By Fidel Mwaki
PROPOSED PROTECTIVE MEASURES FOR LOANS AND MORTGAGE DEFAULTERS
As a result of Covid-19, the Pandemic Response and Management Bill, 2020 was introduced as a Senate Bill in April 2020 to provide a legal framework for a coordinated response and management of activities and temporary measures and relief during a pandemic.
One of the proposed measures includes temporary relief where a pandemic has a negative impact on the capacity of the public to meet its contractual obligations entered into prior to declaration of a pandemic. In respect to loans and mortgages, the measures proposed shall apply during the pandemic and for a period of two months after the pandemic ends as follows:
- the bank and the borrower shall enter into an arrangement reviewing the mode of repaying the loan or mortgage;
- the defaulter shall not be subjected to penalties for default; and
- the defaulter shall not be listed by a credit reference bureau (CRB).
The Bill will be welcome news to borrowers who are facing challenges to meet their repayments though lenders will feel short-changed as the Bill purports to impose terms that affect their right to seek remedies for breach including penalties that were agreed upon before the pandemic or listing with the CRBs. For example, in a default situation, lenders can impose automatic penalties or submit information on the defaulter to the CRB immediately the loans are marked as defaulted. Where a lender is unable to make use of such mechanisms, it can be argued by the lender that the parties’ freedom of contract is being constrained by government and legislative interventions that were not contemplated when loan was first agreed between the parties. Thus, a consequence of this Bill (should it become law) is that many borrowers who entered into loan arrangements prior to the pandemic declaration and are now defaulting or likely to do so, will almost certainly seek refuge in its provisions and seek to re-negotiate their loan repayments without risk of penalties or listing on the CRBs.
It is notable that the Bill is silent on whether lenders will be required to direct removal of borrowers already listed with CRBs prior to the pandemic or how the Bill will address provisions in the loan arrangements that create automatic defaults where there is a material change in the law or circumstances that affects the loan arrangement. Nonetheless, one should not confuse the relief package as an end to a borrower’s contractual obligations as they will be expected to continue to meet their loan repayments once the pandemic ends.
About the author:
Fidel Mwaki is a Kenyan-qualiﬁed Advocate with extensive knowledge and experience in real estate and corporate law in Kenya whose practice currently centers on real estate developments, mergers and acquisitions and commercial transactions. He represents clients developing multi-use commercial and residential real estate projects including advising on joint venture arrangements and project documents such as construction contracts, agency agreements, sale agreements and long-term leases. His corporate expertise extends to supporting clients seeking to invest capital, assets or expertise into various sectors of the Kenyan economy, liaising with regulators on approvals and registration of business transactions such as mergers and capitalizations and reorganizations and advising on Kenya law requirements. Fidel’s key honors and achievements include:
Holds a Bachelor of Laws (Hons) degree in Law and a Master of Laws degree in International Economic Law, both from the University of Warwick, UK
Member of the Law Society of Kenya and the East Africa Law Society and registered with the High Court of Kenya as a Commissioner for Oaths and a Notary Public
Recognized as a Next Generation Lawyer in banking, finance & capital markets by The Legal 500 Europe Middle East and Africa (EMEA), 2017 Edition
Recipient of the prestigious Commonwealth Professional Fellowship Award from the Commonwealth Scholarship Commission in the United Kingdom, 2014