THE DOCTRINE OF THE BONAFIDE PURCHASER FOR VALUE WITHOUT NOTICE

By

Quincy Jesse Kiptoo LL.B. (Hons), CPM, Dip in Law

and

Tabitha Ayiera LL.B., Dip in Law

“They (Thuos) did nothing wrong. They (Thuos) are merely victims of a fraudster; in fact, they are vicarious victims to the fraudster because they never saw nor dealt with him. It is the other parties (BPVWN) to the cases who were directly “victimized.” Yet, through the operation of the law, these other parties have an upper hand in retaining possession and ownership of the properties in question- Justice Professor Ngugi in David Peterson Kiengo & 2 Others -vs- Kariuki Thuo [2012] eKLR

1. The 9th Edition of the Blacks Law dictionary defines a bonafide 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.

2. A bonafide purchaser for value without notice is commonly referred to as Equity’s darling. Doctrines and Maxims of equity are a source of law in Kenya by virtue of Section 3 (1) (c) of the Judicature Act which posits thus:

The jurisdiction of the High Court, the Court of Appeal and of all subordinate courts shall be exercised in conformity with— subject thereto and so far as those written laws do not extend or apply the substance of the common law, the doctrines of equity and the statutes of general application in force in England on the 12th August, 1897, and the procedure and practice observed in courts of justice in England at that date”

3. The term bonafide purchaser for value without notice is used predominantly in the law of real property and personal property. The instant article shall primarily address the doctrine as it applies to real property

4. In the case of Katende -vs- Haridar & Company Ltd (2008) 2 E A 173 the Court of Appeal in Uganda stated what amounts to a bonafide purchaser for value without notice in real property as a person who honestly intends to purchase the property offered for sale and does not intend to acquire it wrongly.

5. The core issue that is mostly addressed in this doctrine is whether an innocent purchaser for value can acquire a good title over a parcel of land from a person who had fraudulently acquired title over the land and thereby defeat the claim by the original owner of the proposed issue.

6. The right to ownership of land is protected under Article 40 of the constitution of Kenya which grants every person the right, either individually or in association with others to acquire or own land of any description and in any part of Kenya. In verbatim Articles 40 (1 and 6) posit thus:

“Article 40 (1) Subject to Article 65, every person has the right, either individually or in association with others, to acquire and own property–
(a) of any description; and
(b) in any part of Kenya.”

“Article 40 (6) The rights under this Article do not extend to any property that has been found to have been unlawfully acquired”

7. Under our statutes, the doctrine is embodied under Section 26 of the Land Registration Act (hereinafter referred to as the LRA) which posits thus:

“The certificate of title issued by the Registrar upon registration, or to a purchaser of land upon a transfer or transmission by the proprietor shall be taken by all courts as prima facie evidence that the person named as proprietor of the land is the absolute and indefeasible owner, subject to the encumbrances, easements, restrictions and conditions contained or endorsed in the certificate, and the title of that proprietor shall not be subject to challenge, except—
(a) on the ground of fraud or misrepresentation to which the person is proved to be a party; or
(b) where the certificate of title has been acquired illegally, unprocedurally or through a corrupt scheme”

8. Section 80(1) of the Land Registration Act provides that:

“Subject to subsection (2) the court may order the rectification of the register by directing that any registration of the register be cancelled or amended if it is satisfied that any registration was obtained, made or omitted by fraud or mistake.”

“Subsection (2) states that the register shall not be rectified to affect the title of a proprietor who is in possession and had acquired the land, lease or charge for valuable consideration, unless the proprietor had knowledge of the omission, fraud or mistake in consequence of which the rectification is sought, or caused such omission, fraud or mistake or substantially contributed to it by any act, neglect or default.”

9. In Hannington Njuki -vs- William Nyanzi High Court civil suit number 434 of 1996 it was held that for a purchaser to successfully rely on the bonafide doctrine he must prove the following:
a) He holds a Certificate of title
b) He purchased the property in good faith
c) He had no knowledge of the fraud
d) The vendors had apparent valid title
e) He purchased without notice of any fraud
f) He was not party to any fraud

(A) He Holds a Certificate of Title.

