[LAND LAW] MORTGAGE

MORTGAGES

 

Meaning:

 

  A mortgage is a conveyance of land or an assignment of chattel as a security for the repayment of a debt or discharge of other obligation for which it is given, with a provision for redemption on repayment of the loan or discharge of such other obligation – SUBERU V. AISL LTD (2007) 10 NWLR (pt 1043) 590.  See also SANTLEY V. WILDE (1899) 2 CH. 474; OLOWU V. MILLER BROTHERS (LIVERPOOL) LTD (1922) 13 NLR 110, particularly at page 111. According to Megary & Wade in The Law of Real Property, the essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in property, with a provision for redemption, that is, that upon repayment of a loan or performance of some other obligation, the conveyance shall become void or the interest shall be re-conveyed.


It may also be rightly described as a charge that a borrower gives to a lender upon a part or the whole of his property to guarantee the repayment of a loan. Our attention in this discussion will be focussed more on land than chattels; this is because land is more reliable than chattels as security.  You can investigate the title of land by conducting a search at the Lands Registry, etc, to ascertain its genuineness.

Other Types Of Security (apart from land) --

1.   Debenture
2.   Insurance securities
3.   Guarantees
4.   Stock and shares
5.   Charge over fixed deposit account
6.   Trust receipts
7.   Bill of sale
8.   Letter of set-off
9.   Trust deed, etc.

REASONS FOR THE PREFERENCE OF LAND AS AGAINST OTHER PROPERTIES AS SECURITY FOR A LOAN

The reasons for this preference are not far-fetched. 
1.   Landed properties are more stable.
2.   The value of land appreciates than the others, particularly in times of inflation.
3.   Land is immovable and we can go to the land and inspect it physically.
4.   It is easier for banks and other mortgagees to enforce their security in the case of landed properties than other properties.

In a mortgage transaction, the borrower is called “the mortgagor” while the lender is the “mortgagee”.  Note that it is not out of place to use “borrower/lender” but we must be consistent in the use of language.  A mortgage may be legal or equitable and in either case, the sole object of a mortgage as against related/similar transactions is that the interest in the property transferred by the borrower to the lender is subject to a proviso for redemption upon repayment of the loan.  In practice, solicitors are involved in the negotiation, drafting and perfection of mortgages. 



CONTRACT SUBJECT TO MORTGAGE

A contract of sale of land entered into in expectation of some loan should be made conditional upon your client (purchaser/borrower) obtaining the loan.  The contract should also provide that in the event that the loan is not obtained, the vendor shall return the deposit paid by the purchaser; this is what is referred to as contract subject to a mortgage. 
                              
CONDITIONS FOR THE VALIDITY OF THE SUBJECT TOMORTGAGE CLAUSE IN A CONTRACT OF SALE OF LAND

1.   It must state the source and amount of the loan.
2.   The terms of payment; and
3.   The interest paid on the loan.

Here is a model subject to mortgage clause in a contract of sale of land:

“This contract of sale is conditional on the purchaser obtaining a mortgage loan from BETTER BANK LTD in the sum of N5,000,000 (five million naira) with interest payable at the rate of 12 % PROVIDED THAT where the loan is not obtained on completion, this contract of sale shall be void and the purchaser shall be entitled to the return of the deposit paid."

MORTGAGE AND RELATED TRANSACTIONS

(1)     A MORTGAGE AND A PLEDGE

A pledgee’s right originates from possession. A pledge involves actual or constructive delivery of possession to the pledgee on the condition that the property would be returned when loan is repaid.  In other words, a pledge is hinged on possession.  This is not the case with a mortgage.  A mortgagee, though may enter into possession in some circumstances, is not encouraged to do so because if he does, he will account to the mortgagor for the profits he has made and also for the profits he ought to have made on the property.

(2)     A MORTGAGE AND A LIEN
A lien is a right to detain the chattel until a debt is satisfied; hence a mechanic has a common lien over a motor car repaired by him. Unlike in a mortgage, there is no general right of sale in lien in order to realise the indebtedness neither can the lienor otherwise deal with the property. It is merely a means of coercing the debtor into payment, rather than a security against repayment not being made. A lien does not vest any estate in the lienee, which he can transfer through sale whereas in a mortgage, the mortgagee/lender has an estate and it is possible for him to exercise his power of sale where the need arises. More often than not, lien arises not from agreement between the parties but by operation of law. 

(3)     A MORTGAGE AND A CHARGE

A mortgage is usually accompanied by a transfer of property rights whilst a charge is an appropriation of specific property for the discharge of an obligation without transfer of title or possession. The chargee only has limited right over the property.  Sometimes, a charge may arise by operation of law (statutory charge), unlike a mortgage. Note however that where a charge by Deed expressed to be by way of legal mortgage is created, the mortgagee has all the powers of a legal mortgagee. In this respect, a charge has some similarity with a mortgage

(4)     A MORTGAGE AND A SALE

A mortgage is not a sale. In Owoniboys Technical Services Ltd v. Union Bank of Nig Ltd (2003) SCNQR 58, the court pointed out that “ once a mortgage, always a mortgage; there must be no clog on the equity of redemption.” The law does not divest the mortgagor of his title in the property; he remains the owner, whilst the mortgagee is the custodian of the property as a form of security to ensure repayment of the mortgagor’s indebtedness. But it is pertinent to note that while a mortgage is not a sale, the mortgagee reserves the right in some instances to sell the mortgage property where the mortgagor defaults in his obligations under the mortgage.

MORTGAGE INSTITUTIONS

(1)     FEDERAL MORTGAGE BANK

This is the apex mortgage institution in Nigeria. It grants loan for the purchase or construction of houses or for the improvement or extension of existing ones. Its loans are usually long-term.  It is a Federal Government agency and should be a preferred mortgage institution for the following reasons:
1.   It gives long-term credit facilities.
2.   The interest rate of the bank is low.
3.   It has branches spread all over the country .

(2)     HOUSING CORPORATIONS

We have several housing corporations.  The most prominent of these statutory corporations is the Federal Housing Authority established by the Federal Housing Authority Act, Cap , LFN 2004, which was set up primarily to execute the National Housing Programme.

At the States level, we have the State Property Development Corporation. In Lagos State, it is called Lagos State Development & Property Corporation (LSDPC) and in Kogi it is the Kogi State Investment and Property Ltd. In most other states, it is called the State Housing Corporation.  They provide funds for building and sometimes they build houses and sell to the public by way of mortgage.  Advantages of this source of Mortgage Finance

1)   There is security of title in respect of property purchased from any of these corporations as there is no problem of demolition.
2)   Funds from the corporation attract low rate of interest.
.

(3)     HOUSING SCHEMES

This is employers’ scheme for the benefit of employees, to enable them (employees) acquire their own houses.  The practice is that the employee is required to deposit the title document with the employer until the loan is liquidated. 
Advantages
1.   Interest rate is low.
2.   It is on a long-term repayment plan.  In other words, affordable deductions are made from the employee’s remunerations for several years.


(4)     COMMERCIAL BANKS

Commercial banks are in the business of providing credit facilities for financing projects, including housing projects.  A lot of mortgages come from commercial banks, especially those involving companies and individuals who want loan advances.  Of course, they will be asked to mortgage their properties.  Besides, most banks now have subsidiaries that engage solely in mortgage banking. Usually, the customer would have to save 20-40 per cent of the cost of the property while the bank provides the balance. Period of repayment is between 5 and 10 years, depending on the bank, and interest rate is most times very high, as high as 21 per cent. This therefore is not the best option for loan to build or purchase houses; the interest rate is very high and customers are often unable to provide the kind of collateral demanded by the banks.

DISADVANTAGES
1.   Interest rate is usually very high.
2.   Their loan may me be short-term


(5)     PRIVATE PROPERTY DEVELOPERS

Private property developers build houses like the housing corporations and make them available to the public on mortgage basis.  A buyer pays deposit and takes possession.  Balance is repayable over long period, of course, at an interest rate.

(6)     LIFE ENDOWMENT

This is a policy of life insurance and is a form of savings. Insurance companies may lend or guarantee loan from a bank with a collateral mortgage of life policy. In other words, this arrangement is usually on the condition that you maintain a life assurance policy with the insurance company concerned.  The borrower assigns the policy to the lender and the notice of this is given to the insurance company.

This is good in that it is a form of savings for the rainy day, for example, to fall back on after retirement. But it t has some demerits: most insurance companies will not do this because it is a long-term loan; and the lender will have to wait for the number of years stated in the policy or where payment is due on the death of the borrower, he will have to wait till he dies.

