OVERVIEW OF MORTGAGE TRANSACTION IN NIGERIA
ALL YOU NEED TO KNOW ABOUT MORTGAGE TRANSACTION IN NIGERIA
PROPERTY LAW TRANSACTION
OVERVIEW OF MORTGAGE TRANSACTION IN NIGERIA
This is the transfer of interest in land as security for the repayment of loan or performance of an obligation with a proviso for Cessar upon redemption.The property transferred is called security, collateral or mortgage property. It is pertinent to mention that not all forms of borrowing are mortgages because once there is not a transfer of interest in property as a form of security, there is no mortgage.
· There are five key points used to describe mortgages
ü Existence of an Obligation. Otherwise it will be a gift upon transfer of an interest in property
ü The transfer must arise from the agreement of the party. This could be by conduct but never by Operation of Law.
ü Proviso for cesser upon redemption.
ü Transfer of interest in the security to the mortgagee.
ü The purpose of transfer of the security for such an obligation must be to secure specifically the performance of the obligations
ü SEE SUBERU V AISL LTD, OLOWU V MILLER BROTHERS
MEANING OF MORTGAGE
Conveyance of land or assignment of chattel as a security for the repayment of a debt or discharge of other obligation for which it is given, with a proviso for redemption on repayment of the loan or discharge of such other obligation.
A mortgage is the transfer of legal or equitable interest in land or other property as security for the repayment of a debt or the discharge of some other obligation for which it was given, with a proviso for Cessar on redemption. That is, upon the repayment of the loan or the performance of the obligation, the conveyance becomes void and the interest is reconveyed.. See OLOWU v. MILLER BROS.; BON LTD v. AKINTOYE (1999) 12 NWLR (pt. 392) 403
The following are the key words in a definition of a mortgage:
• Property used as security – the property here include both movable and immovable properties and it include the following (they can be regarded as security(s)
· Insurance securities
· Stock and shares
· Charge over fixed deposit account (cash collateral
· Trust receipts
· Bill of sale
· Letter of set-off
· Trust deed
· Equity of redemption
· Any other property
However, it is pertinent to note that the best security is LAND and it is preferable for use as security. The reasons why land is the best security are:
· Landed properties are more stable and reliable
· The value of land always appreciates, especially in times of inflation
· Land is immovable, so it is easier to investigate and conduct physical inspection on it
· It is easier to enforce a security on land.
· It is easy to perpetuate fraud with moveable property. Shares can depreciate.
In determining the kind of security or collateral to demand, the mortgagee usually considers the following factors:
Ø The amount of the loan;
Ø The nature of the facility being sought
Ø The duration of the loan
• The integrity and financial strength of the borrower.
• Performance of an obligation – the obligation need not be repayment of loan.
• With a proviso for cesser upon redemption – this is a major distinguishing factor of mortgage as the person using the property has the right of getting the property back upon fulfillment of the obligations. Hence, once a mortgage always a mortgage and nothing but a mortgage. See YARO V. AREWA CONSTRUCTIONS LTD. Where a provision in a mortgage contract removes the right to redeem the property, then by virtue of the above principle, the PROVISION is void.
TERMS USED IN MORTGAGE
· MORTGAGORS-THE BORROWER
· MORTGAGEE-THE LENDER
· LOAN AGREEMENT(DOCUMENT PREPARED AT THE CONTRACT STAGE OF A MORTGAGE WHILE A DEED OF LEGAL MORTGAGE IS THE FINAL DOCUMENT TO BE PREPARED AT THE COMPLETION STAGE)
· LEGAL MORTGAGE
· MORTGAGE PROPERTY
DISTINGUISHING MORTGAGE FROM OTHER TRANSACTION
MORTGAGE AND LIEN: The main distinguishing factors between mortgage and lien are:
• A mortgage is the transfer of interest in land as security for the repayment of a debt or the performance of some other obligation, with a proviso for cesser on redemption. While a lien is the right to retain possession of a property of another until a debt is repaid. . See AFROTECH TECHNICAL SERVICES LTD. V. MIA & SONS LTD (2001) ALL FWLR (pt. 35) 643
• A lien does not give the creditor the right to sell or otherwise deal with the debtor’s property; while a mortgage gives the mortgagee the power to sell the mortgaged property after fulfilling certain conditions
• A lien is a means of coercing a debtor to pay the money advanced to him, rather than as security against payment not being made; while in mortgage, the property is conveyed as security for the repayment of the debt
• In a mortgage, legal or equitable title is transferred with a proviso for cesser on redemption; but in a lien, no title is transferred.
• A lien could arise as a statutory right without any prior agreement between the creditor and the debtor; while a mortgage always arises out of a prior agreement between the mortgagor and the mortgagee
Ø LIEN ARISES BY OPERATION OF LAW, WHILE A MORTGAGE ARISES OUT OF THE AGREEMENT OF THE PARTIES.
MORTGAGE AND SALE:
• Both involve the transfer of interest. However in mortgage, there is a proviso for cesser upon redemption, such that the property will be conveyed back to the mortgagor upon the repayment of the debt; while in a sale or assignment, the vendor/assignor divests himself of and transfers the entire unexpired residue of his interest with no remainder in him. Hence, in a mortgage, the mortgagor is still the owner of the mortgaged property and the mortgagee is the custodian of the property; while in a sale, the purchaser/assignee becomes the owner of the property.
• In a sale, the parties are described as vendor and purchaser (assignor and assignee); while in a mortgage, they are described as mortgagor and mortgagee
MORTGAGE AND CHARGE:
Charge has all the feature of a mortgage UNLESS TRANSFER OF INTEREST.
• In a mortgage, the parties are described as mortgagor and mortgagee; while in a charge, the parties are called Chargor and Chargee
• In a mortgage, interest in the property is conveyed by the mortgagor to the mortgagee; while in a Charge, no interest whatsoever is transferred by the chargor to the chargee. Rather, there is some encumbrance in the property which serves as security for the money advanced by him.
A charge operates like a mortgage. However, in charge, neither possession nor ownership nor any interest whatsoever is transferred to the Chargee. The Chargor retains all the interests, but creates an encumbrance over his title in favour of the Chargee. The Chargee only has an encumbrance.
MORTGAGE AND PLEDGE:
· Like mortgage it arises out of agreement of the parties
· Both are a form of security. However mortgage does not require possession to be in existence at the time of the transaction
• In a pledge, the parties are described as Pledgor and Pledgee; while in a mortgage, the parties are described as mortgagor and mortgagee.
• A pledge is usually created under the incidences of customary law; while a mortgage is created under the authority of Statutes.
• In pledge, there is no legal due date for redemption as a pledge is perpetually redeemable. That is, even after 100 years, upon repayment of the debt, a Pledgor has the right to redeem; while in a mortgage, there is usually a legal due date for redemption and at its expiration, the mortgagee can sell the property to realize the money advanced, after fulfilling certain conditions.
Ø A pledge is a possessory security, while a mortgage is a proprietary security. This is because by a pledge, actual and physical possession is transferred; while by a mortgage, title is transferred. That is, the pledgor retains general title, but transfers possession to the Pledgee until the debt is satisfied. While in mortgage, the mortgagor may retain possession, but transfers title to the mortgagee until the debt is repaid. See ADETONA v. ZENITH BANK (2011) 18 NWLR (pt. 1279) 629
TERMS USED IN MORTGAGE
For the purpose of property law practice, mortgage deals with borrowing of money (loan) and property is used as security for repayment of the loan. The terms used are:
· Mortgagor (borrower) / Mortgagee (lender)
· MORTGAGEE’S SOLICITOR PREPARES THE MORTGAGE DEED
· Guarantor (surety) – this involves using another person’s property as security for repayment of the loan. X borrows/obtain loan from ABC Bank and Y use his property as security for the repayment of the loan, X is the mortgagor while Y is surety/guarantor.
Where a guarantor is involved, then it will be said to be a THIRD PARTY LEGAL MORTGAGE.
APPLICABLE LAWS IN MORTGAGE TRANSACTION IN NIGERIA
NB: CAPITAL GAINS TAX ACT DOES NOT APPLY TO MORTGAGES
The Capital Gains Tax Act is not applicable as there is no gain in mortgage transactions. Therefore, by section 7(4) of the CGTA mortgages are expressly excluded from disposal of assets and so does not attract the payment of CGT.
For the purposes of mortgages, Nigeria is divided into three (3) jurisdictions, namely:
• CA jurisdiction: states of the old northern and eastern region of nigeria
• PCL jurisdiction: states of the old western and Midwestern region(i.e Edo, Delta)
• MPL jurisdiction: the whole of Lagos
The applicable law in mortgage transactions in Nigeria are:
• Land Use Act
• Property and Conveyancing Law
• Mortgage and Property Law LAGOS 2010
• Conveyancing Act
• Mortgage Institutions Act
• Companies and allied Matters Act
• Land Instrument Registration Law
• Case law
• Principles of Equity.
• Stamp Duties Act
• Illiterates Protection Law
• Land Registration Law 2015.
