Service of statutory and redemption notices to persons who were not administrators of a deceaseds chargors estate but later on appointed as administrators is not proper service

Brief facts

The deceased had charged the suit property to the 3^rd respondent, Standard Chartered Bank (the bank), as security for financial facility advanced to the 4^th respondent who defaulted in the repayment. The deceased died on July 27, 2009 and on December 29, 2009, the bank issued a demand letter to the 4^th respondent for payment of the outstanding amount. The 4^th respondent did not make any payment. Consequently, on July 22, 2010 the bank issued statutory notices of intended sale of the suit property to 1^st and 2^nd respondents, who are beneficiaries of the deceaseds estate. By that time, no grant had been issued to the 1^st and 2^nd respondents. 

The 1^st and 2^nd respondents were issued with a grant of letters of administration on August 2, 2011. The bank instructed an auctioneer to sell the suit property, the auctioneer served the 1^st and 2^nd respondent with a 45 days redemption notice on May 6, 2011, and on September 14, 2011 the auctioneer sold the suit property and declared the appellant the highest bidder for the suit property. Subsequently the appellant paid the full purchase price, a certificate of sale was issued to it, a transfer registered, and title issued in its favour. Aggrieved the 1^st and 2^nd respondents filed a suit in the trial court, in their capacity as administrators of the estate of the deceased seeking an order for cancellation of the sale of the suit property to the appellant, as well as general damages. 

The 1^st and 2^nd respondents did not dispute that the deceased executed a charge and further charge in favour of the bank. They however disputed the deceaseds sanctioning of the banks conversion of the said instruments into overdraft facilities in favour of the 4^th respondent. They further claimed that it was as a result of the 4^th respondents failure to pay the sums arising from the overdraft facilities that the bank set in motion the process to realize its security in the suit property. The trial court ruled in favour of the 1^st and 2^nd respondents and cancelled the appellants title. The appellant being aggrieved by the judgment filed the instant appeal.

Issues

1. Whether service of a statutory notice and a redemption notice upon a person who was not an administrator of a deceaseds estate but later on appointed as an administrator was proper service. 
2. What was required of a bank, as a chargee, so as to exercise its statutory power of sale as related to a deceased chargors property where letters of administration had not been issued.
3. What were the guiding principles with regard to the obligation of a mortgagee in the exercise of the statutory power of sale? 
4. Whether a deceaseds right of redemption become extinct upon the death of the deceased? 
5. What was the impact of wrongful exercise of a banks statutory power of sale on the purchase of property by an innocent purchaser for value without notice? 
6. What were the guiding principles on role of a court when confronted with a claim of fraud in the process of exercising the statutory power of sale of a bank? 
7. What was the standard of proof required to prove fraud? 
8. What were the elements for qualification of a party as a bona fide purchaser? 
9. Whether one was an innocent purchaser for value without notice where the title to the property had its roots in a banks flawed process in the exercise of its statutory power of sale. 
10. Whether a deceaseds property which was charged to a bank was free property to be inherited by the beneficiaries of the deceaseds estate. 
11. What were the elements of unjust enrichment? 
12. Under what circumstance could a court consider issues not contained in pleadings?

Held

 Per RN Nambuye, JA

1. There was no specific pleading that the appellant was a bona fide purchaser of the suit property for value without notice of any defect either in the title or the process that led to its acquisition of title to the suit property through sale by public auction. Both parties and the court were bound by the pleadings proffered by the parties as basis for seeking a courts intervention in any civil litigation. The only exception arose where there was sufficient demonstration on the record that parties by their conduct at the trial raised the issue(s) and left them to the trial court to determine. 

2. There was sufficient demonstration on the record that parties by their conduct invited the trial court to interrogate and express itself on the issue as to whether the appellant was an innocent bona fide purchaser of the suit property for value without any notice of any defect either in the title or the process under which it acquired title to the suit property, even in the absence of any specific pleading in the appellants defence to that effect. 

3. When a registered proprietors root of title was under challenge, it was not sufficient to dangle the instrument of title as proof of ownership. It was that instrument of title that was in challenge and the registered proprietor had to go beyond the instrument and prove the legality of how he acquired the title and show that the acquisition was legal, formal and free from any encumbrances including any and all interests which needed not be noted on the register. 

4. The contracts executed by the bank, the deceased and the 4^th respondent forming the substratum of the appeal were subject to sections 65, 69, 72, 74 and 77(3) and (4) of the repealed Registered Land Act, Cap 300, Laws of Kenya (RLA). Cumulatively, they anchored the chargors right of redemption and the banks right to realize the security in the event of any default on the part of the chargor to repay the indebtedness to the bank as chargee. 

