Lesson Outcomes

 

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

1. Explain the concept of up-stamping and state when a deed of mortgage need to be up-stamped.
2. Discuss the remedies available to a mortgagee and a mortgagor in a mortgage.
3. State how a mortgage can be discharged
4. Explain the rights and remedies of mortgagor and mortgagee
5. Explain the ethical issues arising

 

Lesson contents

• Search report
• Up-stamping
• Rights of a mortgagor
• Rights of a mortgagee
• Discharge of mortgage

 

When governor’s consent is unnecessary in a mortgage

• In the case of up-stamping
• Re-conveyance or release of the mortgage property by the mortgagee after repayment of the mortgage sum , provided that governors consent was obtained at the time of creation;
• Creation of equitable mortgages;
• Where consent is obtained for the creation of an equitable mortgage that is subsequently converted to a legal mortgage, there shall be no need to apply for another consent Okuneye v FBN plc (1996), Adepate v Babatunde (2002) NWLR
• Mortgages created in respect of property that is not real property (e.g. shares)

 

Note the following about up-stamping

• No need for fresh governor’s consent (since consent was obtained in the first transaction)

 

UPSTAMPING

Meaning: where a mortgagor has an existing mortgage with a particular mortgagee over a particular property, up-stamping entails making an application for, and payment of, additional stamp duties, to accommodate the value of a second loan over the same property, without creating a second mortgage.

 

Rights available to the mortgagor

1. Equity of redemption
2. Legal right to redeem
3. Equitable right to redeem

 

EQUITY OF REDEMPTION–

This is the right that ensures the mortgage does not translate to forfeiture of property. This is the most important right that gives rise to the other two rights of a mortgagor. It arises as soon as the mortgage is created and it dies when the mortgage dies. It monitors the mortgage to ensure that once a mortgage always a mortgage. As a result of this, the law says that any provision or clause in a mortgage purporting to defeat or derogate or contradict the right of a mortgagor to redeem the property provided he has fulfilled the obligation is void. Any provision making it impossible to redeem the property is void.  A mortgage is not a sale, once a mortgage always a mortgage. It is the principle that says the person is the owner of the property, the person has not thereby forfeited the rights in the property, and so as long as the mortgage is there the person has the right to redeem the property. It is the mother of all the rights the mortgagor has in the property. The right is inseparable with the mortgage itself hence it is in existence for as long as the mortgage subsists. This right gives rise to the notion that once a mortgage always a mortgage.

The equity of redemption is an interest/estate in land, and could be sold, disposed of or used to create another mortgage. But note that equity of redemption, being an equitable interest could be used to create only an equitable mortgage.

Equity of redemption is the equitable interest, which a mortgagor has in the mortgage property as the owner of the property.

Valid sale or foreclosure of the mortgage property, upon mortgagor’s default destroys or extinguishes the equity of redemption. It dies because the mortgage dies.

Equity of redemption is what is left after all the rights have been transferred to the mortgagee, even after the unexpired residue has been transferred.

Thus any clause in the mortgage instrument, that purports to delay unduly, limit or deny mortgagor’s right to redeem must be void-  Multi-service Banking ltd v Merden

Right of redemption continues until there is a valid sale by the mortgagee or foreclosure order becomes absolute, thus extinguishing mortgagors rights; in summary there must be no clog on mortgagors right of redemption.

See Ndaba v UBN (2007) 9 NWLR (pt 1040) 439; Knightsbridge Estate v Bryne (1939) 1 Ch 441.

 

Every mortgagor has a right to create a successive mortgage because of equity of redemption.

Whereas the creation of successive legal mortgage depends on the jurisdiction.

The rule is that equity of redemption must never be clogged.

See the following cases:

• Okonkwo v CCB (2003) 8 NWLR; UBA v Okeke(2004) 7 NWLR
• Warring v London & Manchester Assurance Coy Ltd (1935)
• Biggs v Hoddinoff (1898)
• Morgan v Jeffreys(1910)
• Bradley v Carrit(1903)

 

AN EXCEPTION to the rule(note section 171, CAMA)

When a company borrows money and creates a mortgage, the company also creates a debenture (they are the same), a debenture trust deed would be signed between the company and the bank, and to redeem a debenture is the same thing as redeeming the security/collateral.

The rule that right/ equity of redemption must never be clogged does not apply to debentures. Hence a company may issue a perpetual debenture. Accordingly, a clause or condition in any deed for securing any debenture shall not be invalid only because the debenture is made redeemable only—

• on the happening of a contingency, however remote, or
• on the expiration of a period of time, however long.

 

 

LEGAL RIGHT TO REDEEM

It starts with mortgage but dies with the expiration of the legal due date. Legal due date is the date agreed by the parties for repayment of the loan.

This is the right of the mortgagor to redeem the mortgage property at any time from the date of the creation of the mortgage to the legal due date, provided that the mortgagor has settled fully the mortgage sum and interest. This right must never be taken away.

