

14. He also stated that his indebtness should have been Kshs, 15,300,000 by the time he signed the Agreement dated 15th February 2019 but the 1st Defendant did unauthorized deductions from him.

15. In cross examination, it was his case that he had changed his postal address and notified the bank of the change.

16. He further stated that the bank indulged him on without prejudice basis to carry out the subdivision the suit premises which he agreed.

17. It was his further case on cross examination that some payments he made did not reflect in the 1st Defendant’s bank statement and he was charged for legal fees.

18. The Defendant called one witness, DW1, Quentin Afande. He introduced himself as the Relationship Manager at the 1st Defendant.

19. He relied on his witness statement dated 14th October 2022 and further witness statement of the same date in his evidence. He also relied on the Bundle of Documents filed on 19th December 2019 and further list of documents dated 4th March 2021 to support the 1st Defendant’s case.

20. In cross examination, it was his case that the 1st Defendant indeed issued statutory notices for sale of the suit premises which was served upon the Plaintiffs by registered post via P.O Box 52347-00200 Mombasa.

21. He further stated that the Plaintiffs changed address and they statutory notices 27th November 2014 and 14th July 2015 via the new address 94015-80107 Mombasa also by registered post.

22. The witness also stated that the Plaintiffs did not fulfil the terms of the agreement because they fall in arrear and failed to service the loan.

23. Further, it was his case that the amount to be secured was Kshs. 22,990,574. 15 inclusive of the arrears of Kshs. 7,011,162. 50.

24. The witness also confirmed that no statutory notices were issued in 2018 as the bank was relying on the notices issued on 8th May 2016.

25. The Court directed parties to file their respective written submissions.

26. The Plaintiff filed submissions dated 10th May 2023. It was submitted that the 1st Defendant produced the statutory notice dated 12th June 2014 and another one dated 14th July 2015 but as a consequence of the changes occasioned by the agreement of 9th August 2016 and 25th February 2019, the notices issued more than 4 years ago would not properly constitute the threshold anticipated under Section 90 (1) of the Land Act.

27. Counsel further submitted that the 1st Defendant did to prove service of the statutory notices after the Plaintiffs denied service. Reliance was placed on the case of Esther Cherop Chebelyo & Another vs Oriental Commercial Bank & 3 Others (2021) eKLR.

28. It was also submission of the Plaintiffs that per the agreement dated 25th February 2019 had two options: for payment of interest and for parties to revert to the position before the agreement and that the 1st Defendant had opted for the interest option since the Plaintiffs paid Kshs. 4,000,000/= between February 2019 and June 2019 and the 1st Defendant accepted payment totaling Ksh. 5,100,000/= between June 2019 and August 2019. The Plaintiff urged the court to apply contra prefendum rule against the Defendants if there was misinterpretation in the consistency of the agreements and relied on the case of Mwangi Ngumo v Kenya Institute of Management (2012) eKLR.

29. On the part of the 1st Defendant, it was submitted that the bank was entitled to exercise its statutory power of sale now that it was in dispute that the Plaintiffs had defaulted on the loan which was secured by the suit property.

30. Counsel further submitted that the 1st Defendant had issued 90 and 40 days’ statutory notices and instructed auctioneers who also issued 45 days’ notice as required under the law.

31. It was thus the submission of the 1st Defendant that it the Plaintiff had failed to prove their case on a balance of probability. To anchor this point, it was submitted that a valid notice had been issued and the 1st Defendant had no obligation to issue a further notices. Counsel relied on the case of Nyando Enterprises Limited v Barclays Bank Limited (2018) eKLR.

32. Further, it was submitted that the letter dated 25th February 2019 was on without prejudice basis and subsequent to this letter, the bank issued 2 more letters to the Plaintiff being one dated 21st August 2019 and 9th September 2019 informing the Plaintiff that due to failure to pay, the offer had lapsed and the bank was proceeding to realize the security.

33. The 1st Defendant thus submitted that the bank was entitled to charge 13% interest as agreed through the letter dated 25th February 2019 and the court ought to vary the terms of the letter as this would amount to rewriting the agreement between the parties. Reliance was placed on the case of Pius Kimaiyo Langat v Co-operative Bank Ltd (2017) eKLR.

34. It was also submitted that there was no need for a repeat issue of the 45 days auctioneers notice as once it was issued and served, the law did nit provide for a repeat. Reliance was placed on the case of Anne Wachisi Situma & Another v I&M Bank Limited & 2 Others (2021) eKLR.