10. A BPVWN must possess a valid certificate of title from the registrar of lands so as to be protected under Sections 26(2), 30(3) and 35(1) and (2) of the Land Registration Act.

11. Section 26 (2), 30 (3) and 35 (1) and (2) state as follows:

“26 (2): A certified copy of any registered instrument, signed by the Registrar and sealed with the Seal of the Registrar, shall be received in evidence in the same manner as the original

30(3): A certificate of title or certificate of lease shall be prima facie evidence of the matters shown in the certificate, and the land or lease shall be subject to all entries in the register”

35 (1): Every document purporting to be signed by a Registrar shall, in all proceedings, be presumed to have been so signed unless the contrary is proved.

35 (2): Every copy of or extract from a document certified by the Registrar to be a true copy or extract shall, in all proceedings, be received as prima facie evidence of the contents of the document.”

12. It is therefore submitted that a BPVWN should possess a valid title that fulfills the above criteria

(B) He purchased the property in good faith;

14. The 9th edition of Black’s Law Dictionary describes good faith as:

“A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty, (3) observance of reasonable commercial standards of fair dealing in a given trade or (4) absence of intent to defraud or to seek unconscionable advantage.”

15. It must be shown that the BPVWN honestly intended to purchase property offered for sale and did not intend to acquire it wrongly.

16. He must lack cognizance of any inadequacies and shortcomings in the land transfer process.

(C) He had no knowledge of the fraud;

17. The 9th edition of Black’s Law Dictionary describes knowledge as:

“An awareness or understanding of a fact or circumstance; a state of mind in which a person has no substantial doubt about the existence of a fact”

18. Fraud is further described by the Black’s Law Dictionary as:

“Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional. As applied to contracts, it is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. Fraud, in the sense of a court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another”.

19. Section 2 of the now repealed Registration of Titles Act opines that:

“Fraud” shall on the part of a person obtaining registration include a proved knowledge of the existence of an unregistered interest on the part of some other person, whose interest he knowingly and wrongfully defeats by that registration.”

20. The BPVWN must not know of any fraud on the part of the previous land owner who sold the land to him.

21. On the other hand, allegations of fraud as against BPVWN must be specifically pleaded, particularized and proved. The Court will be hesitant to delve into vague conjectures and inferences when faced with allegations of fraud.

(D) He purchased the property for valuable consideration;

22. Equity favors one who paid for value when acquiring a legal estate. The same must be proved.

(E) The vendors had apparent title;

23. The BPVWN must show to the Court that the vendor had apparent title that would not raise any suspicion as to their ownership status.

24. In conveyancing, the purchaser must undertake due diligence. The purchaser’s advocate must establish good root of title. This involves doing site visits and a search of the title so as to confirm the real owner of the land as well as check encumbrances. However, this duty of due diligence is only to a certain extent.

25. Conveyancing would be frustrated if it required a purchaser to inquire from a “valid title wielding vendor” where he bought the land from and who were the previous owners all the way back to the respective government grant.

26. Furthermore, our jurisdiction operates under the Torrens System of Registration which is based on the following principles:

The Mirror Principle- the register is intended to operate as a ‘mirror’, reflecting accurately and incontrovertibly the totality of estates and interests affecting the registered land.

The Curtain Principle- the register is/should be source of all information pertaining to the title. This principle is essentially reflective of the principle of the finality of the register.

The Insurance Principle- this principle stipulates that any case of any error/flaw in the register, anyone who has suffered loss as a consequence thereof ought to be put in the same position by way of indemnity as if the register were correct. This is reflective of the principle of indemnity. In essence the state itself guarantees the accuracy of the registered title, in the sense that an indemnity is payable from public funds if a registered proprietor is deprived of his title or is otherwise prejudiced by the operation of the registration scheme.

(F) He purchased without notice of any fraud.