INVESTIGATION OF TITLE

Prudent practice requires a solicitor acting for the lender to investigate the genuineness of the borrower’s title over the property proposed to be used as security for a loan. Method of investigation here is similar to the method a purchaser’s solicitor adopts in investigating a vendor’s title in conveyancing. There is a difference however in that the mortgagee has a stronger bargaining power and is in a better position than the purchaser; there is yet no existing contract between the proposed mortgagor and the mortgagee and so there is no obligation on the part of the mortgagee to advance money, but a purchaser may sometimes be compelled under the contract to complete the purchase. The mortgagee may therefore at any time withdraw from the transaction if it is not satisfied with the mortgagor’s title.

Two major issues that must be properly investigated before loan is approved on the security of a building or land are:
a)   the title of the borrower; and
b)   the value of the property – this must accommodate the credit proposed by the borrower.


Reasons for Investigating Borrower’s Title

a)   to ascertain borrower’s ownership of the property mortgaged to the bank as security;
b)   to ensure that the same property has not been previously mortgaged or charged as security;
c)   to ascertain that there is no other encumbrances on the property.

Depending on the circumstances, investigation of the borrower’s title may require all or one of the following
a)   a thorough scrutiny of the document, which may be a Deed of assignment, certificate of Occupancy, Land Certificate, Certificate of Purchase, Deed of Lease, etc.
b)   physical inspection of the property;
c)   searches at the land Registry, Probate Registry, Companies Registry, etc;

The brief for the investigation of title in a mortgage transaction is usually given out by Banks, through their legal Departments to External Solicitors. The solicitor should be thorough in establishing the worth of the documents using all known conveyancing practices and techniques as prescribed by law. After the search, the Solicitor writes a Search Report, which is sent to the Bank for consideration whether or not to accept the property as security. The solicitor should comment on the type and condition of the building, whether or not there are tenants, squatters, right of way or other encroachments.

Checklist of Matters to be covered by a search report:

a)   Date of Search;
b)  Name of Borrower;
c)   Name of the person giving security, if different from the borrowers;
d)  Description of the property;
e)  Title of the borrower or person giving security;
f)    Encumbrances (if any);
g)  Conclusion—this should state I unequivocal terms whether or not the borrower or person giving security has good title to the property and whether or not he has an unencumbered power to charge it to the Bank as security for a loan.
h)  Name, address and signature of the solicitor that conducted the search.

Where the borrower is a company/incorporated body, the following matters should be inspected at the Corporate Affairs Commission:
a)   Date of incorporation/registration of the company;
b)   Borrowing powers of the company;
c)   Particulars of Company Directors;
d)   Whether annual returns are filed up to date;
e)   Any registered charge or encumbrances.

CREATION OF MORTGAGES

There are, at common law, two broad types of mortgages, namely, LEGAL and EQUITABLE.

(1)     LEGAL MORTGAGE
This mortgage created pursuant to statutory provisions. It is usually by Deed. There are three operative laws regulating the creation of legal mortgages in Nigeria, namely, The Conveyancing Act, 1881 (for States created from the old Northern and Eastern regions and some parts of Lagos), Property & Conveyancing Law, 1959 (for the States created from the old Western and Midwestern regions,)  and the Registration of Titles Law, Cap R4 Laws of Lagos state 2003,  (for some parts of Lagos, especially Victoria Island, Ikoyi and Surulere, Lagos Island, Yaba , Bariga, Somolu, Apapa, Oyingbo, Badagry . The form and contents of the instrument creating such a mortgage are prescribed by law, and non compliance with the law may be fatal to the entire transaction. Subject to the relevant laws and due execution, a legal mortgage conveys the legal estate of the mortgagor over the property to the mortgagee as security for a loan on the condition that the mortgagor is entitled to redeem the mortgage property upon fulfilment  of his obligations under the mortgage.


Creation of Legal Mortgage

 The location of the property determines the mode of creation and the law(s) applicable. The country is divided into three jurisdictions, namely –

1)    The Conveyancing Act, 1881 (CA) States -- Under the Conveyancing Act, we have two Methods/modes of creating a legal mortgage:

a.   By assignment of the unexpired residue of the mortgagor’s leasehold interest with a proviso for ceaser or reassignment upon redemption: One major feature of this in that the mortgagor transfers the entire unexpired residue of his leasehold interest to the mortgagee; there is no reversionary interest in the mortgagor, hence in the event of default, the mortgagee can pass the mortgagor’s entire interest to a purchaser without any problems. Again, even though there is no privity of contract between the Governor/Head-lessor and the mortgagee, there is privity of estate; the mortgagee is therefore bound to observe and perform all restrictive covenants that run with the land. This though creates some difficulty/problems.

b) Sub-demise of the unexpired residue less few days with a proviso for ceaser
     upon redemption Unlike in assignment, the mortgagor here has a reversionary
     interest in the mortgage property. The main advantages of this mode are:
i)       there is neither privity of contract nor privity of estate between the
Governor/head-lessor and the mortgagee;
ii)      there is uniformity , as this mode is applicable under the CA as well as under the PC & L.. This makes it attractive to banks.

2)    Property & Coveyancing Law (PC & L) States: -- Under the PC & L, there are two methods/modes of creating a legal mortgage:
 a)     Sub demise for a term of years absolute, less at least one day than the term vested in the mortgagor and subject to provision for ceaser on redemptionthe same rules as explained earlier apply here, except that under the PC & L, there is no need for the drafting devices to ensure conveyance of the totality of the mortgagor’s interest in the property. The law already makes provisions for them. See section 112, PC & L.
b)      A charge by Deed expressed to be by way of legal mortgage – this charge confers in the mortgagee all the powers and privileges of a legal mortgagee, even though it creates no legal interest.
Advantages:
i)       since no interest is passed to the mortgagee, it is no breach of the covenant against sub-letting. See section 22, Land Use Act
ii)      it is shorter and simpler to create. See Samuel v. Jarrah (1904)  AC 323, at 274, and
iii)      it is easily discharged by a statutory receipt.
IV)     this mode is most appropriate where the mortgagor is charging several properties. If the mortgages were by assignment/sub-demise, each of the properties would have to be conveyed by a separate instrument.
                 
One obstacle with this mode is that statutory receipt is not a registrable instrument, with
the effect that  at the discharge of the mortgage (the creation of which is registrable), the
mortgage can still be found on the Register.

3)      Creation Of Legal Mortgage Under The Registration Of Title Law, Lagos: -- This law regulates creation of mortgage in the Registration District of Lagos. There is only one method of creating mortgage under this Law, and that is by a Charge using Form 5. See section 21, RTL.

DISTINCTION BETWEEN LEGAL MORTGAGE CREATED BY ASSIGNMENT AND LEGAL MORTGAGE CREATED BY SUB-DEMISE

Banks prefer the legal mortgage by sub-demise for two reasons:

1.      Lack of Privity -- In a legal mortgage created by an assignment, even though there is no privity of contract, there is privity of estate, and under the principles in Tulk v. Moxhay 41 ER 1143, the burden of restrictive covenants that run with the land in equity bind the mortgagee, who is therefore bound to observe and perform such covenants. This opens the mortgagee to liability for breach of the covenants. On the other hand, in a mortgage by sub-demise, there is neither privity of contract nor privity of estate between the Governor/head-lessor and the mortgagee, so the mortgagee is not open to any liability for breach of covenants.

2.      Uniformity – The sub-demise is common to both under the CA as well as under the PC & L, hence there is uniformity, which is attractive to the Banks that have branches all over Nigeria.

Notwithstanding the advantages of legal mortgage by sub-demise over that by assignment, legal
mortgage by sub-demise suffers one technical problem in respect of the power of the mortgagee
to enforce his/its security. The problem is that the mortgagor did not convey his reversionary
interest to the mortgagee, thus when the mortgagee is enforcing the security, it cannot sell that
reversionary interest. The question now is, since the mortgagee cannot validly sell the mortgage property in a mortgage created by sub-demise, how then will the mortgagee be able to deal with the reversionary interest of the mortgagor and be able to sell the property if the mortgagor defaults?  
NOTE:
A)      this problem is peculiar to the CA States; the problem does not arise in the PC & L States because section 112(1) of the P & CL provides that the mortgage term shall merge in the leasehold reversion and the mortgagee can validly sell the entire interest of the mortgagor including his reversionary interest.

B)     the problem does not arise in legal mortgage by assignment, since there is no reversionary interest in the mortgagor.

In the CA States, the problem of reversionary interest can be taken care of as follows:

a)      POWER OF ATTORNEY CLAUSE: By a power of attorney clause in the mortgaged deed, the mortgagee, in consideration of the mortgage sum is appointed attorney with authority to deal with the entire estate and including the reversionary interest.  The power of attorney is expressed to be irrevocable until the loan is discharged and by this device, the mortgagee can sell the legal estate by virtue of the clause. 
OR

b)      TRUST DECLARARTION: the mortgage may provide for a trust declaration. The mortgagor will be made to declare himself a trustee of the property in favour of the mortgagee and he would convey the property to the mortgagee as a beneficiary. The trust may provide that the mortgagor may be removed as trustee and be replaced and the mortgagor shall make a declaration vesting all his estate including his reversionary interest in the new trustees.