35. Finally, counsel submitted that the Plaintiff had not come to court with clean hands being indebted to the 1st Defendant and the suit should be dismissed.

Analysis 36. The Court has reviewed and considered the pleadings, testimonies and evidence produced by parties in support and opposition to their respective cases.

37. The issue for determination in this case is whether the 1st Defendant was under obligation to issue fresh Statutory Notices before exercising the statutory right under Section 96 of the Land Act, 2012.

38. The Plaintiffs claim is that after the agreement dated 25th February 2019, the applicable loan amount was the negotiated Kshs. 15,300,000/- and not the charged Kshs.16,000,000/=. The 1st Defendant alleges that the Agreement dated 25th February 2019 was on without prejudice basis and did not rule out the commitment on the part of the Plaintiffs to remit monthly instalments.

39. The 1st Defendant further contended that per this latter agreement, interest of 13% would be charged upon the Plaintiffs’ default to service the loan and indeed they defaulted.

40. What the parties contest is whether the 1st Defendant was under obligation to issue fresh statutory notice after the Agreement of 25th February 2019.

41. The Plaintiffs maintain that 1st Defendant should have issued fresh statutory notices while the 1st Defendant denies this obligation.

42. The 1st Defendant’s case is that the agreement of 25th February 2019 was purely on without prejudice basis and as the Plaintiffs continued in default, the 1st Defendant was at liberty to reclaim the full debt.

43. The extend and application of the evidentiary principle of without prejudice has been deliberated in various decisions home and internationally. In the case of Oceanbulk Shipping and Trading SA v TMT Asia Limited and 3 others [2010] UKSC 44, on the legal principles of the "without prejudice" rule, in a majority decision of the Supreme Court of the United Kingdom, the Judges stated-“The approach to without prejudice negotiations and their effect has undergone significant development over the years. Thus the without prejudice principle, or, as it is commonly called, the without prejudice rule, initially focused on the case where negotiations between two parties were regarded as without prejudice to the position of each of the parties in the event that the negotiations failed. The essential purpose of the original rule was that, if the negotiations failed and the dispute proceeded, neither party should be able to rely upon admissions made by the other in the course of the negotiations. The underlying principle of the rule was that parties would be more likely to speak frankly if nothing they said could subsequently be relied upon and that, as a result, they would be more likely to settle their dispute."

44. Further, in the case of Walker v Wilsher (1889) 23 QBD 335 at 337 Lindley LJ asked what the meaning of the words "without prejudice" was in a letter written "without prejudice" and answered the question this way.“I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms proposed in the letter are accepted, a complete contract is established, and the letter, although written without prejudice, operates to alter the old state of things and to establish a new one."

45. Back home, Section 23(1) of the Evidence Act, Cap 80 provides as follows:In civil cases no admission may be proved if it is made either upon an express condition that evidence of it is not to be given or in circumstances from which the court can infer that the parties agreed together that evidence of it should not be given.

46. In the case of Randu Nzau v Mbuni Transport Company Ltd [1989] eKLR the Court stated:“The section makes inadmissible a certain crop of admissions which the parties by either an express condition or by implication did not intend that evidence thereof be adduced in subsequent proceedings. The marginal note describes those as without prejudice admissions. By the rules of construction the marginal note must be read with the body of the section. It then follows that the section accords protection to any pre-trial admissions made without prejudice unless the consent of the other party or parties to it be first obtained."

47. Similarly, in Guardian Bank Ltd v Jambo Biscuits Kenya Ltd [2014] eKLR the court stated as follows:There is ample judicial authorities on this subject of ‘’without prejudice’’. The string of those judicial authorities confirm that, the practice of ‘’without prejudice’’ is a matter of public policy aimed at encouraging parties to resolve civil disputes amicably and to engage into such negotiations, compromises and admissions without the fear of the admissions being used against them in formal court proceedings should they fail to fasten a settlement. However, for communication to receive the privilege and the protection of the practice of without prejudice, it must be one which is made during an amicable negotiation of a dispute with the intention of yielding a settlement or compromise of the dispute. The communication may be expressly signed to be on without prejudice basis or it may be inferred from the circumstances in which it was made that the parties agreed or intended it should not be given in evidence. The communication may be oral or in writing. Such communication or letter is inadmissible in evidence. See Halsbury’s Laws of England, 4th Edition Vol. 17.

48. I have said enough to show that without prejudice communications are as a general rule not admissible in evidence. However, when the terms of a without prejudice letter are accepted, a contract is formed.