27. The BPVWN must be without notice of any fraud. There are four types of notice:

Actual Notice: a purchaser will be found to have had actual notice if he knew of any rights affecting the land because he had been told of the rights or had found out for himself;

Constructive Notice: a purchaser will be found to have constructive notice if he would have been aware of the estate if he had checked for himself. Checking would include all those enquiries and inspections which he ought to have reasonably made. This includes but not limited to official searches and site inspections. A purchaser should always visit the property because he may be bound by rights that may only be discovered by physical inspection of the property or by checking whether registrable rights had been registered as against the property.

Imputed Notice: a purchaser will be found to have imputed notice if his legal agent had made investigations and unraveled an inconsistency. This will apply even if the legal agent failed to relay the same to the client.

Inquiry Notice: This is the type of notice that is also referred to as ‘smelly fish’, if it smells like fish then it probably is fish. This notice presumed to exist when a person is in command of sufficient facts as would cause a reasonable person to make further inquiries. It must be distinguished between “knowing something that would have stimulated inquiry” or “willfully abstaining from inquiry to avoid notice”.

(G) He was not a party to any fraud:

28. The BPVWN must be clean of any inequity as he who comes to equity must come with clean hands.

29. On the part of the Party alleging fraud on the BPVWN, the fraudulent conduct must be specifically pleaded, particularized and proved. Allegations of fraud are not taken lightly and the Courts have set the standard of proving fraud at “more than a mere balance of convenience”

30. It is settled law that fraudulent conduct must be distinctly alleged and distinctly proved, and it is not allowable to leave fraud to be inferred from the circumstances.

31. Absence of any fraudulent conduct on the part of a purchaser, then the legal test as to who constitutes a BPVWN is satisfied.

32. Once a party fulfills the above criteria and becomes a BPVWN, then their title is absolute and indefeasible under the Land Registration Act which embodies the doctrine of sanctity of title.

33. Essentially, Section 26(1) and 80(2) of the Land Registration Act seeks to protect a purchaser’s title to property if the purchaser was an innocent buyer for value without notice. The title to property can only be absolute and indefeasible by the purchaser if the purchaser was not aware of the fraudulent dealings of the seller and if the purchaser followed due process in obtaining the title. The due process entails conducting due diligence on the property to verify the details and particulars of the property, entering into a written sale agreement with the seller, obtaining consent to transfer, payment of stamp duty, payment of rates and other outgoings to the government of Kenya before and after the transaction amongst others.

CASE LAW

Henry Mwangi Gatai and Another –vs- Margaret Wanjiku Godwin & 2 others (2018) eKLR
Facts

34. The Plaintiffs entered into a Sale Agreement on 18th August 2011, with the Defendant for the purchase of the parcel of land situated in Karen within Nairobi County (hereinafter referred to as “the suit property”). The Defendant was to be paid Kshs 12,000,000.

35. He was paid Kshs 2,000,000 which was followed by Kshs 5,000,000. However, prior to the completion date and without terminating the Sale Agreement, the Defendant proceeded to enter into another Sale Agreement with the Interested Parties on 21st November 2011 and sold the land for Kshs. 13,000,000.

36. A dispute arose. The Defendant opted to refund the Plaintiff’s money and averred that the Defendants did not pay the balance of the purchase price. The Plaintiffs pled for specific performance based on breach of contract whereas the Interested Parties defended themselves as Bonafide Purchasers for Value Without Notice.

Holding

37. A BPVWN is 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.

38. The onus is on the person who wishes to rely on such defence to prove it, and the defence is against the claims of any prior equitable owner.

39. Snell’s Principles of Equity illustrates the issue thus:

“An important qualification to the basic rule is the doctrine of the purchaser without notice, which demonstrates a fundamental distinction between legal estates and equitable interests.” The doctrine. A legal right is enforceable against any person who takes the property, whether he has notice of it or not, except where the right is overreached or is void against him for want of registration. If A sells to C land over which B has a legal right of way, C takes the land subject to B’s right, although he was ignorant of the right. But it is different as regards equitable rights. Nothing can be clearer than that a purchaser for valuable consideration who obtains a legal estate at the time of his purchase without notice of a prior equitable right is entitled to priority in equity as well as at law.”

