Critical Analysis: Mortgage As A Form of Securing Loan Transaction in Nigeria

By Patrick Mgbeoma Esq. , Senior Associate – AAA Chambers

Mr Ken intends to obtain a loan facility from Titanium Bank but will have to use his house as collateral to obtain the loan, when Mr Ken exchanges the title document to his house with Titanium Bank, then a mortgage has been created between the parties which is equitable. The Mortgage can become a legal mortgage when he executes a deed of mortgage and obtains the relevant governor’s consent.

Put differently, Mr Ken wants to obtain a loan from Titanium Bank but he does not have a house to use as collateral to get the loan. Mr Ken decides to approach his friend; Mr Pat who has a house, to use his house as collateral for the loan obtained by him from Titanium Bank. Once there is an agreement from the parties, a tripartite legal mortgage has been created.

MORTGAGE

A mortgage is a conveyance or lien over a property for the security of the repayment of loan facility which is discharged after the liquidation of the loan facility. It should be noted that there is always a provision for redemption on repayment of the loan or discharge of such other obligation see the case of SUBERU V. AISL LTD (2007) 10 NWLR (pt. 1043) 590

Note that it is not out of place to use “borrower/lender” but we must be consistent in the use of language. 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.

MORTGAGE & OTHER RELATED TERMS

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 the 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.

A MORTGAGE AND LIEN

Lien is a right to hold on to a property or land 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 a general right of sale. In the case of a 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 security against repayment not being made. 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, a lien arises not from the agreement between the parties but by operation of law.

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 a 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

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 mortgaged property where the mortgagor defaults in his obligations under the mortgage.

TYPES OF MORTGAGE

There are Two (2) broad types of mortgages, namely, LEGAL and EQUITABLE.

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 mortgaged property upon fulfilment of his obligations under the mortgage.

EQUITABLE MORTGAGE

An equitable mortgage is a type of mortgage created under the rules of equity. It confers equitable interest on the mortgagee. An equitable mortgage is more suitable for short-term loans. Equitable mortgage is not as secure as a legal mortgage, but in practice, the mortgagee protects his/herself 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 to 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 where they make use of Forms.

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 –

THE CONVEYANCING ACT, 1881 (CA) STATES

Under the Conveyancing Act, we have two Methods/modes of creating a legal mortgage:

• 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. 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 the estate; the mortgagee is therefore bound to observe and perform all restrictive covenants that run with the land.
• 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 mortgaged 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.

PROPERTY & CONVEYANCING LAW (PC & L) STATES:

Under the PC & L, there are two methods/modes of creating a legal mortgage:

• 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 redemption – the 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.
• 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. It is advantageous since no interest is passed to the mortgagee, it is no breach of the covenant against sub-letting. as provided in SECTION 22, LAND USE ACT

CREATION OF LEGAL MORTGAGE UNDER THE REGISTRATION OF TITLE LAW, LAGOS:

This law regulates the creation of mortgage in the Registration District of Lagos. There is only one method of creating a mortgage under this Law, and that is by a Charge using FORM 5. See SECTION 21, RTL.

UPSTAMPING

This is the process of creating successive Legal Mortgage using the same property as security provided the value of the property can conveniently accommodate the successive mortgages. The possibility of creating successive legal mortgages over the same property depends on where the property is located:

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 a legal mortgage is the common law, and at Common Law successive legal mortgages could not be created over the same property. The rationale behind this is that where a mortgagor creates a legal mortgage, he/she 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

In The P &CL 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 a successive legal mortgage over the same property thus:

CREATION OF LEGAL MORTGAGE IN LAGOS STATE

The law guiding all mortgage transactions in Lagos State is the Mortgage and Property Law of Lagos State, 2010 which has abolished the P & CLFOR LEGAL MORTGAGE Sec 15(1) of the MPL2010 makes it only operable in the following ways.

• A demise (the conveyance or transfer of property) of a term of years absolute, subject to a ceaser on redemption. A mortgage cannot be created by assignment under the MPL2010, however, the law provides that any purported assignment by mortgage made after the commencement of the law shall have the effect of a demise of the land to the mortgagee for a term of year absolute, but subject to redemption.
• A charge by deed expressed to be by way of legal mortgage. The mortgagee does not take an interest in the land at all but he is still protected under the law as though he has a legal estate. It is drafted to reflect the fact that it’s a deed of legal mortgage.
• A charge by deed expressed to be by way of statutory mortgages in the forms provided under this law. The mortgagee does not take an interest in the land at all, yet he is still protected under the law as though he has a legal estate. It is simply a statutory form to be filled out.

FOR AN EQUITABLE MORTGAGE:

SECTION 18(1) Mortgage and Property Law of Lagos State 2010 (MPL2010) retains the creation of equitable mortgage by:

Agreement to create a legal mortgage. This means that any defective legal mortgage automatically becomes an equitable mortgage. Another way a legal mortgage could arise in this context is where the parties did not create a legal mortgage but simply agrees to create it in the future. In this instance, there’s an agreement or contract to create a legal mortgage.

