Lesson Outcomes

At the end of the lesson students would be able to:

1. Explain the meaning of a mortgage
2. Distinguish a mortgage from other similar security transactions.

1. List and discuss examples of mortgage institutions in Nigeria and parties in a mortgage transaction
2. Explain the various ways of creating equitable mortgage
3. Explain the various ways of creating legal mortgage; search report and documents to process or procure Governor’s consent
4. Draft search report and a covering letter.
5. Explain the ethical issues involved.

 

Lesson Contents

1. Meaning of a mortgage
2. Parties to mortgage transaction

1. Mortgage institutions
2. Types of mortgages
3. Creation of an equitable mortgage
4. Creation of a legal mortgage
5. Creation of successive legal mortgages
6. Perfection of mortgages
7. Drafting a search report & covering letter.
8. Ethical issues

 

Definition of a mortgage

It is an agreement between two or more parties where property is conveyed by the mortgagor to the mortgagee for a grant of a loan and there is an undertaking by the mortgagee to re-convey once the loan has been repaid. Creation of an interest

It can be two or more because in some situations you have a guarantor involved in the transaction. Where there are three parties it is called a third party legal mortgage.

Laws regulating mortgages in Nigeria include:

• Conveyancing act
• Property and Conveyancing law
• Mortgage and Property Law of Lagos state 2010
• Companies and Allied matters act
• Stamp duties act
• Illiterate protection act
• Infant relief act
• Land Use Act

 

Institutions that grant mortgages to individuals or companies

• Federal mortgage bank – this is the apex mortgage institution in the country and it grants loans for acquiring or constructing houses. When a mortgage facility/loan is granted its usually granted for a long term (unlike banks).

Advantages

• It gives long-term credit facilities
• The interest rate is low
• It has branches all over the country
• Gives large sum of money, up to 60%, to complete the building

 

• Housing corporations – formerly state governments used to have housing corporations. In Lagos state there is the Lagos state property development corporations (LSDPC), there is also Lagos homes

Advantages

• You would get a loan facility to buy the home. Note that it wouldn’t give the money to the client, it gives it to the bank that finances the transaction,

 

• Housing schemes:
• Commercial banks – a disadvantage is that the time given for repayment is short.
• Corporative societies – these also give mortgage facilities and they help to raise money towards financing a mortgage
• Private property developers

The preferred option out of the above is the federal mortgage bank because of its advantages.

 

Distinction between a mortgage and a lien, charge and a pledge.

In a pledge – property is given for the money owed. Until the money is repaid the property used for security remains in possession of the pledgee whereas in a legal mortgage the mortgagee need not enter into possession.

A lien entitles the person to hold unto the documents until the other parties carries out or fulfils the obligation.

Mortgage transfers title to the mortgagee for the time being until the loan is repaid but in a charge there is no transfer of title or transfer of possession. In PCL where one of the modes of creating a mortgage is charge by deed expressed to be by way of legal mortgage – even if there is no physical transfer here the charger and chargee have similar rights to that of a legal mortgage. But ordinarily in a charge there is no transfer of possession or title

 

Types of security for loan

• Land:1) This will always appreciate and this is why it is a preferred type of security. Other advantages include: 2) its more reliable and stable, 3)Investigation of title to land is easier, 4)its easier to enforce mortgagee’s security in the case of land than in other cases.
• Debenture
• Insurance securities
• Guarantees
• Stock and shares
• Charge over fixed deposit account
• Trust receipts
• Bill of sale
• Letter of set-off

 

Two documents have to be signed in a mortgage transaction include: loan agreement and deed of legal mortgage.

Note: If you use the term mortgagee you can’t use borrower. Mortgagor – mortgagee; borrower – lender. Maintain the nomenclatures while drafting.

 

 

Forms of mortgage transactions (the nature of a mortgage)

1. Mortgagors borrows money for other purposes, using his property to secure the loan
2. Mortgagor borrows money to build a house which is also used to secure the loan
3. Mortgagor borrows money and uses another person’s property as security
4. Mortgagor borrows money and another person stands as guarantor/surety

 

Another form of mortgage is contract subject to mortgage- this is a sale of land transaction and not a mortgage transaction. This is one of the special clauses in contract of sale of land.