Note the disadvantages to the mortgagee of allowing the legal due date to be too far in the future;

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. See Twentieth Century Banking Corporation Ltd v Wilkinson (1977) Ch 99 which highlights the dangers of putting the legal due date too far away;

This is because it is bad if power of sale has become exercisable but has not arisen, so if the mortgagor defaults in instalment payment but the legal due date has not passed, he cannot enforce valid sale. It is therefore now acceptable at common law to fix a shorter date for redemption.

 

EQUITABLE RIGHT TO REDEEM

Equity follows the law to correct the harsh effect of its strict application.

This right is born when the legal right dies, it comes into existence when the legal right to redeem is lost. The death of the legal right to redeem brings about the equitable right to redeem. After the legal due date the mortgagor does not have any right in law to redeem the mortgage property, however because equity follows the law but not slavishly or sheepishly but so as to correct any injustice or hardship that may be occasioned by a strict /stringent application of the law, equity has introduced a remedy to assist the mortgagor who was not able to redeem before the legal due date – Salt v Marques of Northampton. This remedy – Equitable right to redeem – is to the effect that, even thought the mortgagor has defaulted in repayment of the mortgage sum and interest, if he is still able to raise the outstanding sum/ loan money before the sale by bank of the property/ a foreclosure order becomes absolute, he would still be able to redeem the property. That being the case the rule is that whether or not the legal due date has expired does not affect the right of the mortgagor to redeem provided the property has not been sold or an order of foreclosure has not become absolute.

This right is lost when the equity of redemption is extinguished by:

• a valid sale by the mortgagee or
• when a foreclosure order becomes absolute or
• By a valid order of court

 

RIGHTS AVAILABLE TO A LEGAL MORTGAGEE

Note that these rights are not available to all mortgagees only to legal mortgagees.

When the mortgagor defaults in repaying the loan or interest, mortgagee has the following rights/remedies –

• Right of action in court
• Right to take possession – not available to the equitable mortgagee
• Right to an order of foreclosure
• Right of sale (power of sale) - not available to the equitable mortgagee
• Right to appoint a receiver
• Action for winding up (where mortgagor is a company)
• Rights of a mortgagee under the High Court Rules – see e.g. in see Order 51, Lagos High Court (Civil Procedure) Rules, 2012

 

RIGHTS OF THE EQUITABLE MORTGAGEE

1. Right of action in court
2. Foreclosure
3. Specific performance
4. Appointment of a receiver – by order of court
5. May have right of sale where certain conditions are met (i.e. mortgage created by deed with remedial devices and no contrary intention)
6. Rights of a mortgagee under the High court Rules – see e.g. in see order 51, Lagos High Court (civil Procedure) rules

 

Appointment of a receiver

Who is a receiver?

This is more common in mortgages by companies – debentures

Note, once appointed, only the mortgagee has power to remove the receiver – 393 CAMA, Cap C 20. See also s 43(5) MPL. Courts appoint receiver, but mortgagee removes them because they were appointed by the instance of the mortgagee

 

Ways of appointing a receiver in a mortgage

Appointment of a receiver may arise in any of the following 4 ways:

• By agreement of the parties;
• Express provision in the mortgage instrument
• Appointment by the court
• Appointment under power given by statute.

 

Taking possession

Available only to a legal mortgagee, see s 123 (1) (iv) PCL. Possession follows legal interest, so a person who doesn’t have legal interest cannot have possession

Why is it not advisable, practicable? – They are the occupier, they are entitled to pay all outgoings meant to be paid by the occupier, pay for the maintenance

• See white v City of London Brewery, Nig Loan & mortgage Ltd v Ajetumobi

 

Action in court

Action is taken as a creditor, to recover mortgage sum and interest, see UBN v Olori Motors. This is to compel the mortgagor to pay.  It is when property is sold pursuant to an order of court that a certificate of purchase is given – and this is a good root of title.

 

Power of sale

In a legal mortgage the mortgagee reserves the right to sell the mortgage property upon default by the mortgagor. Note that the legal mortgagee does not need the permission or leave of court before he can sell provided the mortgagor has defaulted. However, there are conditions precedent the mortgagee must satisfy or fulfil before it can sell. Even though the mortgagor has defaulted the mortgagee cannot validly sell unless he has fulfilled these two conditions

Conditions precedent to sale in a legal mortgage

• The power of sale must have arisen
• The power of sale must have become exercisable

Note further that where the power has arisen but is yet to become exercisable, the sale is void and therefore can be set aside at the instance of the mortgagor except the mortgagee can show that the sale was to a bonafide purchaser for value without notice.  In such a case where the power has arisen but has not become exercisable, but it was sold to a bona fide purchaser for value without notice the mortgagor is entitled to be compensated in damages. See s 126 (1) PCL, 21(2) CA – must read them

Power of sale is said to have arisen when ALL the following has occurred:

1. The legal mortgage must have been created by deed, see Shonumu v Dolphin
2. There must be no contrary intention in the mortgage deed
3. The legal due date must have passed

 

After the power has arisen the bank cannot sell until the power becomes exercisable. Power is said to become exercisable when any one of the following three conditions is fulfilled:

1. The bank has sent a notice of demand to the mortgagor and the mortgagor has not complied after the expiration of 3 months of the receipt of the letter of demand, or
2. The mortgagor is in default of repayment of his instalment for up to two consecutive months, or
3. Where the mortgagor has fallen foul /breached/violated has broken a fundamental term of the legal mortgage apart from the covenant to repay

 

Even where the bank has fulfilled the two conditions, for the sale to be valid the bank must fulfil the following precautionary measures

• Bank must conduct the sale in good faith – the sale must be bona fide - Kennedy v Trafford (1897)
• Bank must not sell at a negligible price or gross undervalue
• The sale of mortgage property by the bank must not be to itself, agent , servants or privies–Eka-eteh v Nhds Ltd and ANOR (1973)
• The bank must not connive or collude with the buyer

Note that sale at gross undervalue may be taken as giving evidence of bad faith.