Mortgage of equitable interest. This is created where what is mortgaged is an equitable right or interest. An example of this equitable mortgage is the mortgage of a beneficiary under a trust which is just a mortgage of the beneficiary’s equitable interest.

SECTION 18(1) of the Mortgage and Property Law of Lagos State 2010 has outlawed the practice of creating an equitable mortgage of land by mere deposit of title documents. An exception to this is only in instances where such deposit is accompanied by an agreement of sorts, written and included in it “terms of the agreement.”

CREATION OF EQUITABLE MORTGAGE

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 MORTGAGE– mere 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 an equitable mortgage. Based on the principle in WALSH v. LONSDALE (1882) 21 Ch D. pg 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.

1. 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 the 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, the equitable mortgage is created. See the case of YARO v. AREWA CONSTRUCTION LTD (2008) All FWLR (pt. 400) 603.
2. MORTGAGE OF AN EQUITABLE INTEREST: where the mortgagor has an equitable interest in the property subject matter of the mortgage (e.g. Trust)
3. EQUITABLE CHARGE OF THE MORTGAGOR’S PROPERTY – This is a mere equitable charge of the Mortgagor’s property. This does not create an estate (proprietary right), it merely gives a right to repayment of the debt or other discharge of other obligation/burden in respect of which the property stand charged. 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 a receiver under an order of Court. See OGUNDAINI v. ARABA (supra).
4. INCHOATE LEGAL MORTGAGE: A legal Mortgage that has not been fully perfected. See SAVANNAH BANK v. AJILO (1989) 1 NWLR (Pt. 77) 305

MORTGAGOR’S RIGHT TO REDEEM

This is the right the Mortgagor has to recover his property upon the fulfilment of his obligations. 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).

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 of redemption.”

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.

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 at a fixed date, repayment must be made precisely on that date for the mortgagor to be entitled to exercise this very right. 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.

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, and his equitable right kicks off and extinguishes upon foreclosure.

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 outstanding 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.

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.

Equity of redemption arises 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, 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; U.B.A. v. OKEKE (2004) 7 NWLR (pt. 872) 393.

MORTGAGEE’S RIGHT OF REDEMPTION

These are means by which the mortgagee may enforce the security so as to recover the loan facility granted to the Mortgagor. There are basically three of such rights:

1. Statutory power of sale
2. Foreclosure
3. Appointment of Receivers. (Section 19(1)(iii) of the Conveyancing Act and Section 123(1) of the P & CL.

STATUTORY POWER OF SALE

Under sections 19 (1) of the CA and 123 (1) of the P& CL, 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 mortgaged 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.

PROTECTION OF INNOCENT PURCHASER

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 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 to 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.”

APPLICATION OF PROCEEDS OF SALE

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 the distribution of the proceed of sale.

• Or of distribution of the proceeds of the sale are as follows;
• Prior encumbrances are discharged/settled.
• Cost, charges and expenses properly incurred in the sale;
• Mortgage sum and interest will be paid; and
• 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.

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.

In the case of a successive mortgage, all subsequent mortgagees and the mortgagor should be made parties to the action. There is no doubt that the remedy of foreclosure is also available to a legal mortgagee who requires the protection of the Courts.

Commenting on this nature of foreclosure, Jessel, MR in CARTER v. WAKE (1877) 4 Ch. D 605, stated that foreclosure “is no more than the court’s removing from the mortgagee’s title the stop which the court itself had imposed.”

LEARNING POINTS

Where there is a perfected deed of Legal Mortgage, there is no need for an Order of Foreclosure to exercise our client’s right of sale where the power of sale has arisen, save for the issue of Court’s protection

Where we seek an Order of Foreclosure from the Courts, the first Order made by the Courts is Foreclosure Order Nisi which last for six(6) months before the Honourable court makes it absolute.

It is also key to note that where a party seeks an order of foreclosure nisi before the Honourable court, there is a need to join the other successive mortgagees in the action.

CONCLUSION

Mortgage as security for loan transactions with Commercial Banks and other Financial Institutions is the most reliable form of collateral provided the laws and the principles guiding Mortgage in our Jurisprudence are strictly complied with. The use of Mortgage as a form of security also assures the repayment of loan facilities and is hereby highly recommended.

DEFINITION OF BASIC TERMS

MORTGAGOR: A party to a mortgage that uses his property as security to collect loan facility or discharge an obligation. A mortgagor is also known as a “Borrower”

MORTGAGEE: A party in whose favour a mortgage is created and is entitled to the payment of the money secured to him by the mortgage. Also known as a “Lender”

DEED OF MORTGAGE: A mortgage deed is a legal document in which the mortgagor transfers an interest in real estate to a mortgagee for the purpose of providing a mortgage loan. (It can also be TRIPARTITE meaning Third party bringing in a Surety who usually owns the Mortgage property used as Security)