• Evidence Act
• Legal Practitioners’ Act
• Rules of Professional Conduct
• Case Law: e.g. Savannah Bank v. Ajilo
• Personal Income Tax Act
• Companies Income Tax Act
• Statute of Frauds
• 1999 CFRN (as amended)
MORTGAGE INSTITUTIONS IN NIGERIA
The following are the mortgage institutions in Nigeria:
· Federal Mortgage Bank of Nigerian (FMBN): This is the apex mortgage institution in Nigeria and it is the most preferred mortgage institution because:
· It gives long-term credit facilities, that is, it gives long term loans
· The interest rate of the bank is low. It is as low as 6% unlike commercial banks.
· It gives large sums of money as it can give as much as 67%
· It has a wide coverage as it has branches spread all over the country and this ensures easy of accessibility.
0. Housing Corporation: there is the Federal Housing Authority under the FHA Act and State Property Development Corporation, called in Lagos, Lagos State Development & Property Corporation (LSDPC), Investment and Property Ltd (Kogi) or Housing Corporation in other states.
1. Government and Employers Housing Schemes: this is mortgage arrangement between employer and employee. The employee is given a property to be paid for over certain period of years from deduction from his salary. The contract is only between the employer and employee and should the employee dies, before discharging the loan, the children are not under obligation to pay.
2. Commercial Banks: the disadvantages of using commercial banks are:
• They give short-term loans; and
• They lend at very high interest rates.
3. Private Property Developers
4. Mortgage Banks such as Aso Savings and Loans Plc; Union Homes Savings and Loans Plc
5. Life Endowment policy(Insurance Companies)
6. Lagos State Mortgage Board.
The validity of a mortgage is dependent on
· The capacity of the mortgagor and mortgagee
· The title of the mortgagor
· The proper documentation and execution
· Stamping and registration
· Requisite Governor’s consent
FORMS OF MORTGAGE TRANSACTIONS
A mortgage could take several forms including:
• Where the mortgagor borrows money for any other purpose and uses his property as security for the loan
• Where the mortgagor borrows money to build or buy a house which will also be used to secure the loan.
The contract subject to mortgage applies basically to the second analysis.
CONTRACT SUBJECT TO MORTGAGE (CLAUSE)
It is a sale of land agreement but it is subject to a successful mortgage transaction. An advantage is that it secures the deposit paid to the vendor. The sale of land transaction is dependent on the mortgage transaction.
Where the purchaser does not have the entire purchase price, it is possible that parties can enter into a contract of sale of land subject to a mortgage that is in expectation of some loan and the property to be purchased will be used as security for the loan to be obtained. In such a case, a clause called the “contract subject to mortgage clause” should be inserted into the contract of sale of land to make the contract of sale conditional on the purchaser obtaining the loan. The clause should also provide that in the event that the mortgage fails and the loan is not obtained, the contract of sale shall become void and the vendor shall return the deposit paid by the purchaser. The contents of a valid contract subject to mortgage clause are as follows:
v It must state the source of the loan;
v It must state the amount of the loan;
v It must state the terms and manner of repayment of the loan; and
v It must state the interest payable on the loan.
SAMPLE DRAFT OF CONTRACT SUBJECT TO MORTGAGE CLAUSE:
“This contract of sale is conditional on the purchaser obtaining a mortgage loan from First Bank of Nigeria Plc. in the sum of #150, 000, 000 (One Hundred and Fifty Million Naira Only) to be repaid through equal monthly installments over a period of 2years with interest at the rate of 21% per annum on the security of the property,
PROVIDED that where the loan is not obtained on completion, this contract of sale shall become void and the purchaser shall be entitled to a return of the deposit paid.”
It must be noted that in a contract subject to mortgage, the vendor guarantees the loan facility by permitting his property to be used as security, so it is always done with the consent and concurrence of the vendor.
STAGES IN A MORTGAGE TRANSACTION
Ø Negotiation of the loan(payment of money instalmentally or lump sum)
Ø Preliminary investigation of the Mortgagor’s/Owner’s title
Ø Search Report by the mortgagee’s solicitor.
Ø Valuation of proposed mortgage property(Estate expert, estate valuer,quantity Surveyor)
Ø Contract( preparation of the loan agreement)
Ø Documentation, that is the preparation of thedeed of legal mortgage by the Mortgagee’s solicitor (final document will depend on the location of the property and the mode of creation)
Ø Execution of the deed by the parties
Ø Perfection of the title (note that in Lagos. The procedure for perfection is involves two stages on account of MPL and Lands’ Registry. Where a company is involved, it would be three stages on account of MPL, Lands’ Registry and CAMA
INVESTIGATION OF TITLE AND SEARCH REPORT IN NIGERIA
The steps of investigating title are the same as in the contract of sale of land. A mortgagee must address two major issues in investigation namely:
1) The title of the borrower/owner of the mortgage property. (to ascertain genuineness and encumbrances)
2) The value of the property. A property or estate valuer can be appointed to value the property. A valuation report may be prepared.
3) Where a company is borrowing, the search should also ascertain whether
v The company is a legal person duly incorporated.
v The following matters should be inspected at CAC:
ü Date of incorporation
ü BORROWING POWERS OF THE COMPANY STIPULATED IN THE AOA OF THE COMPANY
ü PARTICULARS OF THE DIRECTOR.
ü To ascertain whether any charge has been created over the asset of the company.
v the company is permitted by its MEMART to borrow and the extent and limits of such borrowing powers of the company.
Where a company is involved, CAC should be visited for search.
At the end of investigation, a search report will be drafted which should contain the following:
1) LETTER HEADED PAPER
2) ADDRESS OF ADDRESSEE
3) DATE OF THE LETTER
4) HEADING OF THE LETTER
5) INTRODUCTORY STATEMENT
6) DATE OF SEARCH
7) PLACE OF SEARCH
Ø NAME OF REGISTERED OWNER
Ø NATURE OF INTEREST
8) PARTICULARS OF THE PROPERTY
9) ENCUMBERANCES, IF ANY
11) SIGNATURE OF THE LEGAL PRACTITIONER
12) NAME OF THE LEGAL PRACTITIONER
NOTE, THE ONES IN BOLD ARE THE MAIN CONTENTS OF A SEARCH REPORT
A DRAFT OF SEARCH REPORT ON A PROPOSED MORTGAGE TRANSACTION
DOCUMENTS REQUIRED FOR PERFECTION OF A MORTGAGE IN NIGERIA
· Duly completed Application form for Governor’s consent – FORM 1C
· 5 copies of duly executed mortgage deed (Deed of Legal Mortgage)
· CTC of original title documents example certificate of occupancy.
· A copy of valuation report of the property
· 3 years tax clearance certificate of mortgagor (and surety or guarantor, if any)
· Evidence of payment of Outgoings such as current ground rent on the property to be mortgaged, land use charge, consent fee, inspection fee and other charges imposed on the property.
· Evidence of Payment of charting, endorsement and consent fees
· Any other documents as required by the mortgagee
· Survey plan, if land(SUBMISSION IN LAGOS IS MANDATORY)
· Building plan if the property is developed.
Where the mortgagor is a company, the following additional documents are required:
· A certified true copy of the memorandum and articles of association of the company (CTC of MEMART)
· A copy of the resolution of the Board of Directors authorizing the mortgage and the loan
· A certified true copy of the incorporation certificate of the company (CTC of Cert. of Incorporation
· Tax clearance certificate of at least two directors of the company
· Updated annual returns
THE ROLE OF THE SOLICITOR/LAWYER IN A MORTGAGE TRANSACTION IN NIGERIA
· Negotiation of the loan agreement
· Investigation of title
· Preparation of search report
· Drafting the mortgage deed and other necessary documents
· Perfecting the mortgage
· Discharge of the mortgage
Negotiation, investigation, preparation, drafting, perfecting, and discharge.
PARTICULARS OF INSTRUCTION NEEDED TO DRAFT A MORTGAGE DEED IN NIGERIA
1. Particulars of the parties, that is, mortgagor and mortgagee
2. Particulars of the amount advanced as loan by the mortgagee to the mortgagor
3. Particulars of the property to be used as security for the loan
4. Particulars of legal due date and the mode and manner of repayment of the loan
5. Particulars of the interest payable.
6. Particulars of the covenants to be reserved in the mortgage
7. Particulars of the witnesses to the mortgage
8. The remedies available to either party upon default by the other party
CREATION OF MORTGAGE
There are two types of mortgage
· Legal mortgage - involves the transfer of legal interest, usually by Deed
· Equitable mortgage - transfer of equitable interest
Legal Mortgage: there are three property law jurisdiction under which legal mortgage can be created. These practice law jurisdiction provides for different modes of creating legal mortgage.
· Conveyancing Act states
· Property and Conveyancing Law states
· LAND REGISTRATION LAW 2015 AND Mortgage and Property Law of Lagos state.
Thus the location of the property determines the mode of creation and the laws applicable
The Conveyancing Act states: under the Conveyancing Act states, there are three modes of creating legal mortgage namely:
· Statutory charge/Mortgage
o By ASSIGNMENT of the unexpired residue of the mortgagor’s interest in the property with a proviso for cesser upon redemption. By this mode, the entire unexpired residue of mortgagor is transferred to mortgagee with a proviso that upon repayment of the loan, the property is reconveyed back to the mortgagor. Upon assignment, the mortgagor only has an equity of redemption in the property.
The advantages of this method are:
· The mortgagee collects and retains the original title documents of the mortgagor.