ADVANTAGES OF LEGAL MORTGAGE

1)   It is easier to enforce a legal mortgage. The equitable mortgagee must obtain a court order before he can sell or take possession of the property or foreclose or appoint a receiver/manager.
2)   A legal mortgagee without notice of the equitable mortgage takes priority over the equitable mortgagee
3)   It is easier to commit fraud in the case of equitable mortgage than in legal mortgage; the borrower who has deposited the original title deeds with a bank may obtain a certified true copy of the Deed from the Registry for other fraudulent purposes.

CREATION OF SUCCESSIVE LEGAL MORTGAGES USING THE SAME PROPERTY AS SECURITY

This occurs when the same property is mortgaged twice or more in security transactions. The possibility of creating successive legal mortgages over the same property depends on where the property is located.

(a)     In the Conveyancing Act States: successive legal mortgages cannot be created over the same property. This is because in the CA States, the applicable law for the creation of legal mortgage is the common law, and at Common Law successive legal mortgages could not be created overt the same property. The rational behind this is that where a mortgagor creates a legal mortgage, he transfers his legal title in the property to the mortgagee and what he has left is mere equity of redemption, which can at best only be used to create an equitable (not a legal) mortgage.

(2)     In the PC & L States: successive legal mortgages can be created over the same property. This is because under the PC & L, where the mortgagor creates a legal mortgage by sub-demise, he retains his legal interest, which he may subsequently mortgage to a second mortgagee by executing another legal mortgage. But section 109 (2) (b) provides a qualification to the mortgagor’s right to create successive legal mortgage over the same property thus:
         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 whose security ranks immediately before that of the second or subsequent mortgagee, if the length of the last-mentioned term permits, and in any case for a term less by one day at least than the term expressed to be assigned”
The arrangement permitted by section 109 (2) (b) PC & L would have been legally impossible because it is in conflict with the Common Law doctrine of interesse termini, which states that it is not possible to create a term of years in a property to commence at the expiration of another term of years created in respect of the same property. Section 163, PC & L has however abolished the doctrine of interesse termini, hence making creation of successive legal mortgages over the same property possible in the states wherein the PC & L applies.




 DISTINCTION BETWEEN LEGAL MORTGAGE CREATED BY ASSIGNMENT/SUB-DEMISE & ONE CREATED BY A CHARGE BY WAY OF LEGAL MORTGAGE

1) In an assignment/sub-demise, the mortgagor conveys the whole or part of his interest to the mortgagee, whereas the mortgagor by way of a legal charge does not convey any interest in the property.  However, the mortgagee enjoys the same right as that of a legal mortgagee created by assignment/sub demise.
2) By a charge the mortgagor can charge several properties. If the mortgages were by assignment/sub-demise, each of the properties would have to be conveyed by a separate instrument.
3)    When the head-lessor prohibits the assignment of the property, such property may still be charged without liability, unlike in assignment and sub-demise


DOCUMENTS RQUIRED TO PROCESS GOVERNOR’S CONSENT TO LEGAL MORTGAGE OF LANDS

1.   The CTC of the original title documents.
2.   4 copies of the duly executed mortgage deed
3.   There (3) years tax clearance certificate of the mortgagor (and the surety, if any).
4.   A receipt of payment of the current ground rent / tenement rate/ land use charge on the property to be mortgaged.
5.   A duly completed application for Governor’s consent Form –( called Form 1C in Lagos state)
6.   Payment of charting , endorsement and consent fees
7.   Any other document as may be required by the mortgagee, such as fire insurance policy.

Where the mortgagor is a  company, the following additional documents are required:

8.   A Certified true copy of the Memorandum and Articles of Association of the Company.
9.   A copy of the resolution of the Board of Directors authorising the mortgage.
10.                 A copy of the Certificate of Incorporation of the Company.
11.                 Tax clearance certificate of at least 2 Directors.
12.                  Up to date evidence of payee returns

STAGES IN A MORTGAGE TRANSACTION

Upon receipt of instruction to effect a mortgage, a legal practitioner is expected to follow the following order:
1.   Conduct a search on the title;
2.   Write and submit the search report on the property to the mortgagee
3.   CONTRACT STAGE; parties agree on the terms of the mortgage. This is put in an agreement to mortgage. This is called the contract stage.
4.   Submit draft contract to the mortgagee. Ensure all relevant documents are taken into possession i.e Title documents, duly executed application for consent, tax clearance certificate, development levy etc where a company; In addition to the above; a duly executed resolution of the board authorising the loan, ensure the memo of the company allows the transaction, evidence of up to date annual returns have been made, CTC of the certificate of registration, CTC of the register of Directors, Payee returns(if applicable)
5.   Ensure the instrument is duly executed by all parties having obligation under the mortgage and in due form as required by law as dictated by the nature of the parties
6.   PERFECTION- this entails obtaining the governor’s consent, paying of stamp duty and registration in that order.(this is strict)
7.   Where a company is a party, register the mortgage instrument at the CAC within 90 days of its creation.

CREATION OF EQUITABLE MORTGAGE

An equitable mortgage is a type of mortgage created under the rules of equity. It confers equitable interest on the mortgagee. Equitable mortgage is more suitable for short-term loans. Equitable mortgage is not as secure as legal mortgage, but in practice the mortgagee protects itself by requesting that the mortgagor at the time of creating the equitable mortgage sign a legal mortgage and consent Form, which is kept aside until the mortgagor is in default of repayment and the mortgagee will perfect the legal mortgage to enable it exercise the statutory power of sale. If the mortgagor is not in default, and he successfully pays back the loan, the legal mortgage becomes useless.

Modes of creating equitable mortgages in Nigeria are uniform, except for the RTL areas. Distinction between CA State and PC & L State is therefore not necessary here. There are five(5) modes of creating equitable mortgages in Nigeria (see Ogundaini v. Araba [1978] 1 LRN 280; [1978] NSCC 334), namely –

1.  Deposit of Title Deed With an intention to create mortgagemere deposit of title deeds with a bank with a clear intention that the deeds should be retained as security for a loan is one of the methods of creating equitable mortgage.  There are two legal consequences of the deposit of title deeds as security for a loan:
a.   There is an implied agreement by the mortgagor to execute a legal mortgage in favour of the mortgage.
b.   It amounts to part performance.
And based on the principle in Walsh V. Lonsdale (1882) 21 Ch D. 9, to the effect that equity looks as done that which ought to be done, where the mortgagor is in default of payment of the loan, the court will, in an action by the mortgagee, compel the mortgagor to execute a legal mortgage in favour of the mortgagee. In Russel V. Russel (1783) 1 BRO CC 269, it was held that a deposit of title deeds of property for the purpose of security is not only evidence of an agreement to mortgage the property but also a sufficient act of part performance which makes the agreement enforceable.

There must be a clear intention that the deed should be taken or retained as security for a loan.  Mere deposit of title deed with a bank without the requisite intention makes the deposit equivocal, and so is not enough.  There must be proof that the deposit is intended as security for a loan.
See British And French Bank Ltd. V. S. O. Akande (1961) ALL NLR 849. If the memorandum of deposit is under deed, statutory power of sale is possible even though it is an equitable mortgage.

2.  Deposit of Title Deed accompanied by an agreement (in writing or under seal) to
execute a legal mortgage at a later date This is an agreement to create a legal mortgage. The owner of a legal estate may agree in writing in addition to deposit of title deeds, to create a legal mortgage in favour of a creditor. In such a case, once the lender advances the money, whether or not the agreement is under seal, equitable mortgage is created. The equitable mortgagee can enforce the agreement by an action in equity for specific performance, on the principle in Walsh v. Lonsdale that equity regards as done that which ought to be done. See Yaro v. Arewa Construction Ltd (2008) All FWKR (pt 400) 603; Carter v. Wake (1877) 4 Ch. D. 605; Ogundaini v. Araba (supra)

3.   Mortgage of an equitable interest


4.  Equitable Charge of the Mortgagor’s Propertythis is a mere equitable charge of the
Mortgagor’s property. This does not create an estate (proprietary right), which may rest in the mortgagee by way of specific performance, but merely gives a right to repayment of the debt or other discharge of other obligation/burden in respect of which the property stand charged. What do we mean by equitable charge?  An equitable charge is a security for a debt taking effect only in equity because either the chargor has only an equitable interest or the charge is made informally (without a deed). The security can only be realised through sale or appointment of receiver under an order of court. See Ogundaini v. Araba (supra). This is because an equitable chargee cannot himself exercise a power of sale or appoint a receiver in the absence of a deed. 