49. In this case, I note from the letter dated 25th February 2019 subject of the without prejudice argument that it stated in part as follows:... we write to advise that the bank management has evaluated your appeal and purely on exceptional and without prejudice basis, counteroffers Kshs. 15,300,000/= in full and final settlement of your indebtedness subject to the following terms and conditions:... a commitment of Kshs. 2,000,000/= and the auctioneer’s fee to be advised is paid by 28th February 2019. . the balance of Kshs. 13,300,000/= is paid on or before 30th June 2019. It continued... in the event of delay in remittance of the negotiated amount, interest will be charged at 13% p.a or at the prevailing rate until redemption in full and we shall be at liberty to reclaim the full amount on your account.

50. Stemming from the above quoted clauses from the letter of 25th February 2019, it follows that the letter was on without prejudice basis. However, it was a counter offer which the 1st Plaintiff accepted by signing and returning a copy to the 1st Defendant within 14 days as stated on the letter itself. The Defendant acknowledges that the Plaintiffs accepted this offer. Therefore, it became a binding agreement and superseded the previous offers.

51. Therefore, the contractual effect of the agreement of 25th February 2016 was that after 30th June 2016, the 1st Defendant was entitled to claim the full debt. The 1st Defendant’s letter dated 26th June 2016 stating the balance as Kshs. 11,567,325. 35 was thus based on the contract dated 25th February 2019. As such, the 1st Defendant was under obligation to issue fresh statutory notices in conformity with this new contract after breach by the Plaintiffs.

52. Although, the 1st Defendant claimed that it issued a letter dated 9th September 2019 stating the outstanding arrears to be Kshs. 19,207,311. 06, this was improper as it was not based on the contract of 25th February 2019.

53. Further, the letter dated 9th September 2019 did not constitute a statutory notice anticipated under Section 90 and 96 of the Land Act.

54. Under Section 90 of the Land Act, a chargee who intends to exercise the statutory power of sale is also required to issue a notice under Section 96 of the Land Act which provides;96. (1)Where a chargor is in default of the obligations under a charge and remains in default at the expiry of the time provided for the rectification of that default in the notice served on the chargor under section 90(1), a chargee may exercise the power to sell the charged land.(2)Before exercising the power to sell the charged land, the chargee shall serve on the chargor a notice to sell in the prescribed form and shall not proceed to complete any contract for the sale of the charged land until at least forty days have elapsed from the date of the service of that notice to sell.

55. This is the procedure the 1st Defendant was obligated to follow after the contract dated 25th February 2019. The Plaintiffs have further agitated that the 1st Defendant undervalued the suit property. The 1st Defendant, acknowledged that the property value has changed after 12 months and a fresh valuation will have to be done in case of lawful sale. In any event, the Plaintiffs will in law, recover if the property is undervalued. As regards the issue of valuation, Section 99(4) of the Land Act provides as follows:A person prejudiced by an unauthorised, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising that power.

56. Further, the Plaintiff has a remedy of seeking damages if the subject premises are lawfully sold at an under value as provided in Section 97(3) of the Land Act which states that:-“(3)If the price at which the charged land is sold is twenty-five per centum or below the market value at which comparable interests in land of the same character and quality are being sold in the open market.(a)there shall be a rebuttable presumption that the charge is in breach of the duty imposed by subsection (1); and(b)the charger whose charged land is being sold for that price may apply to a court for an order that the sale be declared void, but the fact that a plot of charged land is sold by the charge at an undervalue being less than twenty-five per centum below the market value shall not be taken to mean that the charge has complied with the duty imposed by subsection (1).”

57. Dealing with such a scenario, the Court in Joyce Wairimu Karanja vs. James Mburu Ngure & 3 Others [2018] eKLR appreciated that:“both statutory and decisional law have clearly stated that the remedy for a mortgagee who has suffered damages as a result of improper auction, is not to reverse the auction against an innocent purchaser – but in damages."

58. The irresistible conclusion I come to is that the 1st Defendant’s statutory notice dated 14th July 2015 is void by virtue of the subsequent contract dated 25th February 2019 and cannot be used to initiate the realization of security in the suit premises. Similarly, the 2nd Defendant’s subsequent notification of redemption issued on 4th September 2019 purporting to notify of the redemption and default sale of the suit premises were premature, inconsequential and a nullity.