· The mortgagee is vested with the entire interest in the property, subject to the proviso for cesser upon redemption
· There is no privity of contract.
· The mortgagee can enforce the beneficial covenants in the Head lease. This is because there is privity of estate as restrictive covenants run with the land. Thus the restrictive covenants bind the mortgagee(bank) and there are beneficial covenants to the mortgagee.
· The mortgagor has no reversionary interest in the property and so the mortgagee can easily sell and transfer the whole of mortgagors title to a purchaser.
· One important point which operates as an advantage to the mortgagor, but a disadvantage to the mortgagee is that there is privity of estate between the mortgagee and the overlord (Governor) based on the rule in TULK v. MOXHAY. Thus, the mortgagee, not the mortgagor is liable to pay all rates, taxes and outgoings on the mortgaged property and he is bound by restrictive covenants. However, by way of an advantage to the Mortgagee, he can enforce the beneficial covenants in the head lease.
The disadvantages of this method are:
· Mortgagee is bound by covenants in the head lease.
· There is no reversionary interest unless the Equity of redemption.
· It is limited to parts of the country that apply the Conveyancing Act.
· Mortgagor cannot create successive legal mortgage.
SUB-DEMISE transfer of the unexpired residue less at least one day with a proviso for cesser upon redemption. The interest transferred here by the mortgagor is a term of years absolute with the reversionary interest still in the mortgagor.
The advantages of this method are:
· There is UNIFORMITY in the use of sub-demise as it is used both in CA, MPL and PCL states.
· The mortgagor has reversionary interest
· There is no privity of contract or estate between the mortgagee and the head lessor (Governor). Thus restrictive covenants are not binding on the mortgagee.
· As a General Rule, in a Sub-demise the Mortgagor can create successive legal mortgages on the property. However, A legal mortgage by sub demise in a Conveyancing Act State cannot be used to create a successive legal mortgage because
· 1 1the Doctrine of Interesse Termini is still applicable in the CA states.
The disadvantages of this method are:
· Where the mortgagee successfully exercises the power of sale, he will be liable to render account to the mortgagor.
· Mortgagee not entitled to retain title documents
· Mortgagees not entitled to benefits of the covenants in the head lease as there is no privity of estate.
· A legal mortgage by sub demise in a Conveyancing Act State cannot be used to create a successive legal mortgage because the Doctrine of Interesse Termini is still applicable in the CA states.
· In CA States, the mortgagee cannot sell the mortgage property in the event of a default because the reversionary interest is still in the mortgagor which is higher interest unless the mortgage goes to court to sell the property. That is, Sub-demise under Conveyancing Act suffers from the problem of inability of the mortgagee to sell the reversionary interest of the mortgagor based on the principle of (nemodat quod non habet). However, this problem can be overcome by partiesinserting any of the remedial devices or clauses in the sub-demise deed at the creation of the mortgage. They are either:
- A trust declaration
- A Power of Attorney
(note that in PCL and MPL states mortgage by sub-demise does not require remedial devices as it is automatically implied by section 112 of PCL). Simply put, if the mortgagor defaults in repayment of the loan at the legal due date, the reversionary interest inures in the mortgagee after the legal due date without going to Court.
The power of attorney clause: the insertion of the power of attorney clause empowers the mortgagee to sell the property on behalf of the mortgagor. Thus, with the irrevocable power of attorney, the mortgagee can sell the property as an ATTORNEY. However, the attorney will account to the mortgagor and pocket the money owed and expenses incurred during the sale. IHEKWOABA V A.C.B LTD.
AN IRREVOCABLE POWER OF ATTORNEY IS HEREBY CREATED BY MR UDEMEZUE IN FAVOUR OF ACB BANK PLC TO DO ALL AND EXERCISE THE POWERS THAT I CAN LAWFULLY DO.
Trust declaration: by this clause, the mortgagor is turned into a trustee for the mortgagee and the mortgagee is given the power to remove the mortgagor as trustee and appoint anyone, including itself as trustee. The clause can also provide for the transfer of the property to the beneficiary (mortgagee). In the event the trust is revoked, the interest in the property is transferred to the bank as beneficiary and the bank can sell as a beneficiary.
· PLEASE NOTE
· EITHER OF THESE CLAUSES ARE INSERTED BY THE MORTGAGEE’S SOLICITOR AT THE TIME OF CREATION OF THE LEGAL MORTGAGE.
MR UDEMEZUE IS APPOINTED AS A TRUSTEE IN RESPECT OF THE PROPERTY IN FAVOUR OF ABC BANK LTD.
With the insertion of either a trust declaration or power of attorney (irrevocable) in the mortgage deed created by sub-demise in Conveyancing Act states, the problem of inability to sell reversionary interest by the mortgagee would have been cured. That is, these remedial devices are used to circumvent the limitations of creating a legal mortgage by sub-demise in Conveyancing Act states. This limitation is created by the fact that the mortgagor has a reversionary interest in the mortgage property and so, the mortgagee cannot sell the property because he does not have the entire interest in the property. To avoid this limitation, the remedial devices are used and inserted in the deed to give the mortgagee the power to sell without RECOURSE TO COURT
9. STATUTORY CHARGE: this mode of creation of legal mortgage is provided for under section 26(1) of the Conveyancing Act and it is hardly ever used. IT IS DISCHARGED BY WAY OF A STATUTORY RECEIPT. It's disadvantage is that since the receipt is not registrable as an instrument, the mortgage may continue to reflect in the land registry and the property deemed encumbered..
THE PROPERTY AND CONVEYANCING LAW STATES (PCL STATES): there are three modes of creating legal mortgage under the Property and Conveyancing Law 1959. These are:
· Sub-demise (see section 108(1) & 109(1) of PCL)
· Charge by deed expressed to be by way of legal mortgage (also see section 109(1) of PCL)
· Statutory charge.
1. SUB-DEMISE (see section 108(1) & 109(1) of PCL) for a term of years absolute less at least one day with a proviso for cesser on redemption. Note the following
· Mortgagor has reversionary interest
· There is no privity of contract and estate between the mortgagee and the Governor/head lessor
· There is UNIFORMITY as it is also used in Conveyancing Act States and MPL state
· Contrary to the position in Conveyancing Act states, under the PCL, the problem of mortgagee’s inability to sell the whole interest in the property, when such right is exercisable, on account of the mortgagor reversionary interest has been solved by section 112 of PCL. The section is to the effect that if the mortgagor defaults in his obligation (to repay the loan), the reversionary interest would merge with the leasehold interest of the mortgagee and mortgagee (bank/lender) can validly sell the entire interest of the mortgagor including his reversionary interest. THUS, under the PCL states, a mortgage created by sub-demise no longer requires THE REMEDIAL DEVICES of trust declaration and power of attorney pursuant to section 112 of PCL.
· Under the PCL states, unlike in CA states, section 163 of PCL expressly abolishes the Common law doctrine of Interrese Termini, therefore a successive legal mortgage can be created where the mortgage was created by way of sub-demise.
However, with regards to the creation of such successive legal mortgages, section 109 (2)(b) of PCL provides that in a successive legal mortgage, the term to be taken by the second or subsequent mortgagee shall be one day longer than the term vested in the first or other mortgagee whose security ranks immediately before that of the second or subsequent mortgagee. Thus, the first mortgage should expire before the second mortgage
NB: successive legal mortgage simply means one mortgagor using the same property to create different mortgages with different mortgagees
Several legal mortgages is using different properties to create different mortgages, but with the same mortgagee. That is, the same parties. This is usually done where the mortgage was created by Charge by Deed expressed to be by way of legal mortgages.
Upstamping is when the same property, the same parties (same mortgagor and mortgagee) and all that is required is just an increase of the loan facility from the initial facility granted to a higher facility
0. A CHARGE BY DEED EXPRESSED TO BE BY WAY OF LEGAL MORTGAGE (see section 109(1) of PCL). Although it confers no interest on the legal mortgagee, this Charge confers on the mortgagee all the powers and privileges of a legal mortgagee. See section 110 (1) of PCL
· It is simple to create and understand See SAMUEL v. JAWAH
· No transfer of interest in land, therefore convenient for business efficacy.
· It is easily discharged as it is discharged by a Statutory Receipt and no deed of discharge needs to be executed. However, note that the discharge of a mortgage by a statutory receipt is not advisable as it has its own problems. This is because the statutory receipt (receipt of payment) is not a registrable instrument and so, it is not registered. Thus at the Lands’ registry, the mortgage will continue to reflect as an undischarged encumbrance on the property, notwithstanding that the mortgage has actually been discharged. Therefore, the mortgagor will have the onerous task of having to explain the fact of the discharge of the mortgage to all persons dealing with him in relation to the property as the fact of the discharge is not discoverable through a mere search or investigation.
· It can be used to create a mortgage over mixed properties. This is applicable where the mortgagor does not have one property which can effectively serve as security for the loan facility, but he has some other properties ( 2 or 3 others) which if put together would be sufficient to serve as security, then he can use this method to create a legal mortgage over the mixed properties. Note that the creation of a legal mortgage over mixed properties can only be done through this method. If it is an assignment or sub demise, separate documents must be used for each of the properties.