5     . Inchoate legal mortgage. See Savannah Bank V ajilo



THE DIFFERENCE BETWEEN EQUITABLE CHARGE AND THE OTHER TYPES OF EQUITABLE MORTGAGES

The difference between equitable charge and the other types of equitable mortgage is well illustrated in the case of MATHEWS V. GOODAY (1861) as follows:
“With regard to what are called “equitable mortgages", my notion is this: suppose a man signed a written contract by which he simply agreed that he thereby charged his real estate with fifty pounds to ‘A’, what would be the effect of it?  It would be no agreement to give a legal mortgage, but a security by which he equitably charged his land with payment of a sum of money and the mode of enforcing it would be by coming into Court of Equity to have the money raised by sale or mortgage; that would be the effect of such a simple charge. It is the same thing as if a testator devised an estate to ‘A’ charged with the payment of a sum of money to ‘B’  ‘B’s right is not to foreclose ‘A’ but to have his charge raised by sale or mortgage of the lands.  But the thing would be distinctly an equitable and not a mortgage nor an agreement to give one.  On the other hand, the party might agree that having borrowed a sum of money, he would give a legal mortgage when called upon.  That agreement might be enforced according to its terms and the court would decree a legal mortgage to be given and would also foreclose the mortgage unless the money was paid.”

A charge differs from the first two in respect of the remedies it confers.  The charge is a security by which the mortgagee has a lien on the property. What does a lien mean?  According to Osborn’s Concise Law Dictionary, Sweet & Maxwell, 8th Edition, at page 202, a lien is the right to hold the property of another as security for the performance of an obligation.  At Common Law, lien lasts only so long as possession is retained but while it lasts can be asserted against the whole world.  A vendor’s lien is the right of a seller to retain the property till payment of the purchase price.


3.  Equitable Mortgage of Registered Landapplies in the RTL areas of Lagos. It is
effected by a charge and this is achieved by completing the relevant Form which is Form 15. See section 59 (1) RTL, Lagos, which provides thus:
The deposit by the registered owner of land or a charge of his Certificate of Title with the intention of mortgaging his land or charge shall have the same effect as does the deposit of the title deeds of an unregistered land or a mortgage deed of an unregistered land with the same intention.”



ADVANTAGES OF EQUITABLE MORTGAGE

1.      Where the period of repayment is short, equitable mortgage is preferable because it is easier and quicker to achieve than the legal mortgage.
2..     Equitable mortgage is not affected by the covenant in the head lease.
3.      Successive legal mortgages are possible.
4..     It encourages uniformity in the CA and the PC & L States.

DISADVANTAGES

1.   Unless where the two or any of the remedial devices of declaration of trust or creation of power of attorney exist, the mortgagee has difficulty in transferring legal mortgage to their party.
2.   The mortgagee is not entitled to the title documents.
3.   The mortgagee is not entitled to the benefits of the covenants in the head lease and there is no privity of estate between the head-lessor and the mortgagee.

MORTGAGOR’S RIGHT TO REDEEM

In Ndaba Nig Ltd v. UBN (2007) NWLR (pt 1040) 439, the court held thus:
“The right to redeem a mortgaged property is so inseparable an incident of mortgage that it cannot be taken away either expressly or by implication, nor can such redemption be limited to time or particular persons. The right of equity of redemption continues until the mortgagor’s title is extinguished or the interest destroyed by sale either under the process of court or by the mortgagee.”
Thus court of equity will not allow the mortgagee to take any undue advantage of the mortgagor, equity will not give effect to any clause in a mortgage deed that is a clog to the mortgagor’s right to redeem; this principle has been extended to include any clause that delays redemption ( See Morgan v. Jefferys (1910) 1 Ch. 620), hence the maxim “once a mortgage, always a mortgage, there must be no clog on the equity of redemption” In  Ejikeme v. Okonkwo (1994) 8 NWLR (pt 362) 266, the  Supreme Court held, inter alia, thus:
It is a settled rule of equity that any agreement, which directly bars the morgagor’s right of redemption is ineffectual. Similarly, stipulations, which, even indirectly tend to have the effect of making a mortgage irredeemable, are equally void and unenforceable as clogging the equity o redemption.”

This principle does not mean that the court will unduly interfere with the genuine bargain of the parties; but where the circumstance is such that the agreement of the parties is so oppressive and unconscionable that the mortgagor’s right to redeem is rendered nugatory, the court of equity will intervene on the ground that the clause is unreasonable and a clog to the mortgagor’s right of redemption. There is no general rule to determine when a clause in a mortgage instrument will be held to be oppressive and unconscionable.  The court will usually look at other extraneous factors such as:

a)   the bargaining power of the mortgagor, and
b)   The length of time for which the contractual right to redeem is postponed. 

However, every case should be treated on its merit.  In Fairclough V. Swan Brewery Company (1912) AC 565, where in a mortgage of a lease of twenty years the contractual right to redeem was postponed until six weeks before expiration, the Privy Council held that the provision for redemption is nugatory.

Upon creation of a valid mortgage, legal or equitable, a mortgagor possesses three distinct potential rights to redeem the mortgaged property. One of these rights is in law while the other two are rights in equity. The rights are:
1. Legal right to redeem; and
2. Equitable right to redeem;
3. Equity of redemption.

1.    LEGAL RIGHT TO REDEEM

This is the right specifically reserved for the mortgagor to recover his property as the owner upon discharging his obligations under the mortgage. But the mortgagor to be entitled to exercise this right must comply punctiliously with the proviso for redemption. Thus a mortgage to secure money loan ordinarily fixes a definite date for repayment and at law, repayment must be made precisely on that date for the mortgagor to be entitled to exercise this very right. Generally the date for repayment may be suspended for any period. But in practice date for redemption is usually short because it is an advantage to the mortgagee to place the mortgagor in default as soon as possible. However, In Twentieth Century Banking Corporation Ltd .v Wilkinson (1977) Ch 99, the danger of fixing a date too far in the future for the redemption of a mortgage was highlighted, as the mortgagee was refused the right to enforce his security until the legal due
date (which in that case was fixed at thirteen years) had arisen. It has therefore become acceptable at common law to fix a shorter date for redemption.

2.    EQUITABLE RIGHT TO REDEEM

This is the right which arises after the legal date for redemption has passed.  The mortgage agreement will provide a legal date within which the mortgagor should have paid.  If he fails to pay on or before the legal due date, his legal right to redeem will be extinguished on that date. Before the Conveyancing Act of 1881/1882, if the mortgagor failed to pay the loan on a contractual date, he lost his right to property but was still bound to pay the debt.  Equity, however, will allow redemption on a date later than the contractual date.  In other words, you have the legal right of redemption on or before the legal due date; you have the equitable right of redemption after the legal due date. The right to redeem in equity is therefore a right given in contradiction to the declared terms of the contract between the parties: Salt v. Marques of Northampton (18920 AC, 18. This right may be exercised at any time before the right is destroyed by foreclosure or sale.

3.    EQUITY OF REDEMPTION

Equity of redemption is different from equitable right to redeem.  Equity of redemption is the equitable interest which a mortgagor has in the land as the owner.  The mortgagor can redeem his property by paying to the mortgagee the principal money and the interest that has accumulated on the principal money.  Where the mortgagor has paid to the mortgagee the amount that is due, the mortgagee shall re-convey the property to the mortgagor. A Deed Of Release is usually prepared and the particulars of the document of title of the property that is being re-conveyed to the mortgagor shall be stated in the deed of release.  The deed of release shall be registered in the Land Registry and from the date of registration the property of the mortgagor is free from encumbrance.

This is the right of a mortgagor in law to redeem his property once the liability secured by the mortgage has been discharged. Historically, a mortgagor (the borrower) and a mortgagee (the lender) executed a conveyance of legal title to the property in favour of the mortgagee as security for the loan. If the loan was repaid, then the mortgagee would return the property; if the loan was not repaid, then the mortgagee would keep the property in satisfaction of the debt. The equity of redemption was the right to petition the courts of equity to compel the mortgagee to transfer the property back to the mortgagor once the secured obligation had been performed.

Equity of redemption arises simultaneously in favour of the mortgagor as soon as the mortgage is created, and continues until the property is sold or foreclosure occurs. Equity from the onset treats the mortgagor as continuing to be the owner of the property, which he has conveyed away to the mortgagee, subject only to the mortgagee’s interest which is not a right to the mortgaged property but to the mortgage debt. See Okonkwo v. CCB (2003) 8 NWLR (pt 822) 347; UBA v. Okeke (2004)7 NWLR (pt 872) 393. Consequently, the mortgagee’s beneficial interests in the security is only as a means of enforcing his right to the debt.

