Contributed By MMC Africa Law
Real estate lending requires that the borrower issues collateral for the title to be charged to the lending institutions. Commercial real estate could also be funded through REITs and, in the case of government-owned real estate, through public private partnerships (PPP).
These financing options are also possible for other categories of real estate.
A borrower acquiring or developing real estate will provide a legal charge over immovable property in favour of the lender.
There are no restrictions on granting security over real estate to foreign lenders. Similarly, there are no restrictions on repayments being made to a foreign lender under a security document.
Under the Foreign Investment Risk Review Modernization Act (FIRRMA), real estate transactions are subject to oversight by the Committee on Foreign Investment in the United States (CFIUS) if they relate to the purchase or lease by a foreign person of public or private real estate that is located in the US and is either located within an air or maritime port, or is in close proximity to a government or military installation.
FIRRMA empowers the CFIUS to prescribe regulations that define the term ‘foreign person’ and specify the criteria to limit the application of such clauses to investments made by certain categories of foreign persons, taking into consideration how a foreign person is connected to a foreign government and whether the connection may affect the national security of the US.
Kenyans seeking to invest in the US would have to fulfil the criteria to be developed by the CFIUS.
Stamp duty is payable at the rate of 0.1% of the amount being advanced for registrable securities. For unregistrable securities, the stamp duty payable is nominal.
Legal fees are payable to advocates involved, as prescribed in the advocates’ remuneration order. Registration costs are also payable to the registry.
It is necessary for a company to demonstrate commercial benefit before issuing its real estate asset as security for a loan to a third-party company, even if the third-party company is a related company. Where commercial benefit does not exist, the companies are required to enter into a commercial benefit agreement for payment of an agreed fee to the company providing the asset.
Financial assistance relating to the acquisition of real estate assets is not prohibited provided that commercial benefit can be demonstrated.
However, financial assistance in relation to the acquisition of shares in a private company is permitted. Public companies, on the other hand, are prohibited from giving financial assistance for the acquisition of their own shares except where the principal purpose of the financial assistance is not to facilitate the acquisition, or the giving of the financial assistance for that purpose is only incidental to achieving some larger purpose of the company and is given in good faith.
In relation to share acquisitions, if a person is acquiring or proposing to acquire shares in a private company, a public company that is a subsidiary of that company shall not give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place. Also, if a person is acquiring or proposing to acquire shares in a public company, neither the company nor any subsidiary of it may give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place.
Where there is a valid security and the borrower defaults in loan repayment, the lender can exercise the statutory power of sale.
Before exercising this power, the lender is required to serve the borrower with a one-month notice stating the nature of the default and what is required to be done by the borrower in order to remedy the default. This is followed by a 40-day notice of sale.
Before exercising the right of sale the lender is required to conduct a valuation of the charged property.
Once appointed, the auctioneer is required to serve the borrower with a 45-day notice within which the borrower may redeem the property by payment of the outstanding amount.
Unless otherwise provided in the charge, charges rank in the order in which they are registered.
The rule on priority of security is that the earliest security to have been registered takes precedence. Where it is necessary that the existing secured debt be subordinated to newly created debt, this may be achieved by the registration of a deed of variation in relation to the existing security coupled with an inter-lender agreement to record that understanding.
A lender holding or enforcing security over real estate has no liability if it did not cause environmental pollution, since the creation of security (such as registration of charge) does not transfer interest in the property from the owner to the lender.
Insolvency does not affect the security interests of a secured creditor. Section 590 of the Insolvency Act provides protection to secured creditors by expressly providing that an administrator should not do anything that affects the right of a secured creditor of the company to enforce the creditor’s security.
The key consequences of the expiry of LIBOR in 2021 will be as follows:
In order to manage the risk associated with expiration of LIBOR in the US, the Federal Reserve has tasked the Alternative Reference Rate Committee (ARRC) to be responsible for the transition from LIBOR to a new benchmark rate called the Broad Treasury Financing Rate (BTFR). The BTFR rate contains a broad set of US treasury market-based financing transactions.
The BTFR rate will run in parallel with LIBOR for several years in order to help determine a fair compensating credit spread between LIBOR and BTFR for those financial assets that will be affected.
Except for external debt most borrowing in Kenya is however governed by the Central Bank Rate that is published by the Central Bank of Kenya.