This used to refer to a sale of land contract made subject to the borrower/purchaser obtaining a loan.E.g. in a situation where the purchaser has money to pay the deposit but not the balance. It would be stated in the formal contract that the balance would be paid when the purchaser obtains a loan from first bank and the property would be used as security for the loan. It would then further state that, if they do not succeed in obtaining the loan from the bank the contract would come to an end and the deposit would be paid back. – (This a condition that would help them not loose their deposit, so it would be stated as a contingency)

It usually provides that in the event that the loan is not obtained, the contract shall become void and vendor shall return deposit collected from purchaser. It is sale of land transaction conditioned upon the success of an on-going mortgage transaction.

 

For it to be valid: all material facts must be disclosed.

• Must state the source of the loan
• Must state the terms of the repayment

 

Example of a contract subject to mortgage clause

“ This contract of sale is conditional on the purchaser obtaining a mortgage loan form BETTER BANK LTD in the sum of N5,000,000 (five million naira) with interests 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.”

 

How to safeguard the deposit paid

• The money should be paid to the vendor’s solicitor as a stakeholder

 

Stages in a mortgage transaction

• Negotiation of the loan: this is important because the remaining stages hinge on the agreement reached here
• Investigation of mortgagor/owner’s title: it is mortgagor or owner because the mortgagor need not be the owner of the property. At this stage a lawyer is employed to investigate and 1) find out the genuineness of title and 2) see if there are any previous encumbrances on the property.
• Search report by mortgagee’s solicitor - * note that it doesn’t stand as a step on its own , its often combined with investigation.
• Valuation of proposed mortgage property: you can’t do this stage unless you’ve assessed the genuineness of the tile. This stage is to find out the real worth and value of property. A bank would not take property that’s the exact value of the money owed because interest rate may apply on the debt if not paid at the due date.
• Documentation – preparation of loan agreement (at the contract stage), and thereafter, mortgage deed (at the completion) – this is done by the mortgagee’s solicitor.: deed of mortgagee is only required in legal mortgage
• Execution of the deed by parties
• Perfection – it is the mortgagors responsibility to apply for governors consent. Savannah bank v ajilo– the mortgagor cannot use failure to obtain consent as reason for nullification of the mortgage. Perfection takes three different forms in a legal mortgage:
• Traditional perfection: consent, stamping and registration at the land registry
• This mode applies where a company is the mortgagor – this take place at the corporate affairs commission see the s197 CAMA – it says anytime a corporate body creates a charge or mortgage in favour of anybody the company must register that charge or mortgage at the CAC within a period of 90 days of creation otherwise 1) the mortgage would become void and unenforceable against its liquidator and creditors and 2) the mortgage sum would become immediately repayable to the mortgagee.
• Where the property subject to the mortgage is located in Lagos – under the mortgage and property law 2010 Lagos, in respect of any mortgage created in Lagos state the parties must deliver a copy of the mortgage instrument to the Lagos state mortgage board for registration, failure to do this renders the mortgage void because the MPL 2010 says that any mortgage in Lagos that fails to comply with its provisions is void. – s 53 MPL . Also see s 64 MPL

 

There are 4 instances where a mortgage does not require governors’consent

• When creating an equitable mortgage
• Where parties who created an equitable mortgage decided to apply for governor’s consent and later decided to convert that equitable mortgage to legal mortgage – they don’t need to apply for a fresh consent because they already have one.
• Re-conveyance: every mortgage transaction has cesser upon redemption. In a mortgage it’s the interest in the property that’s conveyed and this must be done with governors consent. After payment has been completed, deed of release would be made by the bank to transfer the interest back to the mortgagor, here they do not need to obtain governors consent to do this
• Up stamping

 

Investigation of title

Conducted by mortgagee’s solicitor to ascertain genuineness of borrowers or owners title in proposed mortgage property. The solicitor would collect the epitome of title and abstract of title to investigate the title.

Method of investigation similar to sale of land

The difference is that in the case of mortgage, mortgagee has stronger bargaining power and is in a better position than the purchaser in a sale.

At the time of investigation, there is yet NO existing contract between lender and borrower, so NO obligation on the lender to advance money.