5. The guiding principles with regard to the obligation of a mortgagee in the exercise of a statutory power of sale could be summarized as follows:  

1. a mortgagee had a duty to act in good faith;
2. have regard to the interests of the mortgagor;
3. obtain the best price for the property realized to pay off the debt for the benefit of both the mortgagor and the mortgagee;
4. ensure that its power of sale was not exercised fraudulently; and
5. ensure that the mortgagors right of redemption was only lost pursuant to a valid sale.

In sum, the mortgagee had a duty to ensure that the exercise of the statutory power of sale was not tainted by some kind of impropriety. 

6. Compliance with the prerequisites with regard to service of the notice on to the chargor was mandatory and noncompliance with that prerequisite rendered the entire process undertaken by the chargee to realize the security invalid. The bank did not move to exercise its statutory power of sale during the lifetime of the deceased. That was why documents informing the process were served on the estate of the deceased, represented by the 1^st and 2^nd respondents before they were appointed administrators of the estate of the deceased on August 2, 2011. 

7. Pursuant to section 74(3) and (4) of the RLA which the bank exercised its statutory power of sale, there was nothing therein to suggest that the bank was not obligated to comply with the provisions of the Law of Succession Act, Cap 160, Laws of Kenya (LSA) in circumstances where the exercise of that power was undertaken after the death of the chargor. 

8. By free property as defined in the LSA was meant the property of which the deceased person was legally and competent to freely dispose of the same during his/her lifetime and in respect of which his/her interest had not been terminated by his/her death. The deceaseds right of redemption did not become extinct upon the death of the deceased. It devolved to the personal representatives. It is the reason the LSA did not donate power to the estate of a deceased person to deal with property forming that deceased persons estate, and instead donated that power to an administrator with a will or a personal representative to the intestate estate of a deceased person to deal with a deceased persons property after the death of such a deceased person. 

9. Section 45(1) of the LSA was explicit that dealings with a deceased persons property was only permissible to the extent provided for by the provisions of that Act. Among them was provision that only persons holding a grant of representation to a deceased persons estate had mandate to transact any business with regard to such property and to the extent provided for in section 82 of the LSA on powers donated to a personal representative. 

10. There was nothing in the guiding principles on invocation and application of both the doctrine of estoppel and waiver to suggest that they overrode clear provisions of law. It therefore did not matter that the 1^st and 2^nd respondents held themselves out to the bank as duly authorized administrators with mandate to act on behalf of the estate of the deceased when they were not. That conduct on their part could not be sanctioned to oust the operation of clear provisions of law with a view to sanitizing the flawed process vitiated by the trial court.

11. Elements/ingredients for qualification of a party as a bona fide purchaser were, namely, proof that the claimant; 

1. held a certificate of title;
2. purchased the property in good faith;
3. had no knowledge of the fraud;
4. the vendors had apparent valid title;
5. purchased without notice of any fraud; and
6. he was not party to any fraud.

12. The guiding principles on role of the court when confronted with an appeal of the instant nature were: 

1. No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing the obligations alleged to arise out of a contract or transaction which was illegal, if the illegality was duly brought to the notice of the court.
2. Where an act was a nullity it was void and every proceeding founded on it was also in law a nullity.
3. Every act premised on a nullity could not accrue legitimacy or legality.
4. Sanctity of title was never intended or understood to be a vehicle for fraud and illegalities or an avenue for unjust enrichment at another persons expense.
5. A court of law could not protect title to land which had been obtained illegally or fraudulently merely because a person was entered in the register as proprietor.

13. Proof of fraud was slightly higher than a balance of probabilities but slightly lower than proof beyond reasonable doubt. No fraud was attributed to the appellant by the 1^st and 2^nd respondents in their plaint hence its assertion that the fraud attributed to the bank and the 4^th respondent should not have been applied by the trial court to vitiate its title to the suit property. On proof of fraud, the fraud attributed to the bank and the 4^th respondent were proved to the required threshold. 

14. Illegalities and irregularities were proved to the required threshold based on the fact that the bank well knowing that in law it could only invoke its statutory power of sale upon service of a demand and notification of sale on a chargor, purported to comply with that prerequisite by purporting to serve the processes on the estate of the deceased a process not provided for in law either under the RLA or LSA as none was pointed out to the court by the bank. Want of compliance with the LSA provisions by the bank in the exercise of its statutory power of sale rendered the entire process an illegality and therefore null and void. Once an act was null and void, it amounted to nothing. No right could be founded on it. 