· Although it confers no interest on the legal mortgagee, this Charge confers on the mortgagee all the powers and privileges of a legal mortgagee, and so the mortgagee can enforce the mortgage. See section 110(1) of PCL
· It does not pass any interest to the mortgagee and so cannot amount to a breach of the covenant against assignment or subletting against the mortgagor. Thus, where the mortgagor is a sub-lessee under a sublease with a covenant against assignment and subletting, he can create a mortgage through this method and it will not amount to a breach of the covenant since no interest is passed to the mortgagee.
· Can be used to circumvent restrictive covenants in the headlease.
· There is no proviso for cessar upon redemption since no interest is conveyed in the first place.
· Statutory charge not registrable.
· In the event of a default by the mortgagor, the mortgagee cannot sell the mortgaged property without recourse to the courts unless the remedial devices are inserted.
3. STATUTORY CHARGE: this mode is not very common under the PCL states in creating legal mortgage. Note that is also discharged by a Statutory Receipt.
MORTGAGEAND PROPERTY LAW OF LAGOS STATE (LAGOS ONLY)
Note section 68 of the MPL repeals the Conveyancing Act in Lagos. MPL is APPLICABLE to the whole Lagos.
For the purposes of creating mortgages, the law divides property (land or landed property) into Right of Occupancy and Leasehold interest and provides modes for creation of mortgages for each in section 15 and 16 respectively of MPL. However, they are similar and for practical purposes and for Bar part II, the methods of creating Legal mortgages in Lagos DEPENDING ON THE INTEREST OF THE MORTGAGOR, pursuant to section 15 & 16 of MPL and (LRL) are:
14) Demise for a term of years absolute.
15) Sub-demise for a term of years absolute less one day
16) Charge by deed expressed to be by way of legal mortgage
17) Charge by deed expressed to be by way of statutory mortgage
See sections 15 & 16 of MPL.
Advantages of legal mortgages
· They are easier to enforce. As a general rule, upon default of payment at the legal due date the mortgagee can enforce his power of sale WITHOUT RECOURSE TO COURT.
· They enjoy priority over equitable mortgagesas there is need for registration/perfection. Thus the subsequent legal mortgagee will take priority over the equitable mortgagee where the legal mortgagee is a bona fide purchaser for value without notice.
· They are protected and not easily susceptible to fraud. As the original title documents of the property are in possession of the legal mortgagee.
· In the event of a default, the mortgagee can exercise his power of sale without recourse to the court as long as the power has arisen and become exercisable.
Disadvantages of legal mortgages
· It is usually difficult to create and perfect
· It is not properly suited for short term loans.
· It is also not properly suited for small loans. That is, where the amount loaned is relatively small.
NOTE THAT THE EXTENT OF STEPS TO BE TAKEN FOR PURPOSES OF PERFECTION OF LEGAL MORTGAGE IS DEPENDENT ON WHERE THE PROPERTY IS LOCATED.
THE GENERAL PROCEDURAL STEPS OF GOVERNOR’S CONSENT,STAMPING AND REGISTRATION APPLIES THROUGHOUT NIGERIA.
HOWEVER WHEREA CORPORATE BODY IS A MORTGAGOR UNDER SECTION 197 CAMA THERE IS A MANDATORY STEP FOR PERFECTION. EVERY CHARGE OR MORTGAGE CREATED BY A CORPORATE BODY MUST BE REGISTERED WITH CAC WITHIN 90 DAYS OF THE CREATION OF THE MORTGAGE. FAILURE TO REGISTER THE MORTGAGE WITH CAC WILL RENDER THE MORTGAGE VOID IN FAVOUR OF THE CREDITORS ANDDEBENTURE HOLDERS.
An equitable mortgage is one that confers only an equitable interest on the mortgagee. The creation of equitable mortgage is uniform in Nigeria both under CA and PCL states, except in Lagos which has additional modes of creating equitable mortgages.. Thus, in CA and PCL states, they are created in the following five ways:
· Deposit of title documents with a clear intention to create legal mortgage, accompanied by a memorandum of deposit in writing, whether by deed or not, to that effect. There are two legal consequences of the deposit of title deeds as security for a loan:
· There is an implied agreement by the mortgagor to execute a legal mortgage in favour of the mortgagee
· It amounts to part performance. As Held in B.O.N V AKINTOYE
· An imperfect or inchoate legal mortgage is an equitable mortgage. For instance, where a deed of legal mortgage was not perfected (CSR: consent, stamping, registration) so long as the title deeds have been deposited.
· Where mortgagors interest in property is equitable. Example a beneficiary’s right under a trust. (A subsequent mortgage after a legal mortgage in CA States). This is based on the principle of Nemo dat quod non habet.
· By mere equitable charge of the mortgagors property.
· Agreement to create a legal mortgage. See rule in Walsh v. Lonsdale.
NB: AN EQUITABLE MORTGAGEE CANNOT EXERCISE THE POWER OF SALE WITHOUT AN ORDER OF A COURT. For an equitable mortgagee to be able to exercise power of sale over the mortgage property without recourse to court order, the following conditions must be satisfied:
18) The equitable mortgage must be by deed
19) The equitable mortgage must contain any of the remedial devices; and
20) There must be no contrary intention in the mortgage deed. A contrary intention could be the provision of another remedy in the mortgage deed such as an increased interest rate as penalty or other remedy which will show that the parties did not intend a sale.
In the absence of these conditions, an equitable mortgagee cannot sell the mortgage property without an order of court.
PURSUANT TO SECTION 18(1) OF MPL OF LAGOS, THE METHODS OF CREATING AN EQUITABLE MORTGAGE IN LAGOS ARE:
· Assignment of an equitable interest with a proviso for cesser on redemption
· Deposit of title deeds accompanied by an agreement to create a legal mortgage
· Charge of an equitable interest accompanied by an agreement to create a legal mortgage. That is equitable charge.
See section 18 MPL. Note that this does not expressly exclude the other methods of creating an equitable mortgage such as:
Ø An imperfect or inchoate legal mortgage
Ø Where the mortgagors interest in the property is equitable.
Ø Where there is an agreement to create a legal mortgage.
It is pertinent to note that in respect of the last two modes of creation, a mortgagee has the right to approach the courts within 30 days to request the mortgagor by using an ORIGINATING SUMMONS to execute a legal mortgage in his favour. SECTION 18(2)MPL 2010.
Advantages of equitable mortgages
· Suitable for small loans
· Suitable for short term loans
· It is cheaper and easier to create
· It encourages uniformity in the CA and PCL states.
· Equitable mortgage is not affected by the covenants in the head lease
· Successive legal mortgages are possible.
· Governors consent is not mandatory.
· The mortgagee is not entitled to the title documents
· The mortgagee is not entitled to benefit from the beneficial covenants in the head lease
· It is difficult to exercise the power of sale except with recourse to court unless remedial devices are inserted in the deed creating it.
· Unless there is any of the remedial devices inserted in the deed, the mortgagee has difficulty in transferring legal interest in favour of another party.
· Easier to perpetuate fraud
· Mortgagees interest is not secure as it is subject to a higher interest.
· Legal mortgages have priority over equitable mortgages.
CREATION OF SUCCESSIVE LEGAL MORTGAGES (SUCCESSIVE LEGAL MORTGAGES)
The general rule is that where there is an equitable mortgage, a subsequent legal mortgage can be created (conversion) and where there is legal mortgage, a subsequent equitable mortgage can be created over the equity of redemption.
Successive creation of legal mortgages involves same mortgagor, same property, but different mortgagees. That is, successive legal mortgages is where one mortgagor uses the same property to create different mortgages with different mortgagees.
In the CA states, successive legal mortgages cannot be created over the same property. This is because of the common law doctrine of Interessi Termini which is to the effect that once a legal mortgage has been created, all interest in that property terminates. (NemoDat Quod Non Habet). At best, all that can be created is an equitable mortgage over the mortgagor’s equity of redemption.
In the PCL states and the MPL state (Lagos), successive legal mortgages can be created over the same property. This is because section 163 of PCL abolished the doctrine of interessi termini. Under section 109(2)(b) of PCL, the conditions for the creation of a successive legal mortgage are:
· The first legal mortgage must have been by sub-demise
· The term to be taken by a second or subsequent mortgagee shall be one day longer than the term vested in the first or other mortgagee. Such that the first mortgage will expire before the second mortgage. See section 109(2)(b) of PCL
NB: successive legal mortgage simply means one mortgagor using the same property to create different mortgages with different mortgagees.
Several legal mortgages is one mortgagor using different properties to create different mortgages, but with the same mortgagee. That is, the same parties. This is usually done where the mortgage was created by Charge by Deed expressed to be by way of legal mortgages.Several legal mortgages usually results in CONSOLIDATION so long as there is a covenant to that effect.
Up-stamping is when the same property, the same parties (same mortgagor and mortgagee) and all that is required is just an increase of the loan facility from the initial facility granted to a higher facility. Another difference between successive legal mortgages and up-stamping is that while up-stamping is applicable through-out the country, successive legal mortgages only apply in the Lagos and the States using the PCL as its applicability to the states to old northern and eastern region has been precluded by the common law doctrine of Interrese Termini.
CONTENTS OF A SEARCH REPORT
Date of search report
Name and address of client/mortgagee
Date of search
Place(s) of search
Name of borrower
Name of registered owner of proposed mortgage property
Particulars of mortgage property
Nature of interest
Signature and name of legal practitioner.
