Thursday, February 23, 2012

Bill to tame auctioneers runs into opposition

Auctioneers cart away furniture belonging to the Kenya Railways Staff Retirement Benefits Scheme over a debt of Sh9.7 million arising from a suit filed by one of the retirees, who sued trustees of the scheme for not paying their pension on time, on February 10 this year. Photo/JARED NYATAYA

Auctioneers cart away furniture belonging to the Kenya Railways Staff Retirement Benefits Scheme over a debt of Sh9.7 million arising from a suit filed by one of the retirees, who sued trustees of the scheme for not paying their pension on time, on February 10 this year. Photo/JARED NYATAYA 

By DN2 CORRESPONDENT [email protected]

For the two decades he has been in the real estate business, Dan has found auctioneers indispensable.

The estate agency department of his expansive firm manages hundreds of middle- and high-income residential properties in various parts of Nairobi and Mombasa.

Over the years, business has generally been good, except for one thing: collecting rent has become a real headache owing to a high default rate.

He says that out of every 10 tenants, only six pay promptly — and in full.

Of the four remaining, two usually default for up to four months and the other two pay after a lot of reminders, pushing, cajoling and threats.

This puts the default rate among the tenants he deals with at 40 per cent.

“We are facing a rent payment crisis in the middle- and high-income neighbourhoods,” he says, noting that most of those who default sometimes insist they know their rights and use “flimsy reasons” not to pay rent.

And so, in any given month, Dan’s company has to hire auctioneers to recover rent arrears from one or two households renting the properties they manage. The use of auctioneers, he says, has made the situation a little bit manageable.

But a new development in Kenya’s jurisprudence is giving estate agents like Dan sleepless nights.

The Land Bill 2012, which is due for parliamentary debate, has proposed the abolition of the use of auctioneers by property owners to recover rent arrears in cases of default.

Instead, the Bill requires property owners to obtain a court order to terminate the lease agreement upon failure to pay rent by the tenant.

If the Bill passes in its current form, that will be the end of the Distress for Rent Act, Cap 293, which allows landlords to auction the possessions of tenants for compensation.

Under the Act, a landlord can seize a tenant’s possessions if the tenant is unable to pay rent. The tenant must pay within 14 days, failure to which the possessions are auctioned to compensate the landlord.

Understandably, resident associations are celebrating the planned removal of the provision, saying that the move is in accordance with the Bill of Rights as provided for in Chapter Four of Kenya’s Constitution.

Stephen Mutoro, the chief executive of Kenya Alliance of Resident Associations (Kara), says auctioneers have been trampling on the rights of “innocent” Kenyans through harassment, brutality and destroying tenants’ belongings.

“It is a very welcome move,” say Mr Mutoro. “Currently, auctioneers behave no different from thugs. That cannot be allowed to continue under the new constitution.”

The proposal is sending shockwaves in the property sector, with many arguing that it will discourage investment in rental property in the country.

Dan agrees, saying the move is punitive and would make the default rate worse.

“This thing is going to expose landlords badly. Kenyans are very poor paymasters and the moment you relax the rules, they will not pay,” he says.

Developers who normally depend on rental income to service mortgage loans would suffer even more if the Land Bill passes as it is, Dan adds.

But it is not only individuals like Dan who are voicing their concern. In a review of the Land Bill 2012 and the Land Registration Bill, the Land Development and Governance Institute (LDGI) says that the abolition of distress for rent removes a key self-help remedy available to a lessor (land owner).

It says the move may remove the imperative of paying rent and cause distress to the real estate industry countrywide, and urges that the remedy should be retained.

“Removing this remedy could act as a disincentive to investments in real estate. It (distress for rent) should… not be abolished,” says LDGI.

In the review, a copy of which has been forwarded to the Commission for the Implementation of the Constitution (CIC), the institute proposes that instead of abolishing distress for rent, the drafters of the Bill should put in place regulations that ensure methods used by auctioneers are humane.

“If you tell people that they are not allowed to recover rent in case of default, nobody is going to be interested in developing rental housing. Irresponsible tenants would want to buy time by going to court, and you know how the court process in Kenya takes forever,” says LDGI director Ibrahim Mwathane.

The Kenya Property Developers Association (KPDA) says “it has noted with concern the clause providing for abolishment of distress of rent instead requiring a lessor to obtain a court order to terminate the lease.

However, the association’s administrator, Elizabeth Maina, argues that, should that provision of the Land Bill go through, then landlord-tenant cases must be expedited.

“We would like to encourage the Judiciary to speed up the adjudication of matters so that such claims are resolved in the shortest time possible so as to ensure property owners’ rights are upheld,” she says.

According to the Institution of Surveyors of Kenya (ISK), the rental default rate for residential housing stands at 30 per cent on average.

The surveyors estimate that the rental segment of Kenya’s residential housing market, where 80 per cent of the population live in rental housing, is worth about Sh130 billion per annum.

A 30 per cent default rate, therefore, means that investors in rental housing lose up to Sh39 billion every year, assuming the arrears are never recovered.

“Abolishing the distress for rent provision would be a disaster for this country and the property sector,” says ISK chairman Collins Kowuor. “How can we be saying that we are keen on solving the biting housing shortage when at the same time we are introducing laws that discourage investment in housing? What the Land Bill proposes is even against Vision 2030.”

Mr Kowuor says that, other than creating uncertainty in the mortgage market (lenders may not give home loans to property owners who rely on rental income to service their mortgages), the long court process would increase the cost of recovering arrears both in terms of time and money.

It might also “boomerang” on tenants, he says. For example, he notes, landlords may start insisting on tenants paying rents several months in advance; they may also require large sums of money in deposits or insist on standing orders.

“If we abolish the distress for rent provision, we will be creating a situation like what is happening in informal settlements, where landlords are using unorthodox means such as hiring gangs to recover rent arrears or evict ‘stubborn’ tenants,” says Mr Kowuor.

He notes that the law allows aggrieved tenants to seek redress in a court of law.

A tenant can go to court in case of manhandling; if the auctioneer confiscates tenant’s belongings before 8 am or after 5 pm; if the auctioneer takes away “necessary items” like toothbrush/toothpaste, soap or utensils; if the notice was inadequate (the notice should be at least seven days); and if the rent has been in arrears for at least three months, according to Mr Kowuor.

To a large extent, the proposal to stop landlords and property managers from using auctioneers to recover rent arrears is thought to have been motivated by the ruthlessness — and sometimes brutality — with which auctioneers carry out their duties.

In Kenya, the mention of the word “auctioneer” conjures up a picture of a mean and heartless person who nobody ever wants to deal with.

To the majority of Kenyans, an auctioneer’s work is to sweep clean your house of all the valuables because of rent arrears less than one-tenth of the value of the goods they take away from you, not to mention the level of harassment they subject the defaulters to.

But, even with this bad image, opponents of the removal of the distress for rent provision are not backing down.

“By abolishing the Distress for Rent Act, we are not addressing the real problem. It is like prescribing medicine for symptoms, not the disease. What needs to be addressed is the behaviour of auctioneers, not abolishing the current law,” says Mr Kowuor, noting that auctioneers should be trained on how to handle people in a more humane manner.

Mr Mutoro of Kara, though insisting that the distress for rent provision should be removed, concurs that, should it be retained, auctioneers must be trained to be humane in their work.

He proposes the establishment of a regulatory authority for auctioneers to ensure they carry out their duties in a more humane manner.

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