15. Since the appellants title had its roots in the banks flawed process in the exercise of its statutory power of sale on the basis of which the appellant got title to the suit property, the title was tainted with fraud, nullity, irregularly and illegality. The appellants plea of an innocent purchaser for value without notice to either title or the process resulting in it being vested with title to the suit property was unsanctionable. 

16. The 1^st and 2^nd respondents instructed an advocate to demand the proceeds on their behalf, the record was silent as to whether the balance of the proceeds was ever paid out to the 1^st and 2^nd respondents and if so, how much and when the same was paid out. The plea of unfair and unjust enrichment levelled against the 1^st and 2^nd respondents by the appellants was not founded on the facts on the record. 

Per H Okwengu, JA (concurring)

17. The banks statutory power of sale having been exercised on September 14, 2011, the provisions of the Land Act (No 6 of 2012) that applied to the exercise of statutory power of sale having come into effect on May 2, 2012 after the impugned sale, could not act retrospectively. Therefore, the law applicable as at September 14, 2011 was the RLA.

18. Section 74 of the RLA gave a chargee remedies which included the right to sell the charged property. However, before that right could be exercised, the chargee was required to serve a notice on the chargor in writing, requiring him/her to pay the money owed or perform the agreement. That notice had to be served at least three months before the sale, and the sale could only take place if no payment was made. Section 77 of RLA gave the chargee the power to sell the charged property at a public auction through a licensed auctioneer, after the service of appropriate notices. 

19. Copies of the petition for letters of administration that were on record showed that the 1^st and 2^nd respondents had filed the petition for letters of administration for the estate of the deceased on May 31, 2010. As at May 6, 2011 when they were served by the auctioneer, they had not obtained any grant as the grant was issued to them on August 2, 2011. The purported service of the statutory notice and the redemption notice upon the 1^st and 2^nd respondents on July 22, 2010 and May 6, 2011 respectively, was thus not proper service on the estate of the deceased, as the 1^st and 2^nd respondents had no authority to deal with the estate of the deceased before August 2, 2011 when they were issued with a grant. 

20. The 1^st and 2^nd respondents as administrators of the estate of the deceased, did not act in their own capacity nor did they represent their own interest alone. They acted on behalf of all the beneficiaries of the estate and what they did in their personal capacity had to be distinguished from what they did in their capacity as administrators. 

21. The issue of unjust enrichment was not pleaded nor canvassed in the trial court, nor was it raised in the defence of the bank or the 4^th respondent or the appellant. The bank did not plead nor adduce any evidence that it paid the balance of the purchase price after offsetting the debt, to the 1^st and 2^nd respondents, nor was there any evidence regarding the amount of surplus after the debt was paid, and to whom payment was made or any acknowledgment for such payment. Hence, the court rejected the allegations of unjust enrichment on the part of the 1^st and 2^nd respondents. 

22. Any estoppel or waiver that arose from the conduct of the 1^st and 2^nd respondents in engaging with the bank before they were issued with the grant, was limited to the interests of the two in the estate, and not the interest of all the beneficiaries. 

23. A plain reading of section 82 of LSA showed that it referred to powers of the personal representative of the deceaseds estate to sell the deceaseds property, and that power was only available to the personal representative after the confirmation of the grant. That limitation did not apply in a forced sale by a chargee exercising a statutory power of sale in regard to property charged by the deceased before death. The chargee only had to comply with the provisions of the law in regard to the exercise of the statutory power of sale. 

24. As regards section 66 of the LSA, as a chargee, the bank was not an ordinary creditor but occupied a privileged position as it had priority over the suit property that the deceased had charged to it. However, that privileged position did not deny the deceased or the deceaseds estate the right to pay off the debt and redeem the suit property. Section 3 of the LSA defined free property in relation to a deceased person to mean the property of which that person was legally competent freely to dispose during his lifetime and in respect of which his interest had not been terminated by his death. 

25. Having charged the suit property to the bank, the deceased was competent to dispose it during her lifetime subject to the banks consent, or her paying off the debt. Although her right of disposal was encumbered by the charge, her death did not automatically terminate her interest in the suit property. The property remained part of her estate subject to the debt. It was therefore free property that could be inherited by the beneficiaries of the estate of the deceased subject to the encumbrance. 