Up-stamping entails making an application for, and payment of, additional stamp duties adValorem, to accommodate the value of an increased loan over the same property, without creating a second mortgage. It entails getting additional loan from the mortgagee while using the property used for the first loan as security. In this like, in the new mortgage created, the document will be taken to the stamp duties office for up-stamping. There are conditions which must be fulfilled
· The parties must be the same
· The mortgage property must be the same
· The value of the property must cover both the first and subsequent loans.
· There must be no contrary intention in the deed creating the initial mortgage.
See OWONIBOYS TECHNICAL SERVICES LTD V. UBN LTD (2003) 7 SCNJ 177
Because the previous mortgage agreement is only being up-stamped and additional stamp duties will be paid to the commissioner of stamp duties. The consent of the Governor is not needed. See OWONIBOYS TECHNICAL SERVICES Ltd v. UBN Ltd (2003) 7 SCNJ 177. Also there is no need to execute another Deed. It does not require fresh registration.
Please note that up stamping is not automatic.
PERFECTION OF A MORTGAGE IN NIGERIA
· Governor’s consent
· Registration at the Lands Registry.
NOTE THAT ON ACCOUNT OF MPL OF LAGOS, THE DEED OF LEGAL MORTGAGE WILL ALSO BE REGISTERED AT THE LAGOS STATE MORTGAGE BOARD pursuant to section 53 of MPL 2010
By virtue of s.22 Land Use Act, a holder of Statutory Right of Occupancy cannot alienate his interest or right by mortgage (among others) without the governor’s consent. Failure to seek governor’s consent by virtue of s. 26 LUA, such interest or right alienated would be inchoate. That is, what is rendered inchoate is the transfer of the legal interest and not the entire transaction as the equitable interest remains.
Thus, a mortgage for which the consent of the Governor was not obtained will result in an equitable mortgage (inchoate or incomplete legal mortgages). See SAVANNAH BANK OF NIG LTD v. AJILO.
It is the duty of the mortgagor to obtain the consent of the Governor as he is the holder of Statutory Right of Occupancy. See UGOCHUKWU v. CCB Nig Ltd.
However, there are instances where the consent of the Governor is not necessary and will not be required in the creation of a mortgage, they are:
· The consent of the Governor is not required for the creation of an equitable mortgage. See AWOJUGBAGBE LIGHT INDUSTRIES v. CHINUKWE(governor’s consent may however be obtained for an equitable mortgage)
· The consent of the Governor is not required for the conversion of an equitable mortgage, which was created with the consent of the Governor, into a legal mortgage in favour of the same person. See section 22(a) LUA.
· The consent of the Governor is not required for the re-conveyance or release of a mortgaged property from mortgagee to the mortgagor, where the consent of the Governor was obtained upon creation.. See section 22(b) LUA.
· The consent of the Governor shall not be required for the up-stamping of a mortgage deed. See OWONIBOYS TECHNICAL SERVICES LTD. v. UBN LTD (2003) 7 SCNJ 177
· NOTE THAT THE EXTENT OF STEPS TO BE TAKEN FOR PURPOSES OF PERFECTION OF LEGAL MORTGAGE IS DEPENDENT ON WHERE THE PROPERTY IS LOCATED.
THE GENERAL PROCEDURAL STEPS OF GOVERNOR’S CONSENT,STAMPING AND REGISTRATION APPLIES THROUGHOUT NIGERIA.
HOWEVER WHERE A CORPORATE BODY IS A MORTGAGOR UNDER SECTION 197 CAMA THERE IS A MANDATORY STEP FOR PERFECTION. EVERY CHARGE OR MORTGAGE CREATED BY A CORPORATE BODY MUST BE REGISTERED WITH CAC WITHIN 90 DAYS OF THE CREATION OF THE MORTGAGE.
THE COMPANY WILL FILE A COPY OF THE MORTGAGE INSTRUMENT AND FORM CAC 8(PARTICULARS OF CHARGE), AND A COPY OF THE DENBENTURE TRUST DEED, WHERE APPLICABLE.
FAILURE TO REGISTER THE MORTGAGE WITH CAC WILL RENDER THE MORTGAGE VOID IN FAVOUR OF THE CREDITORS AND DEBENTURE HOLDERS.
Notwithstanding whatever problems may arise, as long as he has benefitted from the loan, he cannot be heard to say that he would not repay the loan.
KNOW THE COVENANTS IN A MORTGAGE DEED
DRAFT A STANDARD LEGAL MORTGAGE
IDENTIFY ETHICAL ISSUES
Form and content of a mortgage
Commencement: this depends on the mode and type of mortgage. For mortgage created by assignment or sub-demise, the commencement can be: THIS LEGAL MORTGAGE OR THIS DEED OF LEGAL MORTGAGE. For mortgage created by charge by deed expressed to be by way of legal mortgage, it is THIS CHARGE BY DEED EXPRESSED TO BE BY WAY OF LEGAL MORTGAGE.
Date and parties: where there is a surety involved in the mortgage agreement that is, A is borrowing money from B and C’s property will be used as security (three parties) the parties’ clause will be drafted as follows:
THIS DEED OF LEGAL MORTGAGE is made this __ day of__ 2013 BETWEEN Chief OmoOnah of 17, Udeh Street, Oyo Road, Oyo state (the mortgagor) of the first part AND Mr. Lanre Musa of 16, Oyo Road, Oyo state (the mortgagee) of the second part AND OCEANIC BANK PLC a registered company under Part A of Companies and Allied Matters Act Cap 120 LFN 2004 with registered office at 20, Oyo Road, Oyo state (the surety) of the third part.
Recital: recital cannot be waived in any mortgage deed. It must be inserted. There are two types of recitals to wit; introductory and narrative recital. The following are the facts which the recital of a mortgage must contain
· The mortgagor’s title
· The existing loan agreement which will include the interest and capital.
· Where there is a surety, recites surety’s title – for instance, where as Mr. A approach bank B and Bank B gives the amount of N10, 000, 000 and C agrees that his property at _____ be use as security for payment of the loan.
· State that the mortgagor has agreed that the property be use to secure the loan.
As a general Rule the operative part starts with testatum for other kind of deed of conveyance, there is only one testatum but for mortgage deed – legal mortgage, there are two testatum
The first testatum has the covenant to repay the principal sum and interest on a named date (the legal due date).
The second testatum has the charging clause in which the mortgagor conveys as beneficial owner to the mortgagee. THE MORTGAGOR AS BENEFICIAL OWNER ASSIGNS/SUB-DEMISES/CHARGES
Habendum: the term granted under the Habendum the mode of creation of the legal mortgage would be known, whether assignment, sub-demise.
Under this part, the various covenants are contained here
· Execution and attestation
Covenants in a Mortgage Deed/Mortgages
The following are the covenants in mortgages.
1.Covenant to repay the principal sum within the legal date. The parties should agree when the loan should be repaid. Even if the mortgage is silent as to the date of repayment, there is a burden on the mortgagor in equity to be liable to pay the principal and the interest.
When no legal due date is included in the deed, it is deemed to be payable on demand. The inclusion of the legal due date is important for the following reasons:
a. The mortgagee cannot bring an action to recover the sum until the legal due date has passed.
b. The mortgagee cannot successful exercise his right of sale or foreclosure if the legal duedate has not arisen. The mortgagee cannot attempt to extinguish the equity of redemption of the mortgagor.
2 Covenant to pay interest: Where interest has not been stipulated, the court will impose a reasonable interest rate. Even where an interest rate stipulated is considered unconscionable, the court can reduce the rate. There are two ways to impose interest rate:
A. Stipulate a higher rate, but if the mortgagor pays on or before the legal due date the mortgagor will pay at a lower rate. Example, the interest is 18% but if the mortgagor pays before 15th April every month, interest shall be 8%.
B. This is as opposed to increasing the interest rate upon failure to pay at a particular date. This would be a penalty and it is not accepted.
3 Covenant to insure the property: both parties have insurable interest. The covenant to insure should provide for the following
· The date of the commencement of the insurance policy
· The insurance company
· When insurance is to commence
· The amount of the insurance cover
· The risk to be insured against
· The person to take out the insurance policy
· The application of the insurance money
By virtue of s. 123(1)(ii) PCL and s. 19(1)(ii) CA once it is a legal mortgage or mortgage is by deed, the mortgagee has a right to insure.
If the mortgagor insures only in his name, in the event of loss the mortgagee cannot compel the mortgagor to apply the money paid for the damage.
If mortgagor insures, he should insure in the mortgagee’s name or joint names.
Note that where Governor revokes the right of occupancy for public interest, compensation is to be paid to the holder of the right which is the mortgagor under the Land Use Act, section 28. A prudent mortgagee lawyer would insert a clause in favour of the mortgagee that compensation should be paid to him in the event of revocation of the right of occupancy of the property.
4 Covenant to create leases and sub-leases on the property. A mortgagor or mortgagee in possession is given the right to grant certain leases. Where a lease had been created prior to the mortgage, the mortgagee and subsequent purchaser are bound by the lease, the mortgagor is entitled to rent. A mortgagor in possession can create lease and he is not to account – s. 18(1) CA, s. 131(1) PCL, 33 MPL. A mortgagee in possession can also create a lease. Where he creates a lease, he must account for rents collected as the rent is meant to be use for discharging the principal and interest.
