Banks to embrace alternate dispute resolution with defaulters

Players in real estate should consider adopting friendlier ways of hunting for debts in the wake of runaway interest rates as the shilling continues to nose-dive against the dollar. Some Monday mainstream newspapers may discourage people from investing in real estate following the acres of space auctioneers use to advertise properties that should be sold at the fall of the hammer. It would be easier if banks, which assist a section of prospective homeowners, buy houses via a mortgage to lead in adopting friendlier ways of collecting their debts.

Maryann, Nairobi

There are forms of Alternate Dispute Resolution (ADR) entrenched in the constitution that banks can embrace to maintain cordial relationships with defaulters. Article 159 (2) (c) of the constitution encourages the use of ADR (reconciliation, mediation and arbitration) in dispute resolution.

The amicable ways to deal with debtors may include mediation which could eventually lead to a significant drop in non-performing loans.

Other legal methods may include debt rescheduling, partial discharges and negotiated settlements instead of rushing to court seeking orders to foreclose and eventually auction property.

The alternative way of settling disputes not only saves time and money compared to litigation which drags following the huge case backlog in courts.

In mediation, both the lender and defaulting client will be in charge of the outcome while the mutually settled on mediator steers the process as long as parties are committed.

Currently, mortgage apathy is also attributed to legal remedies banks employ for non-payment, accrued interest and breach of written agreement also increase mortgage apathy.

For instance, the basic remedy most lenders opt for is to sue for the remainder of the debt or to foreclose - obtain a court order to stop the right to complete payment.

The bank or financial institution may also sell the house under the statutory power of sale after a court order.

The power of sale arises as soon as the legal date for repayment of the loan has elapsed. Legally, three months must elapse after notice to pay the outstanding debt, interest is in arrears of two months or over a breach of a covenant in the mortgage deed.

The lender can also take possession of the property or appoint a receiver to receive all the income from the house.

But now, commercial banks, mortgage firms and other financial institutions will no longer be on a selling spree following provisions of the Land Act (2012).

According to the new law, commercial banks are compelled to sell the property of a defaulter at the highest market value.

Before the passing of the law, there were reported cases of financial lenders auctioning property below 29 per cent of their market value.

Presently, financial lenders are therefore stopped from selling property below 75 per cent of the prevailing market price.

Legally, a valuation must be undertaken to get a valuation report or else the bank, mortgage firm or financial institution will have contravened the law.

- Harold Ayodo is an Advocate of the High Court.