59. Section 90 of the Land Act, 2012 provides;90(1)If a chargor is in default of any obligation, fails to pay interest or any other periodic payment or any part thereof due under any charge or in the performance or observation of any covenant, express or implied, in any charge, and continues to be in default for one month, the chargee may serve on the chargor a notice, in writing, to pay the money owing or to perform and observe the agreement as the case may be.(2)The notice required by subsection (1) shall adequately inform the recipient of the following matters—(b)if the default consists of the non-payment of any money due under the charge, the amount that must be paid to rectify the default and the time, being not less than three months, by the end of which the payment in default must have been completed;

60. In Kenya Commercial Bank Ltd. v Pamela Akinyi Ochien’g Civil Appeal No. 114 of 1991, the Court of Appeal held that:“Before a Chargee, which the bank was in this case, can exercise its statutory power of sale, certain procedures must be complied with, which, in the case of registered land, are set out in section 74(1) of the Registered Land Act Cap 300. For instance they must serve on the chargee three months’ written notice of the default and require her to comply with the conditions broken before exercising the powers of sale or taking steps to recover the sums due. These safeguards are designed to prevent oppressive behaviour by banks in realising their securities over land, which often forms the only home of the chargor. The loss thereof would in many cases cause real hardship to the borrower and his or her family…The circumstances in which a chargee exercising its statutory power of sale can be restrained from doing so have been set out. The mortgagee will not be restrained from exercising his power of sale because the amount due is in dispute, or because the mortgagor has begun a redemption action, or because the mortgagor objects to the manner in which the sale is being arranged; but will be restrained, however, if the mortgagor pays the amount claimed into court, that is, the amount which the mortgage claims to be due to him, unless, on the terms of the mortgage, the claim is excessive; but where he was, at the time of the mortgage, the mortgagor’s solicitor, the court will fix a sum probably sufficient to cover his claim ... The Court should not grant an injunction restraining a mortgagee from exercising his statutory power of sale solely on the ground that there is a dispute as to the amount due under mortgage.”

61. That was the position adopted in the case of Al-Jalal Enterprises Limited v Gulf African Bank Limited [2014] eKLR cited with approval by Nyamu, J. (as he then was) in the case of Mathya v Housing Finance Co. of Kenya Limited & another [2003] 1 EA 133 where the Court stated that:“... he who comes to equity must do equity. Failure to service the loan or to pay the lender or to pay into court what had been admitted took the Applicant outside the realm of exercise of the court’s discretion.”

62. Further, on the undisputed case of the Plaintiffs that they could not finance their loan obligation owing to harsh economic conditions, Pall, J (as he then was) in the case Muhani & Another v National Bank of Kenya Ltd [1990] KLR 73 stated as follows:“The mortgagor who has given an express power of sale cannot by starting a suit perhaps a perfectly hopeless suit derogate from that which it has in express terms conferred upon the mortgagee by the instrument namely a statutory power of sale and to hold otherwise would be simply to tear up the instrument which contains the contract agreed upon by the parties...The very object of the legislation granting a chargee a statutory power of sale would be negated if the courts interfere with his statutory or contractual powers unless, of course there is an allegation of fraud or improper exercise of the power of sale.”

63. In the circumstances, I agree with the Plaintiffs that the initial statutory notices issued by the 1st Defendant were invalid by virtue the agreement dated 25th February 2019 which created new obligations and entitled the Plaintiffs to a fresh statutory notice besides varying the loan amount. The 1st Defendant was accordingly entitled to issue fresh statutory notice of sale of the suit premises. The Plaintiff’s case, on a balance of probabilities is therefore merited and I allow it.

Determination 64. In the upshot, the Plaintiffs’ suit is allowed as follows:-(a)No need to issue another notice.(b)A Declaration be and is hereby issued that the 2nd Defendant should have issued and served the Plaintiffs with a 45 days Auctioneer’s Notice notification for sale before placing Title Number Kwale/Diani Beach Block/1164 for auction.(c)A Declaration be and is hereby issued that the proposed sale of Title Number Kwale/Diani Beach Block/1164 on 19th September 2019 is null and void.(d)1st Defendant to do a fresh valuation on Title Number Kwale/Diani Beach Block/1164 taking into account the developments erected thereon at the current market value before embarking on a fresh sale.(e).Each party will bear their costs. The issue of 19/9/2019 is now moot.

DELIVERED, DATED AND SIGNED AT MOMBASA ON THIS 21ST DAY OF DECEMBER, 2023. JUDGMENT DELIVERED THROUGH MICROSOFT TEAMS ONLINE PLATFORM.KIZITO MAGAREJUDGEIn the presence of: -Randuk for 1st DefendantNo appearance for the Plaintiff