Note that the mortgagor’s equity of redemption must never be clogged or rendered nugatory by the mortgagee by inserting clauses in the mortgage deed that tend to restrict the mortgagor’s ability to redeem the mortgage. Traditionally, the courts have been astute to ensure that the mortgagee did not introduce any artificial stipulations into the contractual arrangements to impede a mortgagor's ability to satisfy obligations and reclaim their property. Such impediments are "clogs" on the equity of redemption, and the courts of equity were particularly astute to strike down any provision which was, or in later cases, which might be, a clog. See Fairclough v Swan Breweries Co. Ltd. 1912 A.C. 565.  Equity will not allow an unreasonable suspension of the mortgagor’s right to redeem the mortgage security. See also Biggs v Hodinott (1898)2ch 307.  Stanley v. Wilde (1899) 2ch 474.

Note further that if the mortgagee is in physical possession of the mortgaged property and he has been in possession of the mortgaged property continuously for more than 10 years, as required under the Limitation Law, before the mortgagor brings an action to recover possession, the claim will be statute barred.  See Federal Administrator General And Ors V. Cardozo And Ors (1973) 1 ALL NLR (PT. 11) 169. Note finally that equity of redemption is more than a mere right; it is an estate in land.  It is therefore possible in some instances for the mortgagor to mortgage his equity of redemption.

Finally, in giving credence to the potency of a mortgagor’s equity of redemption, the courts have placed it on the same footing as the equity of cestui que trust. See Re Sir Thomas Spencer Wells (1933) Ch 29

SEE THE FOLLOWING CASES ON “EQUITY OF REDEMPTION MUST NOT BE CLOGED”
  1. Warring v. London & Manchester Assurance Coy Ltd. (1935) 1Ch 310, 318  
  2.   Biggs v Hoddinoff (1898) 2Ch 307
  3.   Morgan v Jeffreys (1910) 1Ch 620
  4.   Bradley v Carrit (1903) AC 253
  5.   Noakes v Rice
  6.  G&C Krelinger v New Patagonia Meat & Cold Storage Coy. Ltd.                                       


MORTGAGEE’S RIGHT OF REDEMPTION (RIGHTS OF THE MORTGAGEE)

These are means by which the mortgagee may enforce the security so as to recover the loan. There are basically four of such rights:
1.   Statutory power of sale
2.   Foreclosure
3.   Taking possession and
4.   Appointment of Receivers.

1.    STATUTORY POWER OF SALE

Under sections 19 (1) of the CA and 123 (1) of the PC & L, every mortgagee (legal or equitable) whose mortgage is created be Deed may enforce its/his security after the legal due date by sale of the mortgage property. Power of sale here is automatic; the mortgagee does not require a court order before he/it can sell. However, for the mortgagee to be entitled to exercise its power of sale, the power must HAVE ARISEN and become EXERCISABLE. For the power of sale to arise the following three conditions must exist:
a)   The mortgage must have been created by a deed;
b)   There must be no contrary intention against sale in the mortgage deed; and
c)   The legal due date, which is the date of redemption of the mortgage must have passed.

Even where power of sale has arisen, the mortgagee is still NOT entitled to sell the mortgaged property unless and until the power has become exercisable.  The power becomes exercisable when ANY of the three conditions in section 20 of the CA and 125 of the P & CL is satisfied, which is that:
                        i.         Notice requiring payment of the mortgage money has been served on the mortgagor or one of several mortgagors and default has been made in payment of the mortgage money or part thereof for three months after service of such notice/letter; or
                      ii.         Some interest under the mortgage is in arrears and unpaid for at least two months after becoming due; or
                     iii.         There has been a breach of some provision contained in the mortgage deed or in the Act/Law and on the part of the mortgagor or of some person concurring in making the mortgage to be observed or performed other than and beside a covenant for payment of the mortgage money or interest thereon.

This means that when the power has arisen, the occurrence of any of the above three factors will give the mortgagee absolute power to exercise his power of sale.  The requirement of notice to the mortgagor includes notice to persons deriving title through him, for example, where there is a subsequent mortgage.  The notice need not fix the time of repayment.  It is sufficient if it request that the mortgagor should pay the loan. The date of the service of the notice is excluded in the computation of time for this purpose.

Where the mortgagor is in default of payment of any instalment or interest is in arrears, it is not a defence that substantial part of the loan has been paid.  Thus, in Okafor & Sons V. NHDS Ltd (1972) NHJSCC 271, it was held:

Where under the terms of a mortgage deed the mortgage money is to be advanced not as a lump sum but in instalments, the mortgagee has a right to exercise his statutory power of sale under Section 19 of the Conveyancing Act, 1881 if the mortgagor is in default as to the payment of interest, even if the principal sum has not been advanced in full.”

Note that where the power of sale has not arisen, the mortgagee/lender has no right to sell but if it sells after the power has arisen but not yet exercisable, it may pass good title.

PROTECTION OF INNOCENT PURCHASERS

Section 21(2) of the CA, which is similar to Section 126(1) of the P & CL, provides that:
“Where a conveyance is made in exercise of the power of sale conferred by this Act, the title of the purchaser shall not be impeached on the ground that no case has arisen to authorise the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised but any person damnified by an unauthorised or importer or irregular exercise of the power shall have his remedy in damages against the person exercising the power.”

Therefore, where a prospective purchaser is investigating the title of the mortgagee to sell, he is only bound to inquire whether the power of sale has arisen; he needs not concern himself with whether or not the power has become exercisable.

Note that this protection is available only to a purchaser for value acting in good faith. Where the purchaser has actual notice that the power of sale is not exercisable or of any fact or circumstances that is improper or irregular, the exercise of the power of sale of the property to him will be defeated because equity will not allow him to benefit from his fraud.  Otherwise, the purchaser takes free of the mortgagor’s interest.  The sale extinguishes the mortgagor’s equity of redemption. 

The mortgagor’s remedy in such a situation is in damages against the mortgagee. The purchaser takes a good title, provided he a bona fide purchaser for value without notice.

CONDUCT OF SALE

How do you conduct the sale?  Usually, it will be by public auction.  Where a mortgagee’s power of sale has arisen and become exercisable, he is not a trustee of the mortgagor in conducting the sale.  He is, therefore, not bound to sell at a particular price provided he (the mortgagee) acts in good faith. 

A sale at undervalue is not proof of bad faith unless the mortgagee sells to himself and to his nominee or his agent.  In that case, the court can infer bad faith.  See Eka-Eteh V. Nhds Ltd And Anor (1973) ALL NLR 555 where it was held thus:
“undervalue alone is not sufficient to vitiate the exercise of a mortgagee’s power of sale; it must be shown that the same was made at a fraudulent or gross undervalue. Also, if having regard to the circumstances of the particular case, a mortgagee exercises his power of sale in good faith his conduct cannot be impeached.  So since there is no evidence of mala fides or collusion on the part of the defendants, the second defendant is entitled to the statutory protection afforded a bona fide purchaser by Section 126(2) of the P & CL and the sale to him cannot be set aside.”

In Kennedy V. Trafford (1897) AC 180, the court held that a mortgagee discharges his duty towards the mortgagor if he exercises his power of sale in good faith. But if he wilfully and recklessly deals with the property in such a manner as to sacrifice the interests of the mortgagor, he cannot be said to have exercised his power of sale in good faith.

APPLICATION OF THE PROCEED OF SALE

Though the mortgagee is not a trustee of the mortgagor for the conduct of the sale, he is a trustee for the proceeds of sale.  See section 21(3) of the Conveyancing Act and section 127 of the P & CL.  Section 21(3) of the Conveyancing Act and Section 127 of the P & CL regulate distribution of the proceed of sale.  s

         ORDER OF DISTRIBUTION OF THE PROCEEDS OF THE SALE

1.   Prior encumbrances are discharged/settled.
2.   Cost, charges and expenses properly incurred in the sale;
3.   Mortgage sum and interest will be paid;  and
4.   the balance will be paid to the mortgagor.

If there is no balance, the mortgagee is still entitled to demand for the remaining unpaid balance.  See the case of Visioni  V. National Bank (1975) 1 NMLR 8. 

INJUNCTION AGAINST SALE

Though the mortgagor’s power of sale will not generally be restrained by injunction, in deserving circumstances the mortgagee may be restrained from exercising the power of sale. The mortgage can be restrained in the following situations:

1)      Where the right of sale has not arisen;
2)      Where the parties agreed to a different mode of sale.
3)      Where the mortgagor can validly rely on plea of estoppel.
4)      Where the mortgage is a fraud on the mortgagor
5)      Where the mortgagor pays the whole outstanding sum and interest into court before the sale

2.    FORECLOSURE
Foreclosure is a judicial process through which the mortgagor’s equity of redemption is terminated and all the interests in the mortgagor property become vested in the mortgagee, subject to the right of other mortgages who rank in priority above him.  Foreclosure is more effective when the mortgagee is in need of his capital which cannot be realised from rent or profit on the mortgaged property. An interim order called “a foreclosure nisi” is first decreed giving the mortgagor six months within which to redeem the mortgaged debt.  At the expiry of the six months, the order is made absolute.  All subsequent mortgagees and the mortgagor should be made parties to the action.  There is no doubt that the remedy of foreclosure is available to a legal mortgagee.  In Ogundaini V. Araba (SUPRA), the Supreme Court held that foreclosure is available to mortgagee in an equitable mortgage created by deposit of title deed if accompanied by an agreement by the mortgagor to give a legal mortgage when required to do so.  Ideally, foreclosure, and not sale, is the appropriate remedy in an equitable mortgage (except the one created by a mere charge).