 

Procedure for investigating title

After negotiation, the bank would hire a lawyer to investigate title to determine whether the title to the property given is genuine and to ascertain whether the property is being used for another mortgage – prior encumbrances; to ensure the owner has the right to convey.

• The lawyer would collect epitome of title and abstract of tile
• Examine the documents collected
• Conduct a search in the following places depending on the circumstances: The land registry- this is compulsory for everyone, the court registry, probate registry, CAC etc.
• Conduct physical visitation or inspection
• Inspect Traditional history and family/communal background
• Raise requisition where necessary
• Prepare a search report.

 

Where the borrower is an incorporated body, the following matters should be inspected at the CAC: date of incorporation; borrowing powers of the company; particulars of company directors; whether annual returns are filed up to date; any registered charge or encumbrances.

 

Contents of a search report

Note: it must be on the lawyers letter headed paper

 

There are basically two types of mortgages: legal and equitable.

All legal mortgages must be created by deed but the mode or nature a legal mortgage takes on each occasion depends on where the property is located. For this purpose there are three jurisdictions in Nigeria:

• CA states
• P&CL STATE
• LRL – land registration law 2015

 

Modes of creating a legal mortgage within the Conveyancing act jurisdiction

• By assignment of the unexpired residue subject to cesser upon redemption. Reassignment upon redemption is the same thing as cesser upon redemption – this is the bank would execute another deed to convey the property back after debt is paid.
• By sub-demise of the unexpired residue leaving the mortgage with residuary interest
• Statutory charge

 

Under the Property and Conveyancing Law jurisdiction there are also three modes of creating a legal mortgage – ss 109,110 & 137, PCL

• By sub-demise of a term of years absolute less by at least one day than the term vested in the mortgagor – this is the same under CA
• By statutory charge
• Charge by deed expressed to be by way of legal mortgage

Note that if you say charge by deed is wrong, you have to say Charge by deed expressed to be by way of legal mortgage.

Also not all mortgages are charges but all charges are mortgages.

Under the MPL 2010, the modes of creating a legal mortgage are:

• Demise
• Sub-demise
• Charge by deed expressed to be by way of legal mortgage
• Charge by deed expressed to be by way of statutory mortgage

 

Note that the mode to be adopted in each case depends on the nature of interests of the mortgagor. S 15 MPL says that the modes of creation of legal mortgages in Lagos where the mortgagor is right of occupancy

See S16 – where the interest is a leasehold .

See s 18 

 

Assignment under CA

This involves transfer of the owner’s entire unexpired residue, with a proviso for reassignment on redemption. The quantum of interests transferred in sale of land is same transferred in the assignment.

• There is no reversionary interest- The mortgagor is left with nothing
• There is no privity of contract between the head- lessor and mortgagee; but there is privity of estate.:No obligation/ benefit can be enforced on a person that’s not a party to the contract – Tweddle v Atkinson. The bank must respect all the restrictive covenants undertaken by the person and respect beneficial covenants
• Mortgagee therefore bound to observe all covenants that run with the land; this creates some difficulty, this does not apply to sub –demise

 

There is no privity of estate where the mortgage is by sub-demise.

 

Advantages of mortgage by assignment

• Mortgagee gets transferred to it all of mortgagors’ entire interest in the property
• Has a right to retain title document
• Can enforce beneficial covenants

 

 

By sub-demise of unexpired residue less few days, with a proviso for cesser on redemption

Features:

• Mortgagor has reversionary interest on the mortgage property
• Neither privity of contract nor privity of estate between head – lessor and mortgagee
• There is uniformity – this mode applies to both CA and PCL states: this a difference between assignment and sub-demise
• Mortgagor can create successive legal mortgages on the property: The revisionary interest is legal interest and he may in certain circumstances use this remaining interest to create successive legal mortgages. Creation of successive legal mortgages under assignment is impossible because nemo dat quod non habet. However creation of equitable mortgages in assignment is possible

 

 

Advantages of mortgage by sub demise

• Mortgagor has reversionary interest in the mortgage property
• Neither privity of contract nor privity of estate between head lessor and mortgagee
• There is uniformity – this mode applies to both CA and PCL states
• Mortgagor can create successive legal mortgages on the property (but this is possible only in PCL states). The reason is interesse termini

