PROPERTY LAW PRACTICE: MORTGAGES PART 1

Sad Mood Activated…….we mourn the departure of a LEGAL WIZARD, LOCUS CLASSICUS; Dr Francis Julius Oniekoro. Our write up will be in red in Honor of Dr. FRANCIS JULIUS ONIEKORO.

                                    MORTGAGES

Six Key Ingredients that will help us to understand a Mortgage Transaction

1.      Security

2.      Existence of an Obligation

3.      The transaction must arise from the agreement of the party

4.      Proviso for cesser for redemption

5.      Transfer of interest

6.      It must be clearly stated that the transfer of interest is for the purpose of securing the performance of the obligation.

Mortgage is defined as conveyance of Land or assignment of chattel as a security for the repayment of a debt or discharge of other obligation for which it is given, with a provision for redemption on repayment of the loan or discharge of such obligation.

POSER: Do we have other types of securities for loan apart from Land?

Yes, they include;

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

                                        

                             However, the reason why Land is more preferable;

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.

POSER: What are the Applicable Laws in a Mortgage Transaction?

1.      Land Use Act,

2.      CFRN,

3.       Stamp Duties Act,

4.      Rules of Professional Conduct,

5.       Land Instrument Registration Law,

6.      CAMA S. 197

7.      Registration of Titles Law,

8.      Property and Conveyancing Act,

9.      Mortgage Institution Act,

10.  Law Reform Contract Law,

11.  Federal Mortgage Bank of Nigeria Act,

12.  Illiterate Protection Law (where applicable).

13.  Mortgage and Property Law of Lagos State

            PARTIES TO A MORTGAGE TRANSACTION

The borrower is the MORTGAGOR, while the lebder is the MORTGAGEE.

We can have a tripartite mortgage transaction, so we will have a GUARANTOR.

                        MORTGAGE INSTITUTION IN NIGERIA

1.      Federal Mortgage Bank

2.      Housing Corporation

3.      Housing Schemes

4.      Commercial Banks

5.      Private Property Developers

6.      Insurance company

7.      The Lagos State Mortgage Board

POSER: Mr Musa Derin approached you to know the most preferable Mortgage Institution in Nigeria.

FOR THE PURPOSE OF BAR PART II, the answer is FEDERAL MORTAGAGE BANK

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 but this exists, to a large extent, in theory.

4.      It enjoys Government support.

MORTGAGE V SIMILAR TRANSACTION

Mortgage v Pledge

a)      In a pledge, the parties are described as Pledgor and Pledgee; while in a mortgage, the parties are described as mortgagor and mortgagee.

b)      A pledge is usually created under the incidences of customary law; while a mortgage is created under the authority of Statutes.

c)      In pledge, there is no legal due date for redemption as a pledge is perpetually redeemable. That is, even after 100 years, upon repayment of the debt, a Pledgor has the right to redeem; while in a mortgage, there is usually a legal due date for redemption and at its expiration, the mortgagee can sell the property to realize the money advanced, after fulfilling certain conditions.

d)      A pledge is a possessory security, while a mortgage is a proprietary security. This is because by a pledge, actual and physical possession is transferred; while by a mortgage, title is transferred. That is, the pledger retains general title, but transfers possession to the Pledgee until the debt is satisfied. While in mortgage, the mortgagor may retain possession, but transfers title to the mortgagee until the debt is repaid. See ADETONA v. ZENITH BANK (2011) 18 NWLR (pt. 1279) 629

Motgage v Charge

a)      In a mortgage, the parties are described as mortgagor and mortgagee; while in a charge, the parties are called Chargor and Chargee

b)      In a mortgage, interest in the property is conveyed by the mortgagor to the mortgagee; while in a Charge, no interest whatsoever is transferred by the chargor to the chargee. Rather, the charge has some encumbrance in the property which serves as security for the money advanced by him.

c)      A charge operates like a mortgage. However, in charge, neither possession nor ownership nor any interest whatsoever is transferred to the Chargee. The Chargor retains all the interests, but creates an encumbrance over the title in favour of the Chargee. The Chargee only has an encumbrance.