Commenting on the nature of foreclosure, Jessel, MR in Carter v. Wake (1877) 4 Ch D 605, that foreclosure “is no more than the court’s removing from the mortgagee’s title the stop which the court itself had imposed.”  Foreclosure is the destruction of the equity of redemption which previously existed: Re Farnol, Eades, Irvine & Co (1915) 1 Ch D 22 at 24

Because of the drastic nature of foreclosure, it is not every breach by a mortgagor that will warrant making of a foreclosure order. In appropriate cases, the court in an action for foreclosure may order the sale of the property instead of foreclosure (see section 114 (2) of the PC & L). Where the property is sold to acquire the legal interest in the property, the purchaser must comply with the requirement of obtaining Governor’s consent under the Land Use Act. In Danjuma v. Mohamed Bai (1965) NMLR 455, the court held that “there shall be no transfer in the right of occupancy or any part without the Minister’s consent. Until that consent is obtained, the purchaser has no right at all in the property….”

QUESTION
When should action for foreclosure to recover cost be brought after which it will be statute barred?
ANSWER
An action for foreclosure to recover cost must be brought within 12 years of the date fixed for payment of the principal; otherwise it becomes statute barred.  Note that an action for foreclosure to recover land must be brought within 12 years of the date fixed for payment of the principal; otherwise it becomes statute barred.  See the Limitation law of Lagos State. The strict mode of enforcing a mere charge is by sale or appointment of receiver under an order of court but never by foreclosure.  On the other hand, foreclosure and not sale is a better remedy in an equitable mortgage.

RE-OPENING OF A FORECLOSURE

 Instances in which a foreclosure order made by the court can be reopened:

1.   If the mortgagee, after obtaining a foreclosure order absolute still sues the mortgagor on his personal covenant to pay the loan. 

2.   If the mortgagor, after the foreclosure order absolute, applies to the court without delay stating that his inability to repay was due to circumstances beyond his control and that he is now able to pay.

3.   Where the security far exceeds the outstanding mortgage sum and interest;

4.   Where the security is of special value to the mortgagor, e. G. family property.

5.   Where it is just and equitable to allow the mortgagor to redeem




3.    TAKING POSSESSION

Can any equitable mortgagees take possession?  The answer is no.  The right of entry into possession is only available to a legal mortgagee. Possession goes with legal ownership; hence a legal mortgagee is entitled to possession whether or not the mortgagor is in default of payment of the loan.  But where he takes possession, he is liable to account strictly to the mortgagor for the rent/profits accruing from the property.  It is for this reason that mortgagees do not find the right to possession attractive unless it is used as a preliminary to enforcing the power of sale.  But in practice, mortgagees insert in the mortgage instrument a clause that exclude the rule that a mortgagee in possession or a receiver appointed by him shall account strictly.

QUESTION:

When does the right to TAKE POSSESSION arise? 

ANSWER:

As soon as you have executed the mortgage deed and the Governor has given his consent, the mortgagee becomes entitled to possession immediately.  The right arises immediately after the execution of the mortgage deed.  It is possible, however, for the mortgagee to give away this right under the mortgage deed.  If they are the tenants on the mortgaged property, they will pay rent to the mortgagee.  While in possession, the mortgagee can create leases and accept surrender of leases.

A mortgagee is advised not to take possession except the property is being squandered or being destroyed or depreciated is imminent or where there is need to intercept the profit.  If a mortgagee decides to go into possession, equity imposes on him a strict liability to account for the profits on the property.  He will be liable for negligence or wilful default for any sum not recovered.  He is also liable for any deterioration or neglect or disrepair of the property.  He cannot, however, be compelled to get the highest rent on the property.  Note that he cannot make profit from the property; he can only realise his security.

4.      APPOINTMENT OF A RECEIVER

Section 19(1)(iii) of the Conveyancing Act and Section 123(1) of the P & CL provide for the power of the mortgagee, when the mortgage money has become due, to appoint a receiver of the income of the mortgaged property or any part of it.  This statutory right is implied in every mortgage, legal or equitable, created by a deed where the circumstances would allow the mortgagee to exercise a power of sale.

The mortgage money must have become due before a receiver can be appointed.  In other words, the legal due date must have expired.  The remedy for the appointment of a receiver is open to both legal and equitable mortgages. The legal mortgagee himself may appoint a receiver if he has such power under the mortgage deed.  If that power does not exist in the mortgage deed, he can apply to court for the appointment of a receiver. An equitable mortgagee, whose is not by deed, must apply to the court for the appointment of a receiver.  The receiver though appointed by the mortgagee, is the agent of the mortgagor hence the mortgagee is not liable to account to the mortagor.

The duty of the receiver is to take the mortgaged property out of the control of the mortgagor and to apply the income therein; any rent or profit that he can get from the property in offsetting the mortgaged debt. Please, note that the receiver is the agent of the mortgagor where appointed under the mortgage contract by the mortgagee.  He is an officer of the court when he is appointed by the court and on no occasion is he an agent of the mortgagee.

Appointment of receiver is very good for equitable mortgagee since he has no legal estate.  Therefore, he cannot enter into possession; possession is synonymous with legal title.  He cannot enter into a legal estate for the receipt of the rent and profit. What an equitable mortgagee cannot do directly by entering into possession, he can do by appointing a receiver.  In AWOJUGBAGBE’s case, the mortgagee, that is, NIDB appointed a receiver and the receiver took possession by force and the court held that they were not liable in damages.

NOTE:

The rights discussed above are enforceable against the mortgaged property and they are  not mutually exclusive; they are cumulative.  Thus, the mortgagee may appoint a receiver who will take possession and sell.  Nothing prevents the mortgagee from bringing an action against the mortgagor on his personal covenant to repay the loan.


EQUITABLE MORTGAGE BY OPERATION OF LAW

See the case of SAVANNAH BANK NIGERIA LTD. V. AJILO (SUPRA).  The Court in this case that legal mortgage was void for lack of Governor’s consent but there is equitable mortgage.

CAPACITIES OF PARTIES TO A MORTGAGE

See the Infant Relief Act, 1874 that is applicable in the North, East and Lagos.  It states:

“All contracts, whether by specialty or by simple contracts, entered into by infants for the repayment of money lent or to be lent is void absolutely.”

In the P & CL States, a legal mortgage of land is not to be made or transferred to an infant.  Such agreement shall operate as an agreement for valuable consideration to execute a proper conveyance when the infant attains full age. In the meantime, to hold any beneficial interest in the mortgage debt in trust for persons for whose benefits the conveyance was intended to be made.  Where conveyance is made for persons who are of full age and also infants, it shall operate as if the infant had not been named therein.  In other words, you can make a legal mortgage in that instance.  So, when we have persons of full age and an infant the law takes it that the infant does not exist but it does not mean that his interest is extinguished.

TRUSTEES

A trustee has no right to borrow money on the security of a mortgage or trust property.  In other words, if you are a trustee, and you are managing buildings or property, the general rule is that even though you have legal estate, you cannot mortgage trust property.  This is because it is not actually your own; it is for the beneficiaries. Equity will not allow a trustee to unduly subject the trust property to financial risk to the detriment of the beneficiaries.
EXCEPTIONS TO THE RULE
1.   If the trust instrument expressly states so that you are allowed to use their property as security, you can do so.
2.   If a statute gives a trustee power to do that, of course, he can do so.

PERSONS OF UNSOUND MIND
The general rule is that persons of unsound mind cannot enter into contract except during his lucid period and provided that a receiver has not been appointed for him. 

STATUTORY CORPORATION AND REGISTERED COMPANIES

Statutory corporations are registered companies.  See Section 39(1) of the Companies and Allied Matters Act (CAMA) which provides that a company shall not carry on any business not authorised by its Memorandum and shall not exceed the powers conferred upon it by its Memorandum or this Act. Section 39(3) of CAMA protects any acts, conveyance or personal property even though ultra vires from being invalidated.  In other words, notwithstanding the provisions of subsection (1) of this section, no act of a company and no conveyance or transfer of property to or by a company shall be invalid by reason of the fact that such act, conveyance or transfer was not done or made for the furtherance of any of the authorised business of the company or that the company was otherwise exceeding its objects or powers. 

