A Bona fide Purchaser for Value Without Notice: The Demand for Extensive Due Diligence in Property Purchase

Introduction

The principle of a bona fide Purchaser for value without notice has long been the preferred defense of a purchaser who finds him/herself in ownership wrangles where there are challenges to the Certificate of Title held by him or her. Courts have variously held innocent such a purchaser, where it is demonstrated that indeed all necessary due diligence was conducted prior to the purchase and that he/she had no knowledge of any defects in the title transferred by the Seller and was not party to any fraudulent conduct involved therein.

However, to what extent can a purchaser rely on this claim? What would be some of the limitations that can be used to defeat this claim? And what would amount to sufficient due diligence for this defense to be successful?

The Supreme Court in a decision delivered on the 21^st of April 2023 in Petition No. 8 of 2021 Dinah Management Limited vs County Government of Mombasa, The Chief Land Registrar, The Land Registrar, Mombasa, The Director of Surveys, The Director Physical Planning and the Hon. Attorney General (hereinafter the “Dina Case”), carefully distinguished the extent to which a purchaser can plead this defense and set out the requirements for a comprehensive due diligence that will allow a purchaser to successfully plead this defense.

Who is a bona fide purchaser?

The Apex Court, in considering this question, adopted the definition in the Black’s Law Dictionary, 9^th Edition, which defines a bona fide purchaser as:

“One who buys something for value without notice of another’s claim to the property and without actual or constructive notice of any defects in or infirmities, claims, or equities against the seller’s title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims.”

In adopting this definition, the Supreme Court cited with approval the decision by the Court of Appeal in Samuel Kamere v Lands Registrar, Kajiado Civil Appeal No. 28 of 2005[2015] eKLR,which provided three critical points of consideration for one to be considered as a bona fide purchaser;

“….in order to be considered a bona fide purchaser for value, they must prove; that they acquired a VALID and LEGAL title, secondly, they carried out the necessary due diligence to determine the lawful owner from whom they acquired a legitimate title and thirdly, they paid valuable consideration for the purchase of the suit property….”

In defining who a bona fide purchaser for value is and establishing that one is actually a bona fide purchaser, the Court settled on three key critical elements that must be demonstrated;

1. That the Title acquired is Valid and Legal,
2. That the purchaser carried out necessary due diligence to determine the lawful owner from whom they acquired a legitimate title; and
3. They paid valuable consideration for the purchase of the suit property.

So that, where the registered proprietor’s root title is under legal challenge, it will not be enough to dangle the certificate of title as proof ownership. More has to be shown and the purchaser will be required to go beyond the instrument of ownership and prove the legality of the title and show that the acquisition was legal, formal and free from any encumbrance including interests which would not be noted in the register.

What is necessary due diligence required?

Where a bona fide purchaser for value is faced with the challenge to his/her ownership, what would amount to necessary due diligence sufficient to satisfy the Courts? The Court in the Dina Case observes that in establishing that one is a bona fide purchaser for value, requires one to go to the root of the title, right from the first allotment so as to establish the validity and legality of the instrument of ownership held by him/her. This is indeed an onerous task requiring extreme diligence prior to the purchase and transfer of the property.

Previously, various defenses have been available to property owners who find themselves in the middle of ownership disputes, including but not limited to;

1. The absolute indefensibility of the registered title;
2. Bona Fide purchaser for value without notice;
3. Doctrine of laches and indolence and the arguments under the limitation of Actions Act

Such defenses will not be enough against a claim that goes to the root of the title of ownership. The Constitution under Article 40(6) extends the protection of the right to property only to those properties that were legally acquired, and such legality goes to the process of acquisition. The doctrine of laches and indolence will not be available where the property in question is government land as Section 41 of the Limitation of Actions Act excludes the application of the Act on matters concerning government and its recovery.

