The Supreme Court recently delivered an important judgement in the case of Harcharan Singh Sehmi & Another v Tarabana Company Ltd & Others (Petition No. E033 of 2023), clarifying the scope of the doctrine of innocent purchaser for value without notice doctrine.
Brief facts of the case
Harcharan Singh Sehmi, Harbhashan Singh Sehmi and Jaswarana Sehmi (the Original Owners) owned a parcel of land located in Ngara, Nairobi (the Property) under a long-term lease of 59 years from October 1942. This term was set to expire or be extended in October 2001. They applied for an extension of the lease 3 months before its expiry. However, the extension was never formally completed (even after the lease expired in 2001). Despite the lease’s expiry, the Original Owners claim to have remained in possession of the Property and continued paying the Property’s rent and rates. In 2009, unknown to the Original Owners, the Government re-allocated the Property to Rospatech Limited (the Second Owner), who transferred it to Tarabana Company Limited (the Third Owner) in 2014. In 2014, the Third Owner demolished the Original Owners’ structures on the Property and forcibly evicted them from the Property.
Litigation history
The Original Owners initiated legal proceedings at the Environment and Land Court (the High Court). The High Court ruled in their favour, finding that the allocation process of the Property to the Second Owner was illegal and fraudulent, therefore making any subsequent titles issued from that process invalid. Surprisingly, the High Court ordered that the Third Owner’s name be removed from the Property’s land register and that the Original Owners’ names be indicated instead as the rightful owners upon payment of the registration and other fees. This is notwithstanding that the lease to the Original Owners over the Property had expired and had not been renewed. While the Third Owner claimed to be an innocent purchaser for value without notice in its pleadings before the High Court, the High Court did not make any finding on this point. The Third Owner then appealed the High Court’s decision to the Court of Appeal (the CoA), centering the appeal on its claim that it was an innocent purchaser for value without notice of any defect in the title.
The CoA overturned the High Court’s decision. It accepted that the Property had reverted to the Government upon expiry of the lease. It also found that, despite procedural flaws in the allocation of the Property to the Second Owner, the Third Owner’s acquisition of the Property from the Second Owner was legitimate. It made this finding on the basis that no evidence was adduced before the High Court to show that the Third Owner played any role or participated in any way in that process. In its view, even though the process of allocation of title to the Second Owner was irregular, the same was before the Third Owner came into the picture. In the CoA’s view, the doctrine of innocent purchaser for value without notice extended to lack of notice of an illegality or fraud. On this basis, the CoA concluded that the Third Owner was a bona fide innocent purchaser for value without notice.
The Original Owners, wholly dissatisfied with the CoA decision, then prepared a petition of appeal and submitted a formal application to the CoA requesting certification of their appeal to the Supreme Court. The CoA certified the appeal as one involving matters of general public importance under Article 163(4)(b) of the Constitution that transcend the interest of the applicants and the dispute at hand. One of the issues that the CoA identified as requiring the Supreme Court’s final determination is the meaning, scope and extent of applicability of the doctrine of innocent purchaser for value without notice.
The meaning, scope and extent of applicability of the doctrine of innocent purchaser for value without notice
The Supreme Court held that the burden of proof that one is an innocent purchaser for value without notice lies on the person claiming it and they must prove all the following three elements:
- Innocence – that they acted in good faith. The person’s conduct should not raise any suspicion that the purchaser had any notice or knowledge as to the existence of a rival interest in the land. If it comes to light that the purchaser engaged in conduct that was unconscionable in the eyes of equity, such conduct will weaken their claim. They must also prove that they acted diligently and conducted a reasonable inquiry into the status of the land they sought to purchase.
- Purchase for value – that they actually paid consideration in money or money’s worth in return for the land. The purchaser must actually pay all the money, and the land vested in them before notice of an equitable interest over the land. Mere execution of the transfer instrument without payment of money will not avail this defence to the claimant.
- Purchase of a legal estate (and not an equitable interest) – that they purchased a legal interest without notice of an equitable interest in the land (this contrasts with the CoA’s interpretation that the lack of notice related to lack of notice of an illegality or fraud).
Court’s finding:
The Supreme Court found that some of the elements required to prove that someone was an innocent purchaser for value without notice had not been proven in this instance. The Third Owner’s claim primarily failed on two grounds:
- The Third Owner had not acquired a legal estate in the Property from the Second Owner since the Second Owner did not possess a legal interest due to the irregular nature of the allotment.
- The First Owner did not have an equitable interest over the Property that would be in competition with the legal interest claimed by the Third Owner.
Takeaway from the judgement
For a long time, people have attempted to rely on the doctrine of innocent purchaser for value without notice in cases where illegality or fraud is present. The Supreme Court has now pronounced itself clearly on the extent of this defence. Purchasers of land should therefore look beyond the seller’s title and the official search in their due diligence. They should go the extra step of ascertaining that the process by which the seller acquired their title was legitimate and go to the root of the title. This reaffirms and expands the Supreme Court’s decision in the Dina Management Case. Banks also need to re-assess how they conduct due diligence on land that has been provided as security for facilities advanced to borrowers. A mere land search will not be sufficient to qualify one as being an innocent party.