26. As chargee, the bank had the option under section 66 of LSA to apply for letters of administration for the estate of the deceased to enable it exercise its statutory power of sale. Nevertheless, in light of the banks interest in the suit property, and the rights of the deceaseds beneficiaries, the bank could only exercise that option by applying to have a person or persons entitled to a grant of letters of administration for the estate of the deceased chargor appointed as such by the court. That would have enabled the bank to serve the estate of the deceased with the necessary notices through the appointed administrators, to give an opportunity for the estate to pay the debt failing which the bank would be able to pursue its statutory right of sale, the administrators stepping into the shoes of the deceased chargor. The bank did not follow that avenue and the estate of the deceased was not given an opportunity to redeem the suit property before the sale. To that extent the banks statutory power of sale had not accrued. 

27. Fraud had to be specifically pleaded and particulars of the fraud alleged had to be stated on the face of the pleadings. The acts alleged to be fraudulent had to be set out, and then it should be stated that those acts were done fraudulently. Fraudulent conduct had to be distinctly alleged and as distinctly proved, and it was not allowable to leave fraud to be inferred from the facts. 

28. The deceased did not sign the overdraft facility documents and therefore, did not consent to the charge and further charge being converted to an overdraft banking facility. That showed that the variation was done contrary to section 71 of the RLA. It also provided clear evidence of the fraud perpetrated upon the deceased by the bank and the 4^th respondent. Thus, the 1^st and 2^nd respondents established the particulars they pleaded and thereby discharged the burden of proving the fraud that they alleged against the bank and the 4^th respondent. 

29. The fraud rendered void the purported exercise of the banks statutory power of sale. The bank could not therefore purport to exercise its statutory power of sale in regard to the original charge and further charge as the same was no longer available to it. Nor could the bank anchor its statutory power of sale on the subsequent overdraft facility as the deceased was not party to it, nor was the overdraft facility secured by the title to the suit property. 

30. The banks statutory power of sale did not arise as there was no evidence of any default arising from the original charge or further charge signed by the deceased, and the purported exercise of the power of sale was also irregular as no statutory notice was served on the deceaseds estate. The purported exercise of the statutory power of sale by the bank was void and the bank was liable to the deceaseds estate in selling the suit property. 

31. Although the valuation of the suit property was purported to have been done in October 2010, there was no specific reference to the valuation before the sale of the suit property. The bid of Kshs 15,300,000 by the appellant was reasonable, given the valuation by the consultants. The court rejected the allegation of sale at an undervalue as the auction sale, being a forced sale, the highest bid was dependent on the response to the auction, and therefore not predictable. 

32. The appellant having paid the full purchase price, the suit property was transferred to it, and a title issued in its name. There was no evidence that the appellant was complicit in or had any knowledge of any fraudulent dealings involving the sale of the suit property or irregularities concerning the exercise of the statutory power of sale by the bank. The appellant was therefore an innocent purchaser for value without notice. 

33. The power of the court to order cancellation of a transaction that had been procured by fraud or mistake was circumscribed by section 143 of RLA. A plain reading of section 143 revealed that the court could only order cancellation of registration of a title where fraud was established in the case of a proprietor who was in possession and acquired the property for valuable consideration, where it was established that the proprietor was either complicit in the fraud or had knowledge of the fraud, and was therefore not a bona fide purchaser for value without notice. In addition, section 77(3) of the RLA provided that once the sale was registered, a person who was aggrieved by an irregular exercise of a chargors statutory power of sale was only entitled to damages against the person exercising the power. 

34. There was a distinction between an auction sale which was rendered irregular during the sale and a sale which was void because the statutory power of sale either had not accrued or was vitiated by fraud. While an innocent purchaser in an irregular sale could be saved by section 77(3) of the RLA, that section could not help an innocent purchaser in the case of a void sale, particularly in a situation such as the instant case where the bank was complicit in the fraud and had unlawfully sold the suit property. 

35. Despite the court having the obligation to protect an innocent purchaser for value at an auction sale, bank financing was critical to the economy of Kenya and fraudulent realization of security by a large bank such as the 3^rd respondent, could not be allowed to take root by the court protecting an innocent purchaser who was the ultimate beneficiary in such a transaction. It would be inimical to justice and public interest to allow a situation where a bank conspired to deliberately sell property belonging to a dead person, when the property was not charged as security for the outstanding debt, and the deceaseds estate had not even been served with any statutory notice. 

36. Unlike the Land Act, where by virtue of section 99(3), an innocent purchaser for value, was protected even where the charged property was sold when there had been no default by the chargor, or when no statutory notice had been served on the chargor, or the sale was in some way, unnecessary, improper or irregular, the RLA did not have a similar provision. Section 77(3) of RLA did not provide a blanket protection but only protected in the case of an irregular auction sale, not a sale that was void and illegal. The sale of the suit property to the appellant was void and the appellants remedy lay in damages against the bank and not the estate of the deceased.