Mortgage v Lien

a)      A mortgage is the conveyance of land or other property as security for the repayment of a debt or the performance of some other obligation, with a proviso for cesser on redemption. While a lien is the right to retain possession of a property of another until a debt is repaid. It is a CLAIM OR QUALIFIED RIGHT over the property of a debtor. See AFROTECH TECHNICAL SERVICES LTD. V. MIA & SONS LTD (2001) ALL FWLR (pt. 35) 643

b)      A lien does not give the creditor the right to sell or otherwise deal with the debtor’s property; while a mortgage gives the mortgagee the power to sell the mortgaged property after fulfilling certain conditions

c)      A lien is a means of coercing a debtor to pay the money advanced to him, rather than as security against payment not being made; while in mortgage, the property is conveyed as security for the repayment of the debt

d)      In a mortgage, legal or equitable title is transferred with a proviso for cesser on redemption; but in a lien, no title is transferred.

e)      A lien could arise as a statutory right without any prior agreement between the creditor and the debtor; while a mortgage always arises out of a prior agreement between the mortgagor and the mortgagee.

          Mortgage v Sale

a)      Both involve the transfer of interest. However in mortgage, there is a proviso for cesser upon redemption, such that the property will be conveyed bach to the mortgagor upon the repayment of the debt; while in a sale or assignment, the vendor/assignor divests himself of and transfers the entire unexpired residue of his interest with no remainder in him. Hence, in a mortgage, the mortgagor is still the owner of the mortgaged property and the mortgagee is the custodian of the property; while in a sale, the purchaser/assignee becomes the owner of the property.

b)      In a sale, the parties are described as vendor and purchaser (assignor and assignee); while in a mortgage, they are described as mortgagor and mortgagee.

CONTRACT SUBJECT TO MORTGAGE

POSER: when do we say a contract is subject to Mortgage?

His is where a person borrows money to build or buy a house and he uses that house to secure the loan.

SO HOW DOES IT WORK?

Mr A (PURCHASER/BORROWER) enters a contract of Sale of Land, in expectation of some loan with Mr. B (VENDOR) he gives Mr. B a deposit for the Land, and he takes a Loan from the  financial Institution to complete the Purchase of the Land, Mr. B in returns allows him to use the Landed Property as a collateral for the Loan.

Now, the contract would 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 TO MORTGAGE 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."

STAGES IN A MORTGAGE TRANSACTION

Ø  Negotiation of the loan

Ø  Preliminary investigation of the Mortgagor’s title

Ø  Valuation of the proposed security.

Ø  Search report by the mortgagee’s solicitor

Ø  Contract

Ø  Documentation, that is the preparation of the mortgage deed by the Mortgagee’s solicitor (final document will depend on the location of the property and the mode of creation)

Ø  Execution of the deed by the parties

Ø  Perfection of the title: this include Consent, Stamping and Registration

N.B: If a company is the Mortgagor; CAMA provides that every mortgage or charge created by a Company must be registered with the Corporate Affairs Commission within 90 days from the date of its execution. Section 197

N.B: In Lagos, the Mode of perfection includes some other step;

1.      Registration of the Mortgage with the Lagos State Mortgage Board; The Mortgagee must deliver the mortgage Deed/ Instrument to the Executive Secretary of the Lagos State Board for Registration. Section 53 MPL

INVESTIGATION OF TITLE AND SEARCH REPORT

N.B: The steps of investigating title are the same as in the contract of sale of Land. There are 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

N.B: When the borrower is a company, the search should also ascertain whether the company is permitted by it Memorandum and Article of Association to borrow and the extent and limits of such borrowing powers of the company.

REASONS FOR INVESTIGATING BORROWERS 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.

AT THE END OF INVESTIGATION A SEARCH REPORT WILL BE DRAFTED.

Content of a Search Report;

a)      Date Of Search

b)      Place Of Search

c)      Particulars Of The Property

d)      Description Of The Property

e)      Name Of Registered Owner

f)       Nature Of The Interest

g)      Encumberances, If Any

h)      Comments/Advice.