TITLE OF A MORTGAGOR
A mortgage transaction is between the mortgagor and the mortgagee and it is the mortgagor that is supposed to transfer his title to the mortgagee.  See the case of T. B. ERIKITOLA V. A. S. ALI (1941/1942) 16 NLR 565.  In this case, the property was part of family land which was held by a domestic servant of the family.  The servant, by a deed of gift, purported to convey it to his son.  The son, on his part, by a deed of mortgage purported to mortgage it to the mortgagee. The plaintiff bought and obtained the conveyance of the property from the defendant who was also the mortgagee.  An action of the plaintiff to obtain possession of the property failed because the family said it was their land it is family land and you know the principle of inalienability of family land; except it has been partitioned, you cannot sell or transfer. Before a bank will accept a property for mortgage, there is need for proper valuation to ensure that current values leaves a margin between the debt and value of the property in favour of the mortgagee.

PROPER DOCUMENTATION AND EXECUTION

There must be proper documentation and execution.  When you execute, there would be attestation. As regards the issue of an illiterate, once one of the parties is an illiterate, Section 2(2) of the Illiterate Protection Law of Lagos State, for example, requires that the document should be read over and explained to the illiterate before his signature or mark is affixed.

LAND INSTRUMENT REGISTRATION LAW

Section 8(1) of the Land Instrument Registration Law requires the execution of instrument when it involves an illiterate and it must be in the presence of a magistrate, and justice of the peace and it should be subscribed by such magistrate and justice of peace as a witness.  See EDOKPOLO V. OHEHEN (SUPRA). See also the case of OKELOLA V. BOYLE (1998) 5 NWLR (PT. 119) 46, particularly at page 81.  In this case, it was held that is not enough to prove that Exhibit (d)(i), that is, the Will, was prepared by a legal practitioner, it must be shown further that the testator knew the content of the instrument and that the content complied with the instrument of the legal practitioner who prepared it.  It is essential to the validity of a will that the testator should know and approve its content.

STAMPING

STAMP DUTIES ACT

See the case of ILYA V. QUDUS.  What is the effect or penalty of a document that is not stamped?
1.   It would not be acceptable for registration.
2.   It will attract penalty.
3.   It is inadmissible in evidence.

REGISTRATION

Under the provisions of the Land Registration Act, an instrument is a document affecting land in Nigeria whereby one party, that is, the grantor, confers, transfers, limits, charges or extinguishes in favour of another party, that is, the grantee, any right or interest in land in Nigeria, and it includes a certificate of purchase and a power of attorney under which any instrument may be exercised, but does not include a will. It should be noted that what is required to be registered is not an interest in land but merely an instrument affecting land. 

THE EFFECT OF NON-REGISTRATION OF A DOCUMENT

1.   It is inadmissible in evidence in any court.
2.   Non-registration of the registrable instrument will result in loss of priority.  See AMANKRA V. ZANKLEY (1963) 1 ALL NLR 304.
3.   It is void under the Registration of Titles Law if not registered within the specified period of time.
In AMANKRA V. ZANKLEY (SUPRA), Bairamian, JSC, delivering judgment of the court expressed the view that the Land Registration Act is not an Act for the registration of title to land but that it contains sanctions for failure to register and for delay in registration. The learned Justice went on:  When two persons claim the transfer of a legal estate, he who did not register his conveyance cannot plead it or give it in evidence.  If they both registered their deeds, each takes effect as against the other from the date of registration, which means that the one executed earlier loses its priority if it was registered later.  What counts is the date and hour of registration.  Therefore, the plaintiff who had the earlier effective instrument of transfer in accordance with the provisions of the Act was preferred.

GOVERNOR’S CONSENT

See Section 22 of the Land Use Act.  A holder of a statutory right of occupancy cannot alienate his right by assignment, mortgage, transfer of possession, sublease or otherwise without the consent of the Governor.  That is what Section 22 of LUA says.

Section 26 of the same Act states that any transaction or any instrument which purports to confer on or vest in any person any interest or right over land other than in accordance with the provisions of this Act shall be null and void.  See SAVANNAH V. AJILO (1989) 1 NWLR (PT. 77) 305.  In this case, the Supreme Court held that the legal mortgage that was executed in favour of the bank by the respondents was declared null and void on the ground that consent of the Governor was not obtained.  The Supreme Court lamended in that case that it was not canvassed before the court that the respondents, having enjoyed the overdraft from the appellant bank, cannot relay on their own failure to obtain consent to the transaction to defeat the right of the appellant bank to sell the mortgaged property.  The case was never fought for the appellant bank on equitable grounds.  The decision in SAVANNAH BANK OF NIGERIA LTD. V. AJILO should, therefore, not be regarded as a general principle of law and the principle of law therein should be confined to the peculiar facts of that case.

See also FEDERAL MORTGAGE BANK OF NIGERIA V. BABATUNDE (1999) 12 NWLR 632, particularly at page 683.  Here, AJILO V. SAVANNAH BANK’s case was followed.  It was held that a mortgagor was void for absence of the requisite consent. In UGOCHUKWU V. COOPERATIVE AND COMMERCE BANK NIGERIA LIMITED (CCB) (1996) 6 NWLR (PT. 456) 524, it was held that the holder of a right of occupancy is the one to seek the consent of the Governor.  A mortgagor cannot be held to say that the transaction is void for lack of consent.
In the case of ADEDEJI V. NATIONAL BANK OF NIGERIA (1989) 1 NWLR 212, the court held that the transaction was inchoate.

In AWOJUGBAGBE LIGHT INDUSTRIES V. CHINUKWE AND ANOR (1995) 4 SCNJ 162, Section 22(a) of the Land Use Act states that consent of the Governor was not required to the creation of a legal mortgage over a statutory right of occupancy in favour of the person in whose favour an equitable mortgage over the right of occupancy had already been created with the consent of the Governor.

Section 22(b) of the Land Use Act provides that consent shall not be required to the reconveyance or release by a mortgagee to a holder or occupier of a statutory right of occupancy which that holder or occupier has mortgaged to that mortgagee with the consent of the Governor.

CREATING A LEGAL MORTGAGE: CONSENT

Section 22 of the Land Use Act, 1978 provides that where an equitable mortgage has been created in favour of a mortgagee and consent has been obtained, further consent is not required to a legal mortgage replacing the equitable mortgage.  However, the Act does not require consent to a loan transaction nor does it make unlawful for a loan transaction to be effected without first obtaining the Governor’s consent.  See OGUNDOLA V. NICON (SUPRA).  But the prior consent of the Governor is required for the creation and registration of a legal mortgage or a charge by deed.  See SAVANNAH BANK OF NIGERIA LTD. V. AJILA (1989) 1 NWLR (pt 97) 305.

Apart from the legislative requirement of consent by the State Governor, consent of landlord or (sub lessor) may be required on the mortgage of a leasehold land or certificate of occupancy if there is a widely drawn covenant restricting a tenant/sub-lessee’s right to “assign, let, mortgage or otherwise part with possession of the demised property or any part thereof”.

A solicitor, mindful of the effect of such covenant, should have amended it by deleting the words “mortgage” and “charge” and by inserting a qualification that the provisions of the sub-clause do not prohibit an assignment or under letting by way of mortgage.

TRANSFER OF MORTGAGES

Section 27 CA and 134 PC & L provide for the power of the mortgagee to transfer the mortgage or the benefit of the mortgage to a transferee by executing a Deed expressed to be made by way of statutory transfer. The consequences of such transfer are:

1)      The transferee acquires the right to  demand, sue for, recover, and give receipt for, the mortgage money or the unpaid part of it and interest thereon (if any) as may be due.
2)      The transferee acquires the right to sue on all covenants with the mortgagee, and the right to exercise all powers of the mortgagee.
3)      the transferee acquires all the estates and interests I the mortgaged property then vested in the mortgagee subject to redemption of the loan.

COVENANTS BY THE MORTGAGOR
         The mortgage should include all covenants on the mortgagor’s part as follows:

1.   Punctual payment of interest
2.   Insurance
3.   Provisions for borrower not to redeem for certain term, and
4.   Consolidation
5.   Leasing by the mortgagor
6.   Repair

1.   PUNCTUAL PAYMENT OF INTEREST
Basically, there must be a covenant that interest must be charged on the money he borrowed.  At the legal due date, he will pay the principal and also the interest.

2.   INSURANCE
The mortgagee/lender has insurable interest in the property and he may insure.  But Sections 23 of the CA and 130 of the P & CL restrict the power of the mortgagee to insure, the amount of the cover should not exceed the amount specified in the mortgage deed.  Sections 23(3) of the CA and 130(3) of the P & CL provides for the application of insurance money.  Insurance money should be applied to reinstate the property and parties should state what happens if reinstatement is not possible.  In JIA ENTERPRISES LTD. V. BRITISH COMMONWEALTH INSURANCE COMPANY (1962) 1 ALL NLR (PT. 2) 363, the mortgagee wanted to be joined in the action for the insurance money, the court held that they could not be joined. 

