Formal and Informal Charges in Kenya: Creation, Priority and Enforcement

A title document in a lender’s custody, a witnessed undertaking and a registered charge can all affect land. They do not, however, create the same security. The distinction becomes important when funds have been advanced, another lender is proposed or a sale is contemplated. The question is not simply whether the parties meant land to support a debt: it is what form that intention took, what the register records and what remedy the law permits.

The Land Act, 2012 recognises formal and informal charges. Both are security rather than a transfer of ownership, but they have different creation, priority and enforcement consequences. A borrower, lender, purchaser or later financier should begin with an official search and the actual security documents, rather than treating possession of a title or a promise to provide security as conclusive.

A formal charge takes effect through registration

An owner of private land or a lessee may charge the interest by an instrument in the prescribed form to secure a present, future or contingent debt, money’s worth or performance of a condition. Section 79 expressly allows second and subsequent charges, subject to statutory limits and restrictions in the instrument affecting the land.

A formal charge takes effect only when it is registered in the land register. Section 79(5) also says that the chargee is not entitled to exercise remedies under it unless it is registered. Execution therefore matters, but it is not the endpoint. A signed facility letter or a charge lodged for registration is not interchangeable with completed registered security.

The instrument and register should be read together. They should identify the charged interest, parties, secured obligation and material terms. The wider title position also matters: a restriction, earlier charge, lease condition or limitation in the proprietor’s own instrument may affect whether later security can be created or implemented. Where the property is a matrimonial home, section 79 requires the chargor and any spouse living there to execute the relevant document or form, or for it to show assent by all such persons.

Registration gives the transaction public significance and is the starting point for a later lender or buyer’s due diligence. It does not make the lender owner. Under section 80, a charge operates as security only, with the remedies and obligations provided by the Act and the security documents.

An informal charge needs the statutory evidence of intention

An informal charge is not merely an unfinished formal charge. Section 79(6) recognises two routes. First, a chargee may accept a written and witnessed undertaking from the chargor whose clear intention is to charge the land or interest in land for repayment of money or money’s worth, with the agreed interest. Secondly, the chargor may deposit a certificate of title, a lease document or another agreed document evidencing ownership or an interest in land. The Act calls the latter a lien by deposit of documents.

Clear evidence is essential. An informal assurance about a loan, or a lender’s unverified custody of papers, should not be assumed to establish the statutory arrangement. The parties need to show who gave what, the land interest concerned, the secured obligation, the intention to create security and the terms on which documents were held. A current search remains important because a deposited document does not reveal every interest or restriction recorded on the register.

The enforcement position is deliberately different. A holder of an informal charge may take possession of or sell the land only after obtaining a court order to that effect. Section 79 also restricts a chargor from possessing or selling land whose title documents have been deposited under an informal charge without a court order. Neither side should treat that wording as authority for self-help. A dispute over an alleged informal charge calls for close attention to the evidence, the register and the appropriate court process.

Priority answers who stands ahead, not whether a debt exists

Priority determines the order in which competing chargees may look to the charged interest or its proceeds. For charges generally, section 81 says that, unless the charge instrument provides otherwise, charges rank in the order in which they are registered. A lender considering a formal second charge should inspect the current register, the earlier charge and any consent, restriction or arrangement that affects the proposed security before funds are released.

Informal charges follow a separate statutory rule. They rank in the order in which they are made, except that a registered informal charge has priority over an unregistered one. If two informal charges are made or registered on the same day, the first in time to be made or registered has priority. The Act applies these rules, so far as circumstances permit, to liens by deposit of documents. Dates, execution evidence, deposit records and registration details can therefore be critical.

Priority is not always mechanically fixed by a first-versus-second label. Section 81 may postpone a prior chargee’s repayment rights where the prior chargee or chargor acted dishonestly or fraudulently in procuring the earlier charge and a subsequent chargee later lent on the security, unless the instrument provides otherwise. That is a fact-sensitive exception, not a shortcut around ordinary register and document checks.

Further advances require another layer of analysis. A first charge may contemplate later credit, but section 82 provides that a further advance does not take priority over a subsequent charge unless the further-advance provision is noted in the register or the subsequent chargee has consented in writing. The original loan amount alone may not reveal the real priority exposure.

Second and subsequent security must be planned

A proprietor may create a second or subsequent charge in the same broad way as the first. That statutory ability does not erase the terms of the first charge. An earlier lender may have contractual consent requirements, and the title may carry restrictions or conditions affecting a later transaction. The proposed lender should ask for the first charge, a recent search and written evidence of any required consent; the borrower should not promise unencumbered security where the existing documents say otherwise.

A later charge is commonly valuable only to the extent that value remains after prior claims, accrued amounts and enforcement costs. Property value is not enough. The parties need to understand the earlier-ranking security, any future-advance clause, any agreed priority arrangement and the terms on which a sale would occur. A sale by a later chargee may remain subject to prior or intermediate charges unless those interests have been discharged.

For a buyer, the distinction is a warning against relying on a seller’s possession of documents as proof that the land is free of security. Obtain a current official search, investigate entries affecting the property, and ensure any discharge or lender consent needed for completion is documented and registered as appropriate. For a borrower or lender, preserve the executed instrument, search results, authority and consent evidence, registration evidence, correspondence and payment records from the outset.

Use the right document trail before money or land changes hands

Before completing a formal charge, confirm the correct interest is being charged, the parties have authority, required consents are addressed, the instrument is properly executed and registration can be completed. Before relying on an informal charge, identify precisely which statutory route is said to apply and preserve evidence of the undertaking or document deposit. In either case, check the register at the appropriate stage rather than assuming an earlier search is still current.

When a second lender, purchaser or enforcement issue emerges, map the security interests in date order and distinguish a registered formal charge from an informal undertaking or lien by deposit. The documents can determine both whether security exists and who is entitled to be paid first. Prompt advice is sensible where priority, alleged fraud, possession of title documents or a proposed enforcement step is disputed.

Primary source: Land Act, 2012, sections 79–82.