Due Diligence when Dealing with Public Land

In the Dina Case, the Supreme Court re-affirms the position in law that the indefeasibility of title and the right to property are only protected where the process of acquisition is deemed to have been compliant with the existing law at the time. According to the Court, a purchaser of a property, particularly one previously classified as government land, has the onerous duty of conducting necessary due diligence as to the alienation, allotment and subsequent transfer before proceeding with the purchase.

From the Courts judgment, it can be deduced that an intended purchaser, in conducting necessary due diligence, must start by answering the question on the type of land they are intending on purchasing. The Constitution of Kenya broadly classifies land in Kenya into three broad categories of Public Land (Government Land), Community Land and Private Land. The type of land one is purchasing informs the extent of the due diligence necessary.

The land in question in the instant case was government land that had been “allotted” to a private individual and severally transferred until finding its way to the Appellant-Dina Management Limited. In determining whether or not the title held by Dina Management Limited met threshold of indefeasibility and therefore deserving of protection under Article 40 on the right to property.

The Appellant demonstrated that it had conducted the necessary due diligence by:

1. Conducting an official search of the property which confirmed the registration details;
2. Obtaining Consent to transfer from the Ministry of Lands who confirmed the validity of the title to the Appellant;
3. Obtained a beacon certificate and survey plans to determine the boundaries and extent of the property; and
4. Confirmation from the both the national government and the local government at the time that the title was valid.

The Supreme Court disagreed with the Appellant and agreed with the finding of both the Court of Appeal and the Environment and Land Court, observing that the Appellant had not conducted necessary due diligence considering the land in question. The Court affirmed the position that when dealing with government land, a purchaser needed to ascertain that the process of alienating the land was duly followed in accordance with the existing law at the time of the purchase. In summary, one must satisfy themselves as to the following;

1. Whether the land in question is alienated government land or unalienated government-unalienated government land is one which has not been leased to any person or in respect of which the Commissioner of Lands has not issued any letter of allotment or reservation. Courts have held that a reservation for a particular purpose renders the land alienated and therefore not available for allotment.
2. Where the land in question is deemed to be unalienated, whether the procedure for allocation was followed. The Court cited with approval the procedure for the allocation of unalienated land as laid out in the case of Nelson Kazungu Chai & 9 others vs Pwani University [2014] eKLR, which can be summarized as follows;
3. There must be a letter of Application addressed to the Commissioner of Lands seeking to be allocated an identified piece of government land;
4. A Part Development Plan drawn and approved by the Commissioner of Land or the Minister for Lands before any unalienated government land could be allocated; A PDP can only be prepared in respect to Government land that has not been alienated or surveyed.
5. A letter of allotment based on the approved Part Development Plan (PDP) is then issued to the allotees.
6. The letter of allotment will be accompanied with terms and conditions, which must be complied with, such as payment of the prescribed fees therein, the existence of a valuation report of the land in question etc;
7. After compliance with the terms of the letter of allotment, a cadastral survey is conducted for the purpose of issuance of a certificate of lease.

In view of the above, the Court stated that it was not enough for a party to state tat they have a lease or title to the property, where the process leading up to the production of the above title was not followed. The Court cited the case of Funzi Development ltd and others v County Council of Kwale, Mombasa Civil Appeal No. 252 of 2005, where it was stated that;

“…a registered proprietor acquires an absolute and indefeasible title if and only if the allocation was legal, proper and regular. A court of law cannot on the basis of indefeasibility of title sanction an illegality or gives its seal of approval to an illegal or irregularly obtained title.”

Conclusion

The finding by the Supreme Court in the Dinah Management case, settles with finality the position of the law with regards to the process of acquisition of properties previously classified as government land and/or reserved for certain government entities. The existence of fraud or the participation of the proprietor in any alleged fraud is immaterial to the test of alienation and allotment. Where it is demonstrated that the process, whether by design or ignorance or for whatever reason, was not followed, there can only be one outcome-a cancellation of the title-even if this comes 100 years down the line and several generations later.

By Alakonya Z.

zack@alakonyalaw.co.ke

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