40. In such a case, equity follows the law, the purchaser’s conscience not being in any way affected by the equitable right. Where there is equal equity, the law prevails.”

41. It is also stated therein that “the doctrine of purchaser without notice never enabled a purchaser to take free from legal rights, as distinct from equitable interests”.

42. Judge Gacheru thereafter concluded that the interested parties were BPVWN.

David Peterson Kiengo & 2 Others -vs- Kariuki Thuo [2012] eKLR
Facts

43. Mr. Stephen (deceased) owned four parcels of land within Kajiado/Kitengela; he passed away sometime in 1999 while he was still was the legal owner of the four parcels. Three of his heirs (hereinafter the Thuos) jointly successfully applied for Letters of Administration Intestate to the estate of Stephen which were duly issued on 11/07/2001 and confirmed on 22/05/2002.

44. Sometime in 2007, a person by the name Steve Winston Njendu (“Njendu”) purportedly entered into an Agreement for Sale with Stephen for the purchase of three of the parcels of land. The Green Cards to the titles to the said parcels show that Njendu was registered as the owner and issued with a title deed on 21/10/2008 ostensibly pursuant to the Agreement for Sale. It was Njendu who later sold the Suit Properties to David Peterson Kiengo; Nkiiri Victor Michuru; and Kenakena Investments Ltd on or around 16/10/2008.

45. Sometime 11/01/2008, the self-same Njendu was similarly able to enter into a “Sale Agreement” with Stephen for the 4th Parcel of land and subsequently had a transfer effected and a title deed issued in his name. The Green Card to this last parcel of land show as much. The Green Cards show that the “transfers” were made between Njendu and Stephen and not by way of transmission as should have happened if the transfers were done by heirs to the estate of Stephen.

46. Armed with the bona fide titles issued by the Lands Registry, Njendu entered into subsequent agreements for sale of the properties with David Peterson Kiengo; Nkiiri Victor Michuru; and Kenakena Investments Ltd on the one hand; and Fountain on the other. Njendu subsequently vanished into thin air and could not be traced even after due report to the Police and Criminal Investigations Department.

47. A dispute arose between the heirs and the would be current owners of the land who bought from Njendu.

48. The court in this case allowed the Application for injunctive orders by the individuals (BPVWN) who had bought the parcels of land from Njendu (fraudster) and dismissed the Application by the Thuos (Actual Owners) for similar reliefs.
49. Justice Professor Ngugi rendered himself thus;

“…They (Thuos) did nothing wrong. They (Thuos) are merely victims of a fraudster; in fact, they are vicarious victims to the fraudster because they never saw nor dealt with him. It is the other parties (BPVWN) to the cases who were directly “victimized.” Yet, through the operation of the law, these other parties have an upper hand in retaining possession and ownership of the properties in question. For me, it is not enough that I say that the “law made me do it.” I believe that the results here are in keeping with the overall policy objectives of the Land Registration Act, whose stability, I also believe, maximizes the welfare of the polity. That does not make the result here any easier for the Thuos. The only saving grace is that they have a course of action against the State for recovery of damages.”

Lawrence P. Mukiri Mungai, Attorney of Francis Muroki Mwaura –Vs- Attorney General & 4 Others [2017] eKLR
Facts

50. The Appellant is a holder of a lawful power of Attorney. It was donated to him by one, Mwaura, who purchased the suit property from Varsity Villa Limited in 1992 and was issued with a Title Deed over the same. After sometime, Mwaura emigrated to the United States of America and appointed the appellant to look after his affairs in Kenya.

51. In the course of conducting a search on an adjacent plot, the appellant realized that both his plot No.11 and the appellant’s No. 13 (the suit property) had been transferred to some other people. The search showed that the suit property had been registered in the name of the 2nd respondent which prompted the appellant to enquire from Mwaura whether he had sold the suit property to anyone.

