Buying Property on a Charged Land in Kenya: How Partial Discharge Protects Your Investment

Meaning of partial discharge A partial discharge has the effect of releasing the lender’s security interest on part of the secured property. Pursuant to section 102 of the Land Act, the chargor has the right to partially discharge a charge, in respect of a specific part of the charged property - by making the requisite payment to the lender. The lender is then required to execute a partial discharge upon receipt of the requisite payment and release the executed instruments thereof. The provisions of section 102 of the Land Act not only give the right to partially discharge a property to the chargor but also any other person entitled to discharge. Therefore, purchasers of apartments, offices or subplots have a right to discharge their units from the lender’s charge even though the registered owner of the charged land is the developer. Consequences of partial discharge Upon such purchasers ensuring the requisite payment has been made to the chargee, the Land Act obligates the lender to release the discharge documents and release the discharged part of the charged land from its security interests. The formal instrument of partial discharge is simply the documentary evidence that the purchaser has fulfilled their payment obligation. It is a consequence of the discharge, not the discharge itself. In some instances, purchasers may be faced with scenarios where payments have been made but their partial discharges have been withheld by the lender. It is the right of those purchasers to insist on the instruments of partial discharge and title documents to be executed. Considerations by purchasers of charged property The law on creation of security interests over land by a lender has been the subject of litigation in many disputes. Where a purchaser intends to purchase a unit on charged land, it is paramount that they consider in principle the extent of the rights held by the lender over the charged land. The legal due diligence of the charged land should invite the purchaser to scrutinise the terms of the existing charge before purchase. Section 59 of the Land Registration Act equally requires the consent of the lender before any transaction is registered on the land register of a charged land. Recent court jurisprudence suggests that procuring the consent of the lender and the registration of partial discharges is an important indicator of extinguished security interest over part of the charged land. The courts have provided helpful guidance on this issue in a number of decisions. In Kenwood Property Developers Limited v Family Bank Limited; Onesmus Ngige Munyambu & another (Interested Parties) [2020] KEELC 1984 (KLR) the Court held that the purchasers of the villas situated on a property which was charged and the subject of a sale could not obtain orders to compel execution of partial discharges from the chargee’s security until they had completed payment of the purchase price to their villas. In instances where partial discharges are not executed, the obligation lies on the purchaser to ensure that their interests are immediately released through an action in Court before sale of the charged land. In Capital Realty Limited v Housing Finance & another [2020] KEHC 3209 (KLR) Justice GV Odunga (as he then was) refused to grant an injunction to stop a sale to a developer on account of third party purchasers who had paid for their units but no partial discharges had been executed. The Court declined to grant the injunction, finding that the third-party purchasers' interests alone were insufficient to stop the sale — particularly since it was the developer/chargor, not the purchasers, who had filed the application. When all these steps are fulfilled, a prudent purchaser will be well-positioned to protect their interest in the property even if the developer defaults and the lender seeks to exercise its power of sale.