FOR THE PURPOSE OF DRAFTING

Ø  Letter headed Paper

Ø  Address Of Addressee

Ø  Date Of The Letter

Ø  Heading Of The Letter

Ø  Introductory Statement

Ø  Date Of Search

Ø  Place Of Search

Ø  Particulars Of The Property

Ø  Description Of The Property

Ø  Name Of Registered Owner

Ø  Nature Of The Interest

Ø  Encumberances, If Any

Ø  Comments/Advice

Ø  Signature Of The Legal Practitioner

Ø  Name Of The Legal Practitioner

Ø  Designation

THE ROLE OF A SOLICITOR IN A MORTGAGE

1)      Negotiation of the loan agreement

2)      Investigation of title

3)      Preparation of search report

4)      Drafting the mortgage deed and other necessary documents

5)      Perfecting the mortgage

6)      Discharge of the mortgage

THE CREATION OF MORTGAGE

There are two types of Mortgages;

a)      Legal Mortgage

b)      Equitable Mortgage

CREATION OF LEGAL MORTGAGE

A legal mortgage is one, which is created by the written provision of the law. For it to eb legal, it must satisfy the condition stated by the law i.e must be by deed.

RULE: The mode of creation of a legal Mortgage depends on Jurisdiction. We should take note that we have three jurisdictions, so the location of the property determines the mode of creation and the Laws applicable.

a)      Conveyancying Act States

b)      Property and Conveyancying Law States

c)      Mortgages and Property Law of Lagos States.

UNDER C.A

STATES: All states in the Northern and Eastern Part of Nigeria.

MODES (Section 261 (1) CA)

a)      Assignment: By this mode, the entire unexpired residue of mortgagor is transferred to mortgagee with a proviso that upon repayment of the loan, the property is reconveyed back to the mortgagor. Upon assignment, the mortgagor only has an equity of redemption in the property

b)      Sub-demise: The interest transferred here by the mortgagor is a term of years absolute with the reversionary interest still in the mortgagor

c)      Statutory Charge/ mortgage:

SUB-DEMISE UNDER C.A

Sub demise presents a technical problem, mortgagor did not convey his reversionary interest to the mortgagee, thus when the mortgagee is enforcing the security, it cannot sell that REVERSIONARY INTEREST.

However, this problem can be solved by inserting REMEDIAL DEVICES/CLAUSE in the Sub-demise deed. These clauses are;

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. 

b)     

 TRUST DECLARATION: 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

THEREFORE, the inclusion of these devises will allow the mortgagee to sell upon default of the of the Mortgagor.

                              ASSIGNMNET UNDER C.A

ADVANTAGES

1)      The totality of the interest in the property is assigned to the mortgagee.

2)      The mortgagee can exercise his right of sale easily: thus he can transfer the interest assigned to him to a subsequent purchaser

3)      The title deeds are retained by the mortgagee.

DISADVANTAGES

4)      Assignment creates a privity of estate between the mortgagee and the overload.

5)      Thus, the mortgagee is liable for breach of all covenants and conditions in the head lease.

DIFFERENCES BETWEEN MORTGAGE CREATED BY ASSIGNMENT AND SUB-DEMISE

1.      In Mortgage created by ASSIGNMENT, the title deeds are retained by the mortgagee and also that the mortgagee has a right to transfer the interest assigned to him to a subsequent purchaser. WHILE in SUB-DEMISE, the Mortgagee cannot sell the reversionary interest of the Mortgagor upon default except this default is cured by the two remedial devices; Power of Attorney or a Decleration of Trust. (Under Conveyancy Act States)

2.      Mortgage created by ASSIGNMNET creates privity of Estate between the Mortgagee and the overlord of the Estate which makes the Mortgagee liable for all the Covenants and conditions in the head-lease. WHILE In mortgage created by SUB-DEMISE, there is neither Privity of Contract nor Privity f Estate between the Head-lessor and the Mortgagee

3.      In mortgage created by ASSIGNMENT, there is no reversionary interest in the mortgagor, hence in the event of default, the mortgagee can pass his entire interest to a purchaser without problem. WHILE mortgage created by SUB-DEMISE preserves the Mortgagor’s right to reversion.