 

Differences between sub-demise under CA and sub-demise under PCL & MPL

• Creation of successive legal mortgage is possible in a mortgage by sub demise under PCL, it is not possible under CA even in a mortgage. You cannot have two legal mortgages with two different banks pending over the same property in CA even if there is reversionary interest, but the reversionary interest can be used under the PCL even if they have not discharged the first one. The reason it is not possible to create a successive legal mortgage under CA is because of the doctrine interesse termini. This is a common law doctrine- so it applies to CA because CA is a statute of general application and so common law applies to it. The doctrine states that once you create a legal mortgage over your property it doesn’t matter the mode adopted, all your interest in the property is terminated until that mortgage is discharged, so they cant use that property to create a second legal mortgage. This principle does not apply to PCL because with the coming into effect of the PCL, the application of CA seized in those areas.
• Difference with respect to problems or challenges the bank will face in enforcing sale by a mortgage created by a sub demise under CA and PCL & MPL:
• When mortgage is created by sub demise under CA the mortgagor retains reversionary interest
• A major challenge associated with mortgage created by sub demise is how the mortgagee would be able to deal with the reversionary interest of the mortgagor when he defaults in the payment of the loan. This is because when the mortgagor defaults the bank would not be able to exercise its power to sell the property and transfer valid absolute title because it does not have absolute title. The difference between the various jurisdictions lies in how to solve the problem.

Under the CA there is no provision on how to solveit. Under the PCL & MPL there are provisions on how to solve it, see s112 (1) PCL- the provisions of which are to the effect that where mortgage is by sub-demise and the mortgagor fails to pay, the reversionary interest in the mortgagor would abandon the mortgagor and automatically merge with the interest the bank has thereby conferring on the bank an absolute title and from this the bank can now sell has it has valid title. 

Since there are provisions under PCL & MPL, how is it dealt with under CA given there are no equivalent provisions therein? The parties will have to devise a means of dealing with it during the creation of the mortgage. At the time the mortgage is being created, the banks’ lawyer would insert any one of the remedial devices. There are two major types of remedial devices for this purpose: 1) Irrevocable power of attorney clause or 2) a trust declaration. So when the mortgagor defaults the bank would fall back on the remedial devices to be able to sell. The bank makes use of the remedial devices by inserting a clause in the deed of legal mortgage empowering the bank to do all that the owner may lawfully do in respect of the property. Here the bank would then rely on the power of attorney clause and sell it as the attorney of the mortgagor and not as the mortgagee, then agency rules then apply- any expenses incurred by the agent is entitled to be reimbursed. So the bank would sell it, deduct the amount owed and give the rest back to the mortgagor.

Trust declaration - The bank would then appoint the owner as a trustee of the property in the mortgage deed, as the bank has the interest and would be the beneficiary. Just as when a trustee mismanages trust property the beneficiaries can remove him, likewise when he defaults in repayment,the bank can then remove him as trustee and then all the interest in the property would revert back to the bank.

These remedial devices may also be used in equitable mortgages. In a legal mortgage the bank can sell the property without going to court once the mortgagor defaults (Olori Motors Nig Ltd v Union Bank Plc).

so the remedial devices are necessary in two instances

• To enable the bank sell where the mortgage is created by sub demise in CA
• To enable the bank sell where the mortgage is equitable. This is because banks cannot sell where it an equitable mortgage without an order from the court (Owoniboys Technical Services Nig Ltd v UBN PLc)

The three conditions must be fulfilled if the bank wants to be able to sell in an equitable mortgage without going to court: 1) let the parties insert any of the remedial devices in the mortgage instrument 2) ensure the equitable mortgage must be by deed 3) there must be no contrary intention – this means there is no provision in the equitable mortgage that the bank should not sell.