5 Covenant to repair: party in possession usually carries out the repairs. Mortgagee can take over and carry out repairs where mortgagor fails but most not repair the mortgagor out of his estate.
6 Covenant to consolidate different mortgages: As a general rule, Section 115 PCL prohibits consolidation of mortgages. CONSOLIDATION occurs where the same mortgagor, and the same mortgagee but the mortgagoruses different properties to create different mortgages in order to secure a loan of money. These mortgages are consolidated in the sense that the mortgagor will not be allowed to redeem any of the properties without also redeeming the other securities. Thus the parties can exclude the provisions of s. 115 PCL and s. 17 CA, 28 MPL.For the covenant to apply the following conditions must be fulfilled.
a. The same mortgagee
b. The same mortgagor
c. An express covenant to consolidate
d. The legal due date must have passed for all the mortgages
7 Covenant to re-convey with a proviso for Cessar upon redemption. This is the covenant not to clog the mortgagor’s equity of redemption. That upon the payment of the principal and interest, the mortgagee will re convey the property to the mortgagor. The mortgagee must not make it impossible for the mortgagor to redeem the property.
8 Covenant to observe and perform any condition in the head lease. Upon grant of statutory right of occupancy, the mortgagor has the duty of observing covenants in right so granted. On mortgage to the mortgagee, it should be stated that the mortgagee is to observe these covenants.
REMEDIES AND RIGHTS OF THE PARTIES TO A MORTGAGE TRANSACTION
The rights of the mortgagor include:
21) Equity of redemption
22) Legal right to redeem(BANKS AS A MATTER OF PRACTICE TRY TO PUT THE MORTGAGOR ON HIS TOES, AS THEY PUT 6 MONTHS AS THE LEGAL DUE DATE FOR REDEMPTION
23) Equitable right to redeem
Equity of redemption:THIS IS THE PROPRIETARY INTEREST A MORTGAGOR HAS IN THE SECURITY AT THE CREATION OF THE MORTGAGE.. There must be a proviso for cesser upon redemption.This right arises the moment the mortgage is created and it continues to subsist till the day the mortgage ends or is discharged. As long as there is a mortgage, there is an equity of redemption. The mortgagor’s equity of redemption cannot be taken away unless there is an order of foreclosure absolute or a valid sale of the mortgage property under mortgagee’s power of sale. KNIGHTBRIDGE ESTATE LTD V BRYNE.
The mortgagor’s equity of redemption can be conveyed by sale or will or devolve upon his personal representative on intestate succession. This is subject to the right of the mortgagee. The right starts from the day legal mortgage is created.
Of all the three rights of the mortgagor, the equity of redemption is the most important and it is also the basis for the other two rights. The effect of the equity of redemption is as follows:
24) The parties cannot insert any clause in the mortgage to clog or negate the mortgagor’s right to redeem as such a clause would be void. See OKONKWO v. CCB LTD, The equity of redemption must never be clogged, restricted or impeded. See also KNIGHTBRIDGE ESTATE LTD V. BYRNE;
The equity of redemption is so powerful that it entitles the mortgagor to continue to exercise the rights of ownership over the mortgage property. It can even be used to create an equitable mortgage. The equity of redemption is not affected by any breach on the part of the mortgagor. It is not limited by time as the mortgagor can redeem his property back in so far as the conditions have been fulfilled. Thus once a mortgage always a mortgage and nothing but a mortgage..
However, the rule that the equity of redemption cannot be clogged or restricted, does not apply to perpetual debentures. Hence, a company pursuant to section 171 CAMA may issue a perpetual debenture. Accordingly, a clause or condition in any deed for securing any debenture shall not be invalid only because the debenture is made redeemable only
a. On the happening of a contingency however remote, or
b. On the expiration of a period of time, however long.
Legal right to redeem: This is the legal right of the mortgagor to discharge the mortgage and recover his property on or before the legal due date. The legal right to redeem arises the moment is created and it continues to subsist until the end of the legal due date.. Where there is a legal due date stated in the deed, the legal right to redeem can be exercised before the expiration of the legal due date. After the legal due date the legal right to redeem terminates and the mortgagor loses his legal right to redeem the property.
The legal right to redeem entails the mortgagor’s right to repay the mortgage sum and interest and recover his property at any time on or before the legal due date. The mortgagor does not need to wait for the legal due date before he can repay the mortgage sum and interest. He can do so even on the next day. See OKONKWO v. ACB LTD; UBA v. OKEKE (2003) 8 NWLR (pt. 822).
At common law, after the legal due date, the mortgagor loses his right to redeem. This harsh position of the common law has been mitigated by equity through the equitable right to redeem.
IN PRACTICE, THE DATE FOR REDEMPTION IS USUALLY SHORT BECAUSE IT IS AN ADVANTAGE TO THE MORTGAGEE TO PLACE THE MORTGAGOR IN DEFAULT AS SOON AS POSSIBLE AND TO AVOID THE EFFECT OF SECURING THE MONEY LOANED UNTIL THE EXPIRATION OF THE LEGAL DUE DATE AS HELD ON THE CASE OF TWENTIETH CENTURY BANKING CORPORATION LTD V WILKINSON.This provision works hardship on the bank as the mortgagor can refuse to pay as long as the legal due date has not passed and the mortgagee is helpless. TO PROTECT ITSELF, the mortgagee can insert a proviso that the entire mortgage sum and interest is to be repaid at a shorter legal due date. That is, a date shorter than the proper legal due date on which installments would end. The effect of this is to bring the legal due date closer in order to make the power of sale arise in the event of a default. This shorter legal due date is called a “LEGAL FICTION.” The shorter legal due date is used for all remedies of the mortgagee… it can activate all.
The insertion of a shorter legal due date (legal fiction) is not to prejudice the mortgagor, but only to put him on his toes. So, he has nothing to worry about as long as he is faithful with the payments of the instalments of the mortgage sum and interest. Thus, in the example above, the mortgagee can just add proviso that the legal due date is 31st of July, 2015. This will not affect the instalment payments which will end when they ought to end. It will only operate to make the power of sale arise.
Equitable right to redeem: under common law, the legal right to redeem was construed strictly such that once the mortgagor fails to redeem before the legal due date, he is taken to have lost the right to redeem. The equitable right to redeem arises upon the expiration of the legal right to redeem. SALT V MARQUES OF NORTHAMPTON.
Once legal due date elapses and the mortgagor has not redeemed, his equitable right to redeem automatically activates on the expiration of the legal due date. This equitable right to redeem can only be lost upon exercise of power of sale by mortgagee or an order of foreclosure absolute,or by a valid order of court.
GRAPHICAL REPRESENTATION OF THE COMMENCEMENT, LIFE SPAN AND DEATH OF THE RIGHTS OF THE MORTGAGOR
DATE OF CREATION LEGAL DUE DATE END/DISCHARGE OF THE MORTGAGE
+ + +
25) EOR: this means equity of redemption. It starts from the day the mortgage is created and continues till the mortgage dies.
26) LRTR: this means legal right to redeem. It starts from the date the mortgage is created and expires immediately after the legal due date.
27) ERTR: this means equitable right to redeem. It starts from the expiration of the legal right to redeem, that is the legal due date and ends when the mortgage dies
MORTGAGEE’S RIGHTS/ REMEDIES
The foregoing are the rights of a mortgagee. These rights are not mutually exclusive, thus the taking of one does not exclude the use of the others. The mortgagee can exercise any or all of them at the same time.
28) Rights/remedies of a legal mortgagee include:
Ø Right of action in court to recover the principal sum (mortgage sum) and interest.
29) Right to take possession of the mortgaged property(upon default, the mortgagee takes possession of the property)
30) Mortgagee’s power of sale (a legal mortgagee can exercise this power without going to court. See section 123(1)(i) of PCL and section
31) Right to an order of Foreclosure
32) Right to appoint a receiver, see section 123(1)(iii) of PCL section 19(1)(iii) of CA.
Ø Action for winding up(where mortgagor is a Company),since the company cannot pay its debt. See section 408 &409 of CAMA.
Ø Rights of a mortgagee under the high Court Rules. Order 51 Lagos High Court(Civil Procedure) Rules, 2012
33) Rights/remedies of an equitable mortgagee
34) Right of action in court to recover principal sum (mortgage sum) and interest
36) Specific performance (to compel mortgagor to convert the equitable mortgage to a legal mortgage)
Ø Appointment of a receiver by an order of court
Ø Power of sale by an order of court.
The General rule is that An equitable mortgagee cannot exercise the power of sale without an order from the court. Thus to enable the equitable mortgagee to exercise the power of sale without necessarily going to court, the following conditions must be satisfied:
· The equitable mortgage must be by deed
· There must be no contrary intention in the deed
· Any one of the remedial devices must be included in the deed. Such clause include Power of Attorney Clause or Trust declaration.
In the absence of these conditions, the equitable mortgagee cannot exercise the power of sale without an order of the court.
High Court rules apply to an equitable mortgage.
RIGHTS/REMEDIES OF LEGAL MORTGAGEE
ACTION IN COURT TO RECOVER PRINCIPAL SUM AND INTEREST (OR MORTGAGE SUM AND INTEREST): This right avails both a legal and an equitable mortgagee. The mortgagee could institute an action in court against the mortgagor to claim the principal sum advanced to the mortgagee and the interest that has accrued on it. The following are important conditions for the exercise of the right. UBN V Olori motors.