4.      The Parties in an ASSIGNMENT are reffered to as Assignor and Assignee. WHILE the parties in a SUB-DEMISE are reffered to s SUB-Leasor and Under-lessee

5.      The creation of Successive Legal Mortgage using the same property is not possible in ASSIGNMNET, but possible in SUB-DEMISE (under the Property and Conveyancy Law Jurisdiction)

LEGAL MORTGAGE UNDER P.C.L

STATES: All states in the Western and Mid-western Nigeria including Delta and Edo States.

MODES;

1)      Sub-demise. S.109 PCL

2)      Charge by deed expressed to be by way of legal Mortgage. S.110 PCL

3)      Statutory Charge/Mortgage. S.137(1) PCL

SUB-DEMISE UNDER P.C.L

Contrary to the position in Conveyancing Act states, under the PCL, the problem of mortgagee’s inability to sell the whole interest in the property, when such right is exercisable, on account of the mortgagor reversionary interest has been solved by section 112 of PCL. The section is to the effect that if the mortgagor default in his obligation (to repay the loan), the reversionary interest would merge with the leasehold interest of the mortgagee and mortgagee (bank/lender) can validly sell the entire interest of the mortgagor including his reversionary interest. THUS, under the PCL states, a mortgage created by sub-demise no longer requires THE REMEDIAL DEVICES of trust declaration and irrevocable power of attorney as they are implied by section 112 of PCL

CHARGE BY DEED EXPRESSED TO BE BY WAY OF LEGAL MORTGAGE

By virtue of Section 108(1) and Section 110 of PCL provides that where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protection, powers and remedies.

THINGS TO NOTE;

1)      The charge must be made by deed and not by writing; otherwise it shall have no legal effect.

2)      It must also be expressed to be by way of a legal mortgage. In law, the chargee has as much rights as the mortgagee. The charge gives the chargee similar rights as a mortgagee in the enforcement of payment of money loaned.

ADVANTAGES

a)      The form of a legal charge is simple and short.

b)      It does not amount to a breach of covenant in a lease against the assignment and subletting, because the charge creates no actual sub-lease in favour of the mortgagee, but only gives him rights as if he had a sublease.

c)      It is discharged by a simple statutory receipt and not by a deed of release.

d)      It is a convenient way of mortgaging freeholds (where permitted) and leasehold together because the mortgage terms are not stated, but the properties are listed in the schedule with a statement that they are charged by way of a legal charge.

e)      In the event of default by the mortgagor, the mortgagee cannot sell without the remedial devices

f)       It passes no interest to the mortgagee, but it confers on the mortgagee all the powers and rights of a legal mortgagee. See section 110(1) PCL

g)      It can be used to create a mortgage over mixed properties

h)      It can be used to create several legal mortgages

DISADVANTAGES

The disadvantage of the legal charge is that unlike the deed which creates it and is required to be registered, the receipt by which it is discharged is not registrable. The charge may then continue to appear against the property in the register as an encumbrance. Also, it does not carry any proviso for redemption since no interest is conveyed in the first place.

LEGAL MORTGAGE IN LAGOS STATE

For the purposes of creating mortgages, the law divides property (land or landed property) into Right of Occupancy and Leasehold interest and provides modes for creation of mortgages for each in section 15 and 16 respectively of MPL. However, they are similar and for practical purposes and for Bar part II, the methods of creating Legal mortgages in Lagos, pursuant to section 15 & 16 of MPL are:

Ø  Demise for a term of years absolute

Ø  Sub-demise for a term of years less by at least one day

Ø  Charge by deed expressed to be by way of legal mortgage

Ø  Charge by deed expressed to be by way of statutory mortgage

See sections 15 & 16 of MPL.

SUCCESIVE LEGAL MORTGAGE

The possibility of creating a Successive Legal Mortgage over the same property depends on where the property is located.

WHAT IS A SUCCESSIVE LEGAL MORTGAGE?

This simply occurs where more than one mortgage sum can be secured using the same property before the expiration of the initial mortgage.

