NAIROBI, Kenya — The High Court has issued a significant ruling protecting borrowers from premature foreclosure, holding that a bank cannot proceed with auctioning charged property after the arrears that triggered a loan default have been fully settled and the account restored to good standing.
In a ruling delivered on May 28 at the Milimani Commercial Courts, Justice Moses Ado restrained a lender from auctioning two commercial properties that had been used as security for an Sh80 million loan facility.
The decision is expected to have far-reaching implications for commercial lending, property development, and mortgage recovery disputes across Kenya.
Dispute Stemmed From One-Month Default
Court records showed that the borrower had obtained an Sh80 million credit facility secured by two commercial properties under a repayment plan spanning approximately 15 years.
However, after experiencing financial difficulties that led to a one-month repayment default, the bank accelerated the facility less than a year into its tenure, issued statutory notices, and initiated plans to auction the properties to recover the outstanding debt.
The borrower subsequently moved to court, arguing that while there had been a temporary default, all arrears had been cleared before the auction process could be completed.
As a result, the central issue before the court shifted from whether a default had occurred to whether a lender could continue with a statutory sale after the borrower had regularised the account.
Court Finds No Existing Arrears
Justice Ado found that the bank’s own records confirmed the arrears had been reduced to zero and that the account had returned to normal standing.
The court held that continuing with the auction despite the regularisation of the loan raised serious legal and equitable concerns.
“The forced, premature sale of an active asset when no debt is currently in arrears, in the view of this Court, constitutes an irremediable loss that cannot be cured by a simple retroactive arithmetic award of damages,” the judge ruled.
The court noted that the breach relied upon to trigger the recovery process had effectively ceased to exist once the arrears were cleared.
Statutory Power of Sale Not Automatic
The ruling emphasised that a bank’s statutory power of sale must be exercised strictly within the law and in accordance with principles of fairness, proportionality, and good faith.
Justice Ado cautioned lenders against rushing to enforce securities where borrowers have demonstrated willingness and ability to rectify repayment defaults.
Consequently, the court issued an injunction stopping the planned auction pending the hearing and determination of the substantive suit.
The order protects the borrower’s commercial properties from sale while the legal dispute continues.
Potential Impact on Commercial Lending
Legal analysts say the decision could become an important precedent in disputes involving commercial loans, real estate developments and income-generating properties.
The judgment signals that courts may subject accelerated loan recalls and foreclosure proceedings to closer scrutiny, particularly where borrowers have taken steps to regularise their obligations.
The ruling is also likely to be welcomed by developers, landlords, and investors who rely on long-term financing facilities and may occasionally encounter temporary cash-flow challenges.
Constitutional and Legal Context
The decision reinforces the principle that contractual rights exercised by financial institutions remain subject to judicial oversight and equitable principles.
Under Kenyan law, lenders possess statutory remedies to recover secured debts, but courts have consistently held that such powers must be exercised fairly and proportionately.
By intervening in the dispute, the High Court underscored that the statutory power of sale is not an automatic remedy and must be balanced against the circumstances of each case.
