The State must indemnify a lender that suffers loss after relying on an erroneous land register

Gulf African Bank (the Plaintiff) advanced a facility of KES 100,000,000 to Halgan Megabids Limited (the 1st Defendant) by a letter of offer dated 31 July 2019. The letter of offer contained terms providing that the facility was repayable in six months, with interest at 13% per annum and default damages at 20 % per annum on overdue sums

The facility was secured by legal charges over two properties (Dagoretti/ Kinoo/164 and Limuru/Rironi/151 - registered in the name of Mary Wanjiku Kariuki (the 4^th Defendant) and Mary Wambui Macharia (the 5^th Defendant) respectively, an all-assets debenture and joint and several personal guarantees from the 1^st Defendant’s directors Dehaba Kushow Fothey (the 2^nd Defendant), Maryan Hassan Maalim (the 3^rd Defendant), the 4^th Defendant, and 5^th Defendant.

The 1^st Defendant defaulted in repayment on the facility and the Plaintiff proceeded to serve statutory notices to the 1^st Defendant and thereafter instructed auctioneers to issue redemption notices with a view to realizing the charged properties. An auction of one of the properties, Dagoretti/Kinoo/164 drew the highest bid of KES 55 million, which was below the market value. In the course of realizing the security, irregularities concerning both properties emerged leading to investigation by the Directorate of Criminal Investigations. Subsequently, it was discovered that the property titles for both properties had been fraudulently procured and that signatures on the underlying land records had been forged, rendering the securities unenforceable. The outstanding indebtedness amounted to KES 102, 369,273.50 consisting of the principal sum, interest, default damages and the debit balance, with default damages continuing to accrue at 20% per annum. Despite demands for payment, neither the borrower nor the guarantors, i.e. the 2^nd to 5^th Defendants, settled the outstanding debt.

The Plaintiff filed the present suit against the Defendants seeking judgment against the 1^st to 5^th Defendants for KES.102,369,273.50, together with default damages at 20% per annum from 19th October 2021 until payment in full and against the 6^th to 8^th Defendants, for an order compelling them to compensate the Plaintiff for the entire outstanding loan, punitive and exemplary damages and costs of the suit.

Plaintiff’s case

The Plaintiff argued that it exercised due diligence before advancing the facility by conducting valuations, pre- and post-registration searches and obtaining consents, all of which confirmed that the 4^th and 5^th Defendants’ were the registered proprietors of the properties. The Plaintiff argued that, under the Torren system and section 26 (1) of the Land Registration Act, it was entitled to rely on the accuracy of the land register without being required to investigate the historical roots of titles. It contended that its registered charges could not be invalidated for want of further due diligence. It further argued that having relied upon records generated by the Ministry of Lands, Housing and Urban Development and the Chief Land Registrar (the 6^th to 7^th Defendants), it should be compensated for the outstanding loan.

The Plaintiff further argued that the Chief Land Registrar, as custodian of land records, has a statutory duty to maintain accurate and reliable records and cannot shift the consequences of systemic errors to innocent users of the register. Additionally, the Plaintiff argued that section 81 of the Land Registration Act does not require proof of fraud, collusion or negligence by registry officials. It was the Plaintiff’s case that it was sufficient to demonstrate that it relied on an erroneous official record and suffered loss as a result, thereby establishing a claim for indemnity.

Defendants’ case

The 6^th to 7^th Defendants and the Attorney General (the 8^th Defendant) argued that the Chief Land Registrar neither acted negligently nor participated in the alleged fraud. The Defendants argued that fraud committed by third parties cannot be attributed to the Chief Land Registrar in the absence of evidence of collusion or negligence. They further argued that the government cannot be held liable for the Plaintiff’s commercial lending risks merely because the securities were founded upon allegedly fraudulent titles.

The Defendants also faulted the Plaintiff for inadequate due diligence, arguing that it relied principally upon official searches without sufficiently investigating the titles’ historical ownership. They maintained that there is no statutory basis requiring the Chief Land Registrar to indemnify the Plaintiff for losses arising from the borrower’s default.

Determination of the High Court

The Court held that the Plaintiff undertook all reasonable steps expected of a financial institution. The Court emphasized that the Plaintiff cannot be faulted for failing to investigate the historical root of title beyond the official land register because to do so would defeat the very purpose of the Torrens system. The Court found that the Plaintiff acted entirely upon the records maintained and issued by the 6^th to 7^th Defendants. The Plaintiff relied upon the erroneous land records to its detriment and advanced the facility and registered charges. The Court found that the Plaintiff’s loss was directly attributable to the error in the land register.

The 6^th to 8^th Defendants were therefore held liable to indemnify the Plaintiff for the outstanding facility together with default damages. The Court further ordered that the State be subrogated to the Plaintiff’s rights against the 1^st to 5^th Defendants to the extent of any payment under the judgment.

On the issue of whether the Plaintiff was entitled to punitive and exemplary damages, the Court found that no evidence had been brought before Court to prove that any of the officers of the Land Registry knowingly participated in the fraud. Furthermore, the loss suffered by the Plaintiff, while substantial, was a financial loss flowing from the inability to realize the security and was adequately addressed and compensated by the indemnity. It was therefore held that the claim for punitive and exemplary damages had not been proved to the required standard.

Conclusion

The judgment establishes that a lender who conducts reasonable due diligence and relies in good faith on official land records is entitled to indemnity from the State where those records are later found to be inaccurate or fraudulent. It confirms that lenders such as financial institutions are not ordinarily required to investigate the entire historical root of a registered title where official searches and other official land registry documents disclose no irregularity.