Civil procedure applies and after judgement is given, the mortgagee executes the judgement by attaching the moveable or immovable property of the mortgagor..
NOTE: the mortgagee cannot exercise this right of action to recover mortgage sum and interest if the right to an order of foreclosure has been exercised. This is because this right and that of foreclosure are mutually exclusive.
APPOINTMENT OF A RECEIVER:
· A receiver is a person appointed by a creditor or the court to take over the management of mortgage property and receive the income of the property. ADETONA and Anor. V ZENITH INTERNATIONAL BANK LIMITED.
· This is more common in mortgages by companies-debentures.
· Note that once appointed, only the mortgagee has power to remove the receiver-Section 393 CAMA, SECTION 43(5) MPL.
· Who can appoint a receiver?
ü The mortgagee if is a legal mortgage or its mortgage by Deed.
ü Appointment by the court especially in an equitable mortgage where the Deed is silent on the powers.
ü Appointment power given by statute applies to legal mortgage. Section 123 PCL, 19 CA, 35(1) MPL
· This right to appoint a receiver of the income of the mortgage property is available to both legal and equitable mortgagees. For legal mortgagees, see section 123(1)(c) of PCL and section 19(1)(c) of CA. , 35 MPL.
· This right is available to an equitable mortgagee provided the equitable mortgage is by deed and provides for the power to appoint a receiver. Where the equitable mortgage is not by deed, then the power to appoint a receiver will not be automatic as a Court Order will be needed.
· By section 131(1) of PCL and section 24(1) of the CA, a receiver can only be appointed after the mortgagee has become entitled to exercise the power of sale. If the mortgagee has not yet become entitled to exercise the power of sale, he cannot appoint a receiver. See AWOJUGBABE LIGHT INDUSTRIES LTD. v. CHINUKWE.
· When the receiver has been appointed by the mortgagee, the receiver is deemed to be an agent of the mortgagor. See section 131(2) of PCL and section 24(2) of CA. But, if the receiver is appointed by the Court, he is personally liable for his acts. He must therefore give security before assuming his office.
POWERS OF A RECEIVER
o Take possession of the security
o Manage security
o Receive income
o Pay outgoing service, taxes and rates.
DUTIES OF A RECEIVER
o He must act in good faith
o Must act within his scope of authority
o Avoid collusion
o Duty of care.
NOTE: where he has colluded to undervalue the property and have it sold at a gross under value, the sale will be set aside.
RIGHT TO TAKE POSSESSION OF THE MORTGAGE PROPERTY:
This right is only available to a legal mortgagee. Section 123(1)(B) PCL.However, it is not advisable for the legal mortgagee to go into possession of the mortgage property for the following reasons:
a) He who is in possession has an obligation to insure the mortgage property
b) He who is in possession has an obligation to maintain the mortgage property
· The mortgagee who goes into possession is liable to account to the mortgagor.
· Raises presumption of agreement to be repaid in piecemeal.
WHITE V CITY OF LONDON BREWERY.
POWER OF SALE (RIGHT TO SELL THE MORTGAGE PROPERTY):
This is available to all mortgages created by deed, whether legal or equitable, and it is provided for under s. 123(1)(i) of PCL, s. 19(1)(i) CA
a) where it is an equitable mortgage, then the mortgagee cannot exercise the power of sale without a Court Order except where the following conditions are satisfied:
a. the mortgage must be by deed
b. there must be no contrary intention in the deed (a contrary intention could be the inclusion of a higher interest rate as penalty or any other provision that shows that the parties intended another penalty, not a sale)
c. the mortgage must contain any one of the remedial devices.
b) Where it is a legal mortgage, the mortgagee does not need any court order and does not need to go to court before it can exercise the power of sale as long as it has arisen and has become exercisable. Further, the mortgagee can exercise this power not minding that he has used other remedies and not minding that an action over the subject matter is in court. See UBN v. OLORI MOTORS & CO LTD., the mortgagee (bank) brought an action in court to recover the mortgage sum and interest. While the case was pending, the mortgagee sold the mortgage property in exercise of the power of sale. Mortgagor sought to set aside the sale of the mortgage property on the ground that the sale violated the principle of pendente lite and that by instituting an action in court to recover the mortgage sum and interest, the mortgagee could not exercise the power of sale. It was held at the SC that since in a legal mortgage, the right to sell the mortgage property was independent of the court in that the mortgagee can sell without any court order and also, since the remedies of a mortgagee are not mutually exclusive, then the mortgagee can exercise the power of sale even if there was an action in court provided that the power of sale had arisen and was exercisable.
NOTE: MILITARY GOVERNOR OF LAGOS STATE V OJUKWU, WHERE AN ACTION TO RECOVER HAS BEEN INSTITUTED AND THE MORTGAGOR SERVES A NOTICE OF INJUNCTION order restraining the other party from disposing of the res,, THE legal MORTGAGEE BANK CANNOT SELL THE PROPERTY ALTHOUGH THEY HAVE THE RIGHT OF SALE WITHOUT RECOURSE TO COURT.
The power of sale is not automatic. Before the mortgage property can be sold in exercise of the power of sale, two conditions must be satisfied. They are:
· The power of sale has arisen – s. 123(1)(i) of PCL, s. 19(1)(i) CA, 35(1)(4) MPL, Payne v Cardiff RDC.
· The power of sale has become exercisable – s. 125 PCL, s. 20 CA, ACB V IHEKWOABA
These two conditions must be satisfied. Usually, the power must arise first before it becomes exercisable. The power of sale may become exercisable without it arising and in such a case, the mortgagee cannot sell. An example will be given below.
· The power of sale will be said to have arisen when the following factors co-exist:
The mortgage must be by deed.
· The legal due date must have passed (that is, mortgagor must have defaulted and lost his legal right to redeem)
· There must be no contrary intention in the mortgage deed. That is, there must be nothing in the legal mortgage deed that is inconsistent with the power of sale such as an increased interest rate or other penalty or remedy.
These factors are must co-exist at the same time. In the absence of any one of them, the power will not arise.
Notwithstanding the fact that the power of sale has arisen, the mortgagee cannot sell unless and until the power has become exercisable. The conditions under which the power of sale will become exercisable are provided for under section 125 of PCL and section 20 of CA. These conditions are independent and any one of them is sufficient to make the power of sale exercisable. Therefore, the power of sale will be said to be exercisable IF ANY OF THE FOLLOWING
· Notice requiring payment of the mortgage money has been served on the mortgagor and there is default of payment of the mortgage sum and interest or part thereof, for three (3) months after such service; see section 125(1)(i) PCL and section 20(1)(i) CA
· The mortgagor is in default of payment of installment or interest due and payable for a period of 2 consecutive months. THE MORTGAGEE BANK NEED NOT GIVE NOTICE. However, the bank should not sell as the power of Sale has NOT ARISEN. Section125(1)(II)PCL, 20(1)(II) CA
· The mortgagor is in breach of a fundamental term apart from the covenant to repay.Section 125(1)(iii) PCL, 20(1)(III) CA NOTICE NEED NOT BE GIVEN OR 2 CONSECUTIVE MONTHS IN DEFAULT.
Compliance with the above provisions is mandatory on exercise of the right to sell mortgage property. Usually, the power must arise first before it becomes exercisable. The power of sale may become exercisable without it arising and in such a case, the mortgagee cannot sell. For example, 24million is borrowed by John from GTB to be repaid by monthly installments of 1million from January 2015 to 31st December, 2016. If John fails to pay installments in November and December, 2015, the power of sale has become exercisable, but it has not yet arisen because the legal due date has not passed.
In addition to the two conditions above to exercise power of sale, in order to ensure that the sale is not improper or liable to be set aside, the mortgagee must observe the following:
a. The mortgagee must act bona fide, in good faith during sale of mortgage property.Kennedy v Trafford.
b. The mortgagee must not sell the mortgage property at gross under value.(negligible price). Okonkwo v CCB Ltd.
c. The mortgagee must ensure that it does not sell the property to itself, its servants, agents or privies.., ihekwoaba v ACB Ltd.
d. The mortgagee must not collude with the buyer or the proposed buyer of the mortgage property.
PLEASE NOTE, section 35 of MPL, 123 PCL and 19 of CA, the mortgagee may sell at public auction or by private contract.
STATUS OF MORTGAGEE BEFORE AND DURING SALE.
The bank is not an agent or a trustee of the mortgagor before the sale or during the sale of mortgage property. The implication is that the bank has no obligation to do any of the following in exercising the power of sale.
a. The bank has no obligation to carry the mortgagor along either before or during the sale
b. The bank need not sell at any price suggested or proposed by the mortgagor.
c. The bank need not sell at the market value or prevailing market value.. All the obligation the bank owes is to not sell the property at a gross under value(negligible price) and this is dependent on facts.
HOWEVER, the moment the bank concludes sale of the property, the bank becomes an agent/trustee of the mortgagor for the purpose of disbursement and application of the proceeds of sale.He is therefore liable to account to the mortgagor.