52. The 3rd respondent came by an advertisement in the Daily nation sometime in 2005 putting the suit property for sale. He contacted the advertiser- the 2nd Respondent whom they met and was given a copy of the title deed. The 3rd respondent applied for an official search, which confirmed the 2nd respondent as the registered owner of the suit land and subsequently purchased the suit property, with his two daughters, the 4th and 5th respondents, from the 2nd respondent at a price of Kshs. 850,000/=.

53. Consent to purchase the same was granted by the Thika Land Control Board, documents were lodged for registration, the suit property was registered in the names of the 3rd, 4th, & 5th Respondents and a Title Deed issued. Upon evaluating the evidence on record, the learned trial judge held that the 3rd, 4th and 5th respondents’ title over the suit property was valid, notwithstanding the fact that the 2nd respondent who sold and transferred title to the suit property to them had acquired suit property fraudulently, precipitating the present appeal.

Holding

54. In allowing the appeal, the court of Appeal Considered the following:

That the 3rd respondent, who was the only defence witness, did not enter into a written sale agreement with the 2nd respondent, who he did not know until they met sometime after the 3rd respondent read the advertisement in the local newspaper regarding sale of the suit property.

That the 3rd respondent interacted with the 2nd respondent about 4 times, but he never bothered to get the 2nd respondent’s identity card.

That his advocate witnessed the oral sale agreement; and that he did not make any effort to contact the 2nd respondent after commencement of the suit.

That the 3rd respondent did not produce any receipt to prove that he paid any stamp duty for the transfer.

That the 3rd respondent did not have a copy of the transfer that was allegedly signed by the 2nd respondent in respect of the suit property.

55. From the totality of the circumstances surrounding the acquisition of the said title, the Honourable Court opined that the 3rd Respondent was deprived of the protection accorded to a BPVWN.

56. The Court held thus;

“… the conduct of the 3rd respondent in deliberately failing to enter into a written sale agreement with the 2nd respondent; failing to pay stamp duty for the transfer (if any); and failing to keep a copy of the transfer, if at all, raises more questions than answers and portrays him quite negligent in his business transactions. In our view, he cannot be described as a bona fide purchaser for value. The trial court should therefore have ordered rectification of the register.”

57. The Court of Appeal in overturning the trial court’s decision rested its finding on the conduct of the 3rd Respondent who flouted the basic requirements of transactions in disposition of land. In our case, the observance of the vitiating factors, props our contention that our client fits the description of a BPVWN.

Shimoni Resort -vs- Registrar of Titles & 5 others [2016] eKLR

Facts

58. The petitioner moved the Court to challenge the decision of the Registrar of titles of cancelling its title over a land parcel. Apparently, the land was owned by the ruler of the State of Kuwait. It was alleged that the land was fraudulently transferred to an entity known as Koibarak Trading Company Limited then to Miniscule Investments Limited and finally to the Petitioner, Shimoni Resort.

59. It was contended by the Respondents and Interested Parties that since the transfers were fraudulent the petitioner lacked good title. They therefore unilaterally cancelled the title thereby leading to the current case.

Holding:

60. The Torrens System of Registration system lays emphasis on the accuracy of the land register which must mirror all currently active registrable interests that affect a particular parcel of land. Government as the keeper of the master record of all land and their owners guarantees indefeasibility of all rights and interests shown in the land register against the entire world and in case of loss arising from an error in registration the person affected is guaranteed of government compensation. This statutory presumption of indefeasibility and conclusiveness of title under the Torrens System can be rebutted only by proof of fraud or misrepresentation which the buyer is himself involved.

61. A defrauder who had acquired title fraudulently could pass a good title to a bonafide purchaser.

62. The judge recited the decision in Peterson Kiengo and 2 others –vs- Kariuki Thuo (supra) wherein it was held that: Practically, the principle of indefeasibility has two implications for the instant case. It means that if the parties who acquired interests to the properties from Njendu can demonstrate that they did so in good faith, without notice and did not participate in Njendu’s fraud, their titles will be secure and guaranteed by the state. They were not obligated to do anything more than search the official register to establish ownership. If, as it turned out, the register was inaccurate the reason of malfeasance by land officials, the second implication is that the parties deprived of their property by such inaccuracy or malfeasance may bring an action against the state for recovery of damages but not for possession or ownership of the property.