3.      PROVISIONS FOR BORROWER NOT TO REDEEM FOR TERM CERTAIN
When providing for redemption of the mortgage, it should be recalled that the right to redeem cannot be clogged except in the case of company debenture as provided in Section 171 of CAMA. A mortgage cannot be made totally irredeemable and if the right to redeem is for a term certain, the term must not be unduly long, even if there is a corresponding provision preventing the lender from calling in his money.  Each case depends on its facts.  A term of 10 years was held to be fair in the case of MULTI SERVICE BANKING LTD. V. MERDEN (1979) CH. 84.

SECTION 171                 CONSOLIDATION
This is the right of a mortgagee who has two or more mortgages on different properties from the same mortgagor to refuse to permit him to redeem one without redeeming the others.  This right is not favourable to the mortgagee/lender who should exclude it.  It is sufficient if the contrary intention is expressed in any one of the two mortgage deeds.  There is no equivalent prevalent provision under the Conveyancing Act, hence the Common Law rule applies in those States governed by that Act. 

At Common Law, the principle is that he who seeks equity must do equity and the mortgagor’s right of redemption, being an equitable right, he is not allowed to redeem one property and leave the other. 

  5. LEASING BY THE MORTGAGOR
Except otherwise provided in the mortgage deed, the mortgagor has the power to lease the property.  The covenant is dependent on the right to possession.  Therefore, the mortgagee may prohibit leasing by the mortgagor without his consent.  Where leasing is prohibited, the mortgagor may, however take in a licencee.

  6.    REPAIR
There is no statutory obligation on the part of the mortgagor to keep the property in repair, hence, it is important that it is expressly inserted in the mortgage to preserve the value of the property.  But where the mortgagee carries out repairs, the cost is added to the loan.

SECTION 172                 ATTORNMENT CLAUSES
Sometimes, the mortgage deed contains an Attornment clause by which the mortgagor expressly constitutes himself a tenant of the mortgagee at a nominal rent, the mortgagee being given power to determine the tenancy so created at any time without notice.  The clause is of title, if any, value and conveyancers should avoid its use.

MORTGAGE BY COMPANIES
Section 166 of the Companies and Allied Matters Act provides that:

“a company may borrow money for the purpose of its business or objects and may mortgage or charge its undertaking, property and uncalled capital or any part thereof and issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the company or of any third party.  This is done in the following ways:

1.   MORTGAGE OF LAND
A mortgage of land by a company is called “mortgage debentures”.  See KNIGHTBRIDGE ESTATE TRUST LTD V. BRYNE (1940) AC 613.

2.   POWER TO MORTGAGE
Every trading company, unless prohibited by memorandum or articles, has implied power to borrow money for the purpose of its business and to give security for the loan by creating a mortgage or charge of its property.  See GENERAL AUCTION ESTATE COMPANY V. SMITH (1891) 3 CH. 432.

3.      COMPULSORY REGISTRATCION AT COMPANIES REGISTRY
Registration at the Companies Registry under Section 197 of CAMA within 90 days is mandatory because if not registered, it is invalid against subsequent creditors or receiver.  After the period of 90 days, it cannot be accepted for registration without an order of the court.  See Section 205 of CAMA.

4.      REGISTRATION UNDER THE STATE LAND INSTRUMENTS REGISTRATION LAW
         The registration after stamping must be done in each State Capital in respect of dealing with land situated in any particular State.

SECTION 173                 REGISTRATION UNDER THE TITLE LAW, CAP 121 (LAGOS STATE)
         If the land is within a registration district, it must be registered failing which the mortgage will be void after two months.  See ONASHILE V. BARCLAYS BANK DCO (SUPRA).

DISCHARGE OF MORTGAGES

The discharge of a mortgage means that the loan plus interest has been redeemed.  The mortgagee/lender is ready to release the property and return to the mortgagor documents deposited as security.  The discharge of a mortgage terminates and releases the mortgagor from his obligations under the mortgage.  The mode of discharge of a mortgage depends on the type of mortgage and how it was created.  That is:

1.   A LEGAL MORTGAGE CREATED BY ASSIGNMENT OR SUB DEMISE
This is discharged by the reconveyance by deed of discharge, release or surrender of the interests in the property to the mortgagor.  The deed should be registered at the Lands Registry as evidence of discharge.

2.   A MORTGAGE CREATED BY A CHARGE BY WAY OF A LEGAL MORTGAGE
This is discharged by a statutory receipt which states the name of the person who pays the money and is executed by the chargee by way of legal mortgage or the personh in whom the mortgaged proerty is vested and who is legally entitled to give a receipt for the mortgage money.

3.   A MORTGAGE OF A REGISTERED CHARGE UNDER THE REGISTRATION OF TITLES LAW
This is discharged when its registration is cancelled at the Registry by lodging the Charge Certificate and the Land Registry Form 6 at the Registry.

4.   AN EQUITABLE MORTGAGE
A simple receipt under hand discharges an equitable mortgage unless payment is made to the mortgagee’s solicitor in which case, the receipt should be by a deed, so as to protect the mortgagor or the person paying the money.

5.   WHERE THE MORTGAGOR/BORROLWER IS A CORPORATE ENTITY OR A JURISTIC PERSON
Where the mortgagor is a corporate entity upon the redemption of the debt, a memorandum of satisfaction under Section 204 of the Companies and Allied Matters Act should be filed at the Corporate Affairs Commission.

6.   DISCHARGE BY COMPLYING WITH SECTION 135 OF THE P & CL, 1959
An alternative method of the discharge of mortgages is where a receipt is either endorsed on, written at the foot of, or annexed to, a mortgage for all money secured by it which states the name of the person who pays the money and is executed by the mortgagee or the person in whom the mortgage property is vested and who is legally entitled to give a receipt for the mortgage money.  The receipt shall operate without any reconveyance, surrender or release as a discharge of the mortgaged property from all principal money and interest secured under the mortgage.  This method dispenses with the use of a deed of discharge, surrender or release.

EXCEPTION TO THE RULE

SECTION 171 OF THE COMPANIES AND ALLIED MATTERS ACT

This rule of equity does not apply to a debenture.  A debenture is an instrument usually issued by a corporate entity as evidence of a debt or as security for facility.  It contains a promise to pay the amount stated on the face of it.  Section 171 of CAMA provides that:
“A company may issue perpetual debentures and a condition contained in any debenture or in any deed for securing any debenture shall not be invalid by reason only that the debenture are made irredeemable only on the happening of a contingency, however remote, or on the expiration of a period, any rule of equity to the contrary notwithstanding. 

QUESTION
         What are the similarities between mortgage debenture and mortgage?
ANSWER
SIMILARITIES BETWEEN MORTGAGE DEBENTURE AND MORTGAGE

Mortgage implies a debt and a personal obligation by the mortgagor/borrower to pay it.  If there is a covenant or bond for the repayment of this debt, then it is a speciality debt but if it is not, it is a simple debt.  See SHIRU V. BARCLAYS BANK OF NIGERIA (1975) NMLR 148. 

One of the essential elements of mortgage is the equity of redemption.  A mortgagor/borrower has the right to redeem his property that is in possession of the mortgagee by paying to the mortgagee the principal money and interest.  The rate of interest to be charged by a mortgagee is now regulated in Nigeria by the Central Bank and no mortgagee can impose arbitrary rate of interest on the mortgagor. 

It is not only a freehold property that can be mortgaged, a leasehold property can also be mortgaged but in some cases, the consent of the lessor must be obtained to the transaction and if there is any default on the part of the mortgagor his unexpired residue in the leasehold property with the consent of the lessor can be assigned by the mortgagee/lender to a third party.  See TRANS ATLANTIC COMPANY V. BANK OF THE NORTH (UNREPORTED) SUIT NO 1/7/35/91.

A deed of legal mortgage must show clearly the parties to the mortgage agreement, the property under mortgage, the amount for which the property was mortgaged and the duration of the legal mortgage.  If it is a leasehold property the term to be granted to the mortgagee by the mortgagor must be less one day because of the right of reversion of the lessor.
A mortgage debenture, on the other hand, is provided in Section 171 of CAMA which states that a company may issue perpetual debentures and a condition contained in any debenture or in any deed for securing any debenture shall not be invalid by reason only that the debenture are made irredeemable only on the happening of a contingency, however remote, or on the expiration of a period, any rule of equity to the contrary notwithstanding. 

FOR FURTHER  READING:

1)      Imhanobe (legal Drafting & Convyancing)                                            ---  Chapter 16

2)      Osamolu et al. (Real property Law & Conveyancing Practice In Nig.) --–  Chapter 15

3)      Oniekoro (Mortgages in Nigeria)         
                                             
4)      I. o. Smith (The Law of Real Property in Nigeria)
5)      YY Dadem: Propert law practice in Nigeria


THE END (for now)

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