The appropriate order of application of the proceeds of sale pursuant to section 127 PCL,21(3) CA, 39 MPL. are:
a. The bank must settle all prior encumbrances having priority over the mortgage
b. Settle costs and charges incurred in the course of sale
c. Settle outstanding mortgage sum and interests
d. Balance to be returned to the mortgagor or theperson entitled to the equity of redemption.
VISIONI V NBN ltd.
When sale may be set aside or restrained.
a. Where the mortgagor has no good title ab initio as held in the case of Alli v Ikusebiala.
b. When requisite consent was not obtained
c. Non- registration of mortgage
d. Fraud or collusion between mortgagee and buyer
e. Right of sale has not arisen or become exercisable
f. Mortgage is fraud on the mortgagor
g. Sale after mortgagor has paid in full mortgage sum and. Interest
h. Where the parties agree at a different mode of sale where there is a contrary intention.
i. Where the mortgagor can validly rely on the plea of estoppel..
Note the position where proceeds of sale are not sufficient to liquidate mortgage sum and interest as.
NOTE THAT: ALL THE RIGHTS OF THE LEGAL MORTGAGEEARE NOT MUTUALLY EXCLUSIVE. THUS THE MERE FACT THAT THE MORTGAGEE HAS CHOSEN ONE DOES NOT PRECLUDE THE MORTGAGEE FROM EXERCISING OTHER OPTIONS. THUS, WHERE THE MORTGAGEE SOLD THE MORTGAGE PRICE AND DID NOT RECOVER THE WHOLE SUM LOANED, HE CAN MAINTAIN an ACTION AGAINST THE MORTGAGEE on the personal covenant to repay TO RECOVER THE MONEY AS THE MORTGAGEE IS NOT BOUND TO SELL AT MARKET PRICE.
Effect of sale without conditions
Ideally, a mortgagee is to wait for the power of sale to arise and the power to become exercisable before selling. However, if after the power of sale arises, the mortgagee goes ahead to sell without the power becoming exercisable, then the mortgagor can have the following remedies:
1) An order of court setting aside the sale and damages for breach.
2) If the mortgagee has not sold, but is preparing to sell, the mortgagor can obtain an injunction to restrain him from selling
However, if the mortgagee sells to a bona fide purchaser for value without notice, such sale will be valid – s. 21(2) CA, s. 126 PCL. The mortgagor can only sue the mortgagee for damages for improper exercise of power of sale.
Effect of proper and valid sale
The effect of a proper and valid sale is that it extinguishes the mortgagors equity of redemption and terminates the equitable right to redeem. SECTION 111,112 PCL.
Order of application of the proceeds of the sale
1) Settle prior encumbrances first. E.g. prior existing mortgages/ mortgages having priority. That is, prior encumbrances are to be paid first
2) Settle costs, charges and expenses incurred in the course of the sale, such as auctioneer’s fee, advertisement, services of a solicitor.
3) Settle and satisfy the outstanding mortgage/principal sum and interest
4) Pay the balance, if any, to the person or persons entitled to the equity of redemption. It may be the mortgagor or subsequent mortgagee or an assignee of the equity of redemption.
See B. VISIONI v NATIONAL BANK OF NIGERIA LTD Section 127 PCL, 21(3) CA, 39 MPL Lagos
NOTE that where the proceeds of the sale is insufficient to satisfy or liquidate the mortgage/principal sum and interest, then the mortgagee can proceed against the mortgagor by an action in court to recover the outstanding sum and interest or he can proceed against other properties of the mortgagor. See BRISTOL & WEST PLC V BARTLETT.
Mortgagor and sale of security
The mortgagor can sell the security. However, the following points must be noted:
1) Where the mortgagor sells the security with the consent and concurrence of the mortgagee, the purchaser receives a good title
2) Where the mortgagor sells the security pursuant to an order of a court, the purchaser receives a good title
However, where the mortgagor sells the security without the consent and concurrence of mortgagee or without an order of court, the purchaser only acquires the mortgagor’s equity of redemption and takes subject to the mortgagee’s interest.
See OLUFINTUYI v. BARCLAYS BANK DCO
FORECLOSURE:ORDER 51 HCCPR LAGOS.
The right of mortgagee to apply for an order of foreclosure is available to both legal and equitable mortgage. Foreclosure is an order of court by which the equity of redemption of the mortgagor and all persons claiming through him including subsequent encumbrancers are extinguished so as to vest the mortgaged property absolutely in the mortgagee. Usually, foreclosure order is granted in stages
· The first stage is the foreclosure nisi
· The second stage, foreclosure absolute, six months after the decree nisi has been granted
NOTE: THE POWER OF FORECLOSURE is granted where the legal due date has passed or the mortgagor is in breach of a fundamental covenant which makes a power of sale to become exercisable.
EFFECT OF FORECLOSURE ORDER ABSOLUTE
.LEGAL MORTGAGE—becomes the absolute owner of the property subject to any legal mortgage having priority
EQUITABLE MORTGAGE—the mortgagor is compelled to convey the property to the mortgagee, but upon sale of the property, the mortgagee must account(to the mortgagor) for the proceeds of sale.
The order of foreclosure is made absolute after 6 months of granting the decree nisi.Thus the order nisi made, lasts for 6 months and the mortgagee cannot sell the property WITHOUT RECOURSE TO THE COURT within that period and the mortgagor can redeem within that 6 months of the order nisi
ONCE THE FORECLOSURE ORDER BECOMES ABSOLUTE, the mortgagee bank becomes the owner of the property and the equity of redemption stands extinguished.
However, even when the order of foreclosure has become absolute, the mortgagor may still apply to court to set aside the order and this entails an order to re-open the Foreclosure Absolute . Instances that may justify an application to re-open a foreclosure order absolute
a. Value of the security exceeds the mortgage sum And interest.
b. If the mortgagors is able to prove that the mortgage property is of special value to the mortgagor(e.g family property)
c. On any other ground the court thinks just and equitable grounds.
d. If the mortgagee after obtaining a foreclosure order made absolute still sues the mortgagor on his personal covenants to repay the loan.
The applicant must satisfy the following conditions where an application to re-open is made.
a. The application must be brought timeously as equity aids the vigilant and not the indolent.
b. The mortgagor/applicant must not be guilty of any unconscionable conduct/ must act in good faith. Rationale: he who seeks equity must do equity
c. The mortgagor/applicant must show good cause in his affidavit why the money has not been paid.
d. The mortgagor/applicant must show that he has the money at hand to repay.
REOPENING A FORECLOSURE ABSOLUTE
· If the mortgagee after obtaining a foreclosure order made absolute still sues the mortgagor on his personal covenants to repay the loan
· If the mortgagor brings an application timeously stating that his inability to repay was due to circumstances beyond his control and that he is now able and willing to repay the mortgage sum and interest
· That the property foreclosed exceeds the mortgage sum and interest
· Where the security is of special value to the mortgagor such as, family property
· Where, in the interest of justice, it is just and equitable to allow the mortgagor to redeem
Right to Take possession: the right to take possession only avails a legal mortgagee and it is not an attractive right. This is so because where mortgagee is in possession, he will account for money received and the monies he ought to have received if he was not negligent (diligent). Also, the money received is geared towards liquidating the mortgage loan.
Right to retain the title document: this must be returned upon redemption.
Right to consolidation of the provisions if s. 115 PCL and s. 17 CA, 28 MPL have been excluded in the mortgage deed
Specific performance for equitable mortgage
Discharge of mortgages
The mode of the discharge of a mortgage depends on its mode of creation
v For legal mortgages created by assignment, demise and sub-demise, discharge can be either of the following:
· Deed of re-conveyance/Deed of release/Deed of surrender/Deed of Discharge.
The deed issued under discharge by deed of release, surrender and re-conveyance should be registered at the land registry by the mortgagor, failure of which the property will continue to show that it still encumbered.
For mortgages created by charge by deed expressed to be by way of legal mortgage, it can be discharged by a mere statutory receipt – s. 135 PCL.
Discharge of mortgage by companies
a. Evidence of Discharge(deed of discharge or receipt)
0. Filing of Memo of Satisfaction under section 204 CAMA, Form CAC 9.(Memorandum of Satisfaction ).
NOTE BEFORE: Where a company is the mortgagor, both the charge and its release should be registered at the CAC. For instance, failure to register charge will render the charge void in favour of the creditors and debenture holders – s. 197 CAMA, 205 CAMA. There are specified forms for it – Form 8 & 9.(PARTICULARS OF CHARGE, MEMORANDUM OF SATISFACTION) respectively.
For an equitable mortgage, a simple receipt is adequate unless the mortgage was by deed.
Discharge by payment into Court- Section 75 PCL, 5 CA.Payment must be made in full in the instance the mortgagor decides to redeem his property before the legal due date.
Discharge of Mortgages in Lagos State- Section 41 MPL. All mortgages can be discharged by receipt. However, section 55 of the Lagos REGISTRATION Law, discharge may be made by deed which is registrable and this is applicable as it is a latter law.
Once a mortgage is pending in respect of a particular property in Lagos, as long as the mortgage has not been discharged the Mortgagor cannot create a subsequent lease or tenancy without the CONSENT OF THE MORTGAGEE BANK----SECTION 49(1) AND SECTION 54 Lagos Registration Law.
· Particulars of parties
· Particulars of witness
· Particulars and description of property
· Survey plan
· Amount of loan
· Terms of repayment
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