63. It has been suggested and Hon. Justice Majanja appears to have taken this view in the case of Isaac Gathungu Wanjohi & Another –vs- AG & 6 Others eKLR that Article 40 (6) which provides that, “The rights under this article do not extend to any property that has been found to have been unlawfully acquired” has watered down the doctrine of sanctity of title such that as any title that is found to have been procured unlawfully is not protected notwithstanding when the fraud was committed and by whoever.

64. Literally interpreted this constitutional provision would appear to suggest even the title of a bona fide purchaser for value without any notice of fraud would not be protected if a predecessor of the title is found to have acquired the property unlawfully and/or fraudulently.

65. For my part, I would fault such interpretation as it would mean the same constitution that protects the fundamental rights of all persons would be infringing the rights of the bonafide purchaser. The Constitution should be interpreted under Article 259 of the Constitution in a manner that best promotes the object of the Constitution.

66. In the case of Fletcher v Peck 10 U.S 87 (1810) it was stated that; whereas an intending purchaser of a property ordinarily is expected to carry out due diligence, it cannot be expected that the scope of such due diligence would extend beyond what the Law provides as being sufficient e.g. official searches and inspection of survey records unless there is on the face of it apparent need to carry out further investigations.

67. On the flipside, Section 26 provides that if it can be proven that the title was procured irregularly by fraud misrepresentation or mistake then the same can be impeached. In the case of Eunice Grace Njambi Kamau & Another v The Hon. Attorney General and 5 others ELC suit No. 976 of 2012 where the court cited the decision of Tunei JA in Vijay Morjaria v Nansingh Madhusingh Darbar & Another (2000) Eklr ‘it is well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading.

68. The acts alleged to be fraudulent must of course be set out, and it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and distinctly proved and it is not allowable to leave fraud to be inferred from the facts.

69. Section 80 gives the courts powers to order for rectification of a register by directing that any registration be cancelled or amended if it is satisfied that any registration was obtained, made or omitted by fraud or mistake.

70. The party deprived of the land by a fraudster is not left without a remedy. In David Peterson Kiengo & Others v Kariuki Thuo [2012] eKLR, Justice Professor J. N. Ngugi stated that:

“The ultimate task of law, says Critical Legal Philospher and theorist Professor Louis Wolcher, is to apportion human suffering. When lawyers and judges forget this, Prof. Wolcher warns us that, that merely obscures and masks the infliction or toleration of human suffering which the law legitimizes.”

71. In the final analysis, as Justice Professor J. N. Ngugi in David Peterson Kiengo & Others v Kariuki Thuo [2012] eKLR found, thereby stating that:

“Yet, I must return where I began. This is not an elegant solution. It is a hard result for the Thuos. They did nothing wrong. They are merely victims of a fraudster; in fact, they are vicarious victims to the fraudster because they never saw nor dealt with him. It is the other parties to the cases who were directly “victimized.” Yet, through the operation of the law, these other parties have an upper hand in retaining possession and ownership of the properties in question. For me, it is not enough that I say that the “law made me do it.” I believe that the results here are in keeping with the overall policy objectives of the Land Registration Act, whose stability, I also believe, maximizes the welfare of the polity. That does not make the result here any easier for the Thuos. The only saving grace is that they have a course of action against the State for recovery of damages if, eventually, the final resolution of this case mirrors that of the two Applications under consideration.”

72. This Article began by exploring the doctrine of BPVWN as it applies to land in Kenya. It has analyzed the law in extenso. This included but was not limited to the position in equity of the bonafide purchaser, the rights of the bonafide purchaser under our statutes, the rights of the victims who are deprived of land by a fraudster who sells to a bonafide purchaser and in conclusion, their respective remedies.

Notable Cases to be briefed:
Patricia Mary Clark -vs- Godfrey Ngatia Njoroge & 3 others [2019] eKLR