UNDER THE PCL AND MPL STATES (This is applicable)

A state governed by the PROPPERTY AND CONVEYANCING LAW(PCL), successive legal mortgage can be created over the same property. This is because SECTION 163 PCL abolished the doctrine of Interessi Termini. Hence, making creation of successive legal mortgage over the same property possible in the states under this Jurisdiction

However, the conditions for creating a successive legal mortgage are stated in SECTION 109(2)(b) PCL;

1.      The first legal mortgage must have been made by sub-demise

2.      The term to be taken by a second or subsequent mortgage shall be one day longer than the term vested in the first or other mortgage. Such that the first mortgage will expire before the second mortgage

UNDER CA STATES

A state under the Jurisdiction of CONVEYANCING ACT, successive Mortgage cannot be created over the same property. This is because in this Jurisdiction, the applicable law for the creation of legal mortgage is the common law, and at common law successive legal mortgage could not be created over the same property. This is based on the common law doctrine of Interessi Termini which simply means ‘’once a legal mortgage has been created, all interest in that property terminates .What is left is mere equity of redemption, which can at best only be used to create an equitable and not legal mortgage.

                                        ADVANTAGES OF A LEGAL MORTGAGE

1.      More secured against fraud than equitable mortgage

2.      Easier to enforce than equitable mortgage

3.      Ranks higher than equitable mortagage in order of priority

4.      The mortgagee is entitled to the title document

5.      Can be used for small, medium and large loans

                      DISADVANTAGES OF A LEGAL MORTGAGE

1.      It is not easily created or formed

2.      It is not uniform in all jurisdiction

3.      It could be affected by covenants in the head lease especially where it is created by an assignment.

CREATION OF AN EQUITABLE MORTGAGE

An equitable mortgage is a type of mortgage that confers equitable interest on the mortgage. The essence of an equitable mortgage is to effect an agremment to enter into a legal mortage.

The modes of creating equitable mortgage in Lagos under section 18 of Mortgages and property law (Lagos state) as amended are:

1.      By deposit of title documents accompanied by agreement to create legal mortgage

2.      Charge of an equitable interest accompanied by an agreement to create a legal mortgage

3.      Assignment of an equitable interest with a proviso for cesser on redemption.

Subsequently, the provision of Section 18 of Mortgage Property Law does not exclude other methods of creating an equitable motgage such as;

1.      Inchoate legal mortgage (unperfected legal mortgage) see. 22 and 26 Land Use Act.

2.      Where the rule in WALSH v LONSDALE applied (Agreement to create a legal mortgage)

3.      Creation of mortgage over an equitable interest.

FOR PROPERTY AND CONVEYANCY LAW JURISDICION ARE THE SAME AS THE MODE OF CREATING IT IN CONVEYANCY ACT JURISDICTION

1.      Deposit of title document accompanied by a memorandum of deposit

2.      The rule in Walsh V Lonsdale

3.      Inchoate Legal Mortgage

4.      Creation of Mortgage over an equitable interest

5.      Equitable charge

6.      An agreement to create legal mortgage.

V.I.P: AN EQUITABLE MORTGAGEE CANNNOT EXERCISE THE POWER OF SALE WITHOUT AN ORDER OF A COURT. For an equitable mortgagee to be able to exercise power of sale over the mortgage property without recourse to court order, the following conditions must be satisfied:

1.      The equitable mortgage must be by deed

2.      The equitable mortgage must contain any of the remedial devices; and

3.      There must be no contrary intention in the mortgage deed. A contrary intention could be the provision of another remedy in the mortgage deed such as an increased interest rate as penalty or other remedy which will show that the parties did not intend a sale.

In the absence of these conditions, an equitable mortgagee cannot sell the mortgage property without an order of court.

ADVANTAGES OF EQUITABLE MORTGAGE

1. Where loan is for little amount of money
2. Where the period of repayment is short
3. It is easier to create than legal mortgage
4. It is not affected by the covenant in the head lease.
5. Creation of Successive equitable mortgages are possible
6. 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 are inserted, the mortgagee has difficulty in transferring/selling legal mortgage to third 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.
4. The power of sale of the mortgagee can only be exercised by the mortgage upon a court order
5. There is no priority over a legal mortgage
6. There is no legal protection of mortgagee’s interest.