 

Is the bank an agent or trustee of the mortgagor for the purpose of sale of a mortgage property? , Is the bank bound to carry the mortgagor along during the sale of the mortgage property?

Prior to and during the sale of mortgage property the mortgagee is neither an agent or trustee of the mortgagor, accordingly the mortgagee (bank) has no obligation to:

1. Consult with the mortgagor or carry the mortgagor along prior or during the sale of mortgage property
2. To sell at a price prescribed by him (the mortgagor)
3. Sell at the prevailing market price

All that the mortgagee must ensure is that it has observed the precautionary measures prescribed above. However when the bank has sold the mortgage property the bank must apply the proceeds of sale in the following manner. Upon sale of the mortgage property the bank automatically becomes an agent of the mortgagor for the purpose of application of the proceeds. Consequently the bank is bound to apply the proceeds of sale in the following manner. See Eka-eteh v Nhds Ltd and ANOR (1973)Visioni v NBN (1975)

Order of application of proceeds of sale of the mortgage property – s 39 MPL, 127 PCL, and 21(3) CA, see also Visioniv NBN (1975)

• Settle all prior encumbrances – e.g. prior mortgages
• Settle the cost and charges incurred for the purpose of sale of the property
• Bank will take the outstanding mortgage sum and interest
• Return the balance to the mortgagor if there is no subsequent encumbrancer

 

Effect of sale

• Terminates mortgagee’s equity of redemption & equitable right to redeem – ss 11 & 112 PCL
• Mortgagee may incur liability for improper exercise of power of sale, see s126 PCL;21.

Where would there be improper exercise of power of sale

1. Where power has arisen but has not become exercisable,
2. Where the bank does not conduct the sale in good faith – the sale is not bona fide

• Where the bank sells at a negligible price or gross undervalue

1. Where the sale of mortgage property by the bank is to itself, agent , servants or privies – Eka-eteh v Nhds Ltd and ANOR (1973)
2. Where the bank connives or colludes with the buyer

 

When sale may be restrained or set aside

• Mortgagor has no good title ab initio – see Alli v Ikusebiala
• Where requisite consent was not obtained
• Non-registration of mortgage (where property is in RTL district)
• Fraud or collusion between mortgagee and buyer
• Right of sale has not arisen or become exercisable
• Mortgage is fraud on the mortgagor
• Sale after the mortgagor has paid in full mortgage sum and interest
• Where the parties agreed at a different mode of sale
• Where the mortgagor can validly rely on plea of estoppel

 

Are mortgagee’s rights mutually exclusive?

Note the position where proceeds of sale are not sufficient to liquidate mortgage sum and interest – see Visioni v national Bank (1975)

Mortgagee is entitled to sue to recover the balance

 Rights of the mortgagee are not mutually exclusive; they are cumulative

 

FORECLOSURE

It is available to all mortgagees. This is an Order of court extinguishing mortgagor’s equity of redemption. There are two stages: Order is first made nisi, once it becomes absolute the mortgagee loses all the rights in the property. The mortgage dies.

Becomes absolute at the expiration of six (6) months, if the mortgagor is still in default – (see Imhanobe, legal drafting & Conveyancing (2012) ED), page 560

Effect of the order of foreclosure

• It terminates the equity of redemption

 

What happens if the bank sells the property before the order is made absolute, so while the order is still nisi?

Where the foreclosure order nisi is made, the bank would not have the right to sell the property within six months of the making of the order. It must wait, it cannot sell or otherwise dispose of the property. He can only sell it when the order has become absolute. Where it sells or disposes the mortgage property before the order becomes absolute, the sale is liable to be set aside.

 

However note the instances where the order of foreclosure absolute may be reopened –(reopening a foreclosure order means revisiting it) –

• Where the bank still proceeds against the mortgagor after the order has become absolute- so where the bank still takes a legal action against the mortgagor on the mortgage transaction after the foreclosure order was given and has become absolute
• Where the value of the property is far higher than the outstanding mortgage sum and interest
• Where the property is of special value e.g. family property
• On any other ground as the court may consider just and equitable

 

Factors the court will consider whether or not to grant the application for re-opening of the foreclosure order

• The application must be brought timeously, you must not be guilty of delay- because delay defeats equity
• The applicant must not be guilty of any unconscionable conduct because he who comes to equity must come with clean hands
• The applicant must explain/ show to the court that the circumstances that led to the failure to pay the money owed was beyond their control
• Must satisfy the court that they have the money