 

Advantages of mortgage by charge by deed PCL/ feature and difference

• Simple to create and to understand
• No actual transfer of interest in land – it is a charge – therefore convenient for business efficacy
• It is convenient for creating mortgages over mixed properties: You can’t use sub-demise and assignment over mixed charges. Example: if you want to use two properties as security for the mortgage,in practice there will have to be two different deed of legal mortgage, two different applications for consent, two different application of stamping and two different registration. You can’t by one legal document transfer both of them, this makes the process cumbersome, so its makes it easier to adopt charge by deed expressed to be by way of legal mortgage as it assists you to create one mortgage over several properties in one transaction. You can simply just list all the properties in that one document.
• Will not offend the rule against assignment of a lease if inserted in the head lease. – Does not breach covenant not to assign.
• It is vacated by a mere receipt of payment: so discharge is easier. In sub-demise or assignment a deed of release/deed of surrender/ deed of discharge / deed of re-conveyance must be used to reassign property back to you, whereas here you are discharged by a mere receipt once the money owed is paid.
• The charge has all the powers, rights & protection of a legal mortgagee

 

Documents required to process a legal mortgage

• The CTC of the original title documents
• 5 copies of the duly executed mortgage deed (specific number depends on the state)
• Three years tax clearance certificate of the mortgagor (and the surety, if any)
• Evidence of payment of relevant outgoing: a receipt of payment of the current ground rent/tenement rate/ land use charge (depending on the state) on the property to be mortgaged. Note that it depends on the state,
• A duly completed application for governors consent – (called FORM 1 C in Lagos state)
• Evidence of payment of charting and endorsement
• Evidence of payment of consent fees, registration fees, and stamp duty
• Registered survey plan. Note that submission of an approved survey plan in Lagos state is compulsory
• Approved building plan (where property is developed)
• Application/covering/forwarding letter in the lawyers letter head
• Any other document as may be required by the

 

Note that where the mortgagor is a company additional documents will be required to be submitted

• A CTC of the memorandum and articles of association of the company
• A copy of the resolution of the board of directors authorising the mortgage
• A copy of the certificate of incorporation of the company
• Tax clearance certificate of at least 2 directors
• Up-to-date evidence of annual returns (If required)
• Certified evidence showing the directors of the company

 

Advantages of legal mortgage

• Easier to enforce
• Legal mortgage without notice of an earlier equitable mortgage takes priority over the equitable mortgage i.e. bona fide purchaser for value without notice. Registration does two things: 1) it gives priority and 2)gives notice to the whole world
• Easier to commit fraud in the case of equitable mortgage than in legal mortgage
• More reliable
• Legal mortgagee is entitled to retain title deeds, but in an equitable mortgage the bank is not entitled to keep it

 

109(2) (b) PCL abolishes the doctrine of interesee termini

 

 

 

Modes of creation of equitable mortgage in CA & PCL states

The modes appear to be uniform however there are differences

• Deposit of title deeds (accompanied by memorandum of deposit evidencing the transaction)
• Mortgage created by a person (mortgagor) whose interest is only equitable – e.g. a) beneficiary’s right under a trust; (b) any subsequent mortgage created after a legal mortgagee in CA states (since creation of successive legal mortgages is impossible under the CA) etc .
• An equitable charge
• An inchoate legal mortgage – this refers to a legal mortgage that has not been perfected i.e. legal mortgage that fails to meet certain conditions such as consent, stamping,registration.
• An agreement to create a legal mortgage is an equitable mortgage. i.e. the rule in Walsh v Lonsdale.

 

Modes of creation of equitable mortgages in Lagos – s 18 MPL

The MPL provides for only three ways of creating an equitable mortgage in Lagos state namely:

• By deposit of title documents accompanied by an agreement to create a legal mortgage
• By charge accompanied by agreement to create legal mortgage or
• By assignment of an equitable interest

Note however that the other modes of creating an equitable mortgage may still apply in some circumstances such as inchoate legal mortgage, where the interest is equitable and the rule in Walsh v Lonsdale would still apply in Lagos. But for bar part 2 if they ask you 3 ways of creating legal mortgage in Lagos give them this three. If they ask for 6 first list these 3 and say they may also be created by ….

 

Covering letter: please find attached the search report conducted on the …..day of ….. at ……; then bill of charges.

 

Note: creation of equitable mortgage could be by deposit of title deeds accompanied by memorandum of deposit. In Lagos state it is by deposit of title deeds accompanied by agreement to create a legal mortgage, while in other states in Nigeria it is by deposit of title deeds accompanied by memorandum of deposit.