Banks not allowed to sell property privately without the borrower’s consent

The continuing effect of the COVID-19 pandemic is evident in the unending downsizing of human resource and salary-cuts while a number of enterprises continue to close shop altogether. Shoprite, Game Stores, Africell all foreign owned have been some of the companies that have closed and exited the Uganda market in this COVID 19 period. Among the most affected sectors, are those in the value chain of education & the night economy, ultimately constraining the ability of those with loans to repay their creditors. Uganda has gone into two lock downs so far and schools have been closed since March 2020.

According to the Bank Lending Survey Report for the quarter ending September 2021, the Bank of Uganda projected that lending financial institutions in Uganda would experience a 56.4% default on loans to business enterprises and 90% default on loans to households over the final three months of the year. In times as these, foreclosure becomes the lenders’ only straw to clutch on.

Foreclosures are however increasingly running into innumerable road blocks, casting doubt on the extent of the lender’s right to sell the mortgaged property and recover.

It is not in dispute that the Mortgagee (lender) has a right to sell the security in case of default, of course after going through the procedure as set out in the law. The options available to the lender are always set out in the loan documents including the Mortgage Deed, the loan Agreement and other instruments. These usually provide that incase of default, the lender has a right to sell the property by private treaty or by public auction. Sale by Private Treaty would include the Mortgagee head-hunting and reaching out to specific people to purchase the property at a price which can cover the outstanding loan amount. Whereas public auction involves the property being advertised to the general public and on a specific agreed date, interested bidders bid for the property and it is consequently sold to the highest bidder.

It is upon the foregoing that the recent High Court ruling in the case of Letshego Uganda Ltd vs Felix Kulayigye (OS No.5/2020) is a ground-breaking decision for Uganda’s credit market, with serious implications for Lenders at foreclosure. The Court’s ruling emphasized that irrespective of what method of sale was agreed to in the Mortgage Agreement, the Mortgagee must always sell the mortgaged property by public auction.

Therefore, a sale would be illegal if the Mortgagee decided to follow their Mortgage Agreement and sell by private treaty. The Court noted the exception in Regulation 10 of the Mortgage Regulations which permits the Mortgagee to sell by Private Treaty if the same is consented to by the Mortgagor. The Consent must be “fresh” and given at the time of the default and prior to the sale. By implication, any clause in the Mortgage Deed which purports to stipulate a method of sale in case of default it is redundant, useless and of no legal effect.

This ruling has serious implications for both borrowers and Lenders going forward. There has been an unfortunate background of Bank staff colluding to sell off mortgaged properties at under-value, by private treaty, to themselves or “their people” that they have head-hunted. Such was the case in Macdowel Food & Beverages Ltd vs Stanbic Bank Uganda Ltd, Miscellaneous Cause No. 568 of 2020 where the Bank’s senior executive employees incorporated a company and proceeded to but the borrowers/defaulter’s property themselves; by private treaty with Stanbic Bank. While the Sale was condemned by court by awarding the victim/borrower damages of UGX 400 million, the fate of the said senior banking officials is still unknown.

On close scrutiny, the recent ruling in Letshego (U) Ltd vs Col. Felix Kulayigye can be seen as curing a mischief. The ruling attempts to highlight financial consumer protection for a borrower, to the extent that he/she can only be deemed to have consented to a sale by private treaty, if there is written consent given after the default has occurred. Also, sale by public auction ensures transparency and ensures that the best price is obtained for the property. This leaves room for the defaulter to get “a balance” and at the same time clear the loan. Whereas in sale by private treaty, the lenders are largely interested in recovering their outstanding monies and not really concerned with getting the best price for the property.

On the other hand, however, the ruling in Letshego Uganda Ltd vs Felix Kulayigye has ruffled the Banking sector and the Uganda Credit Market generally. Whereas the Uganda Bankers Association is yet to publish a formal statement on the ruling, we have had the opportunity to have an impromptu engagement with their Executive Director, Mr. Wilbrod Owor on the same. From the foregoing, the deep concerns of the Banking sector appear to be that:

  • The ruling will certainly affect existing mortgage agreements, and the general lending framework going forward.
  • To the extent that the ruling nearly outlaws the sale of mortgage property by private treaty, it only serves to constrain the loan recovery process.
  • In our part of the world where other security frameworks, like guarantees, are not sufficiently developed or available, majority of the lending on our credit market is collateral-based lending.
  • Anything that poses challenges to loan recovery at the point of foreclosure can and will complicate and affect the appetite for lending.

While these are noteworthy concerns from the Banking Sector, it should be remembered that the abovesaid Court ruling does not outlaw a mortgagor’s right to sell mortgage property in case of default. Court only clarified that whenever that right arises, the sale must always be by public auction irrespective of what the Mortgage Agreement states, except where the borrower consents to the same.



Claire Amanya Rukundo-Kakeeto

Claire is the Founder & Managing Partner of CR Amanya Advocates & Solicitors. She is a Rotarian, a UK trained lawyer, Advocate, a Commissioner of Oaths, a Notary Public, Insolvency Practitioner and a Certified Chartered Secretary with over twelve years’ experience in legal practice. Claire has previously acted as counsel and relationship manager to a number of leading multi-national companies operating and/or engaged in transactions in Africa such as Standard Chartered Bank, Barclays Bank, Lloyds TSB, African-Import Export Bank (Afrexim Bank). Not to mention regional companies like SABMiller, Tullow Oil Operations Pty, Total E& P Uganda B.V, Toyota Uganda, Helios Towers, AECOM Government Services et al.

Email: Phone: +256772484003

Frank Rovin Wadidi

Frank is a lawyer working with CR. Amanya Advocates & Solicitors. He holds a Bachelor of Laws Degree from Makerere University, Kampala, and is currently a candidate for the Postgraduate Diploma in Legal Practice of the Law Development Centre. He joined the firm in November 2021, and his work at the Firm spans across the Litigation & the Corporate & Commercial Departments.

Email: Phone: +256705444656

1 comment
    January 16, 2022 at 4:04 am

    Yo great counsel for inspiring us upcoming advocates.God bless you.

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