COVENANTS IN A MORTGAGE

Mortgage is a contract. It arises ex-contractual, therefore, the parties to a mortgage must provide for the terms that will bind them. A prudent mortgagee must clearly specify the terms of the mortgage. Common law and relevant statutes still apply in addition to the express terms as nay be stipulated by the mortgagee.

The general covenants usually provided in a covenant are as follows:

1.      Covenant to repay the mortgage sum and interest on it at a fixed date – The mortgage sum is the principal advanced to the mortgagor by the mortgagee while the interest is the sum accruing on the principal over a period of time. It must be agreed between the parties that the mortgage sum and interest will be paid at a fixed date. Instances where it is not expressly stated in the deed of mortgage, equity holds the mortgagor obligated to repay the mortgage sum which is seen as a debt. This has the following effect:

i.                    It determines the mortgagee’s right of action against mortgagor. The mortgagee cannot commence any cause of action against the mortgagor until the expiration date.

ii.                  It determines whether or not the mortgagee can dispose the security in order to recover the outstanding loan and interest. The mortgagee cannot sell or dispose the security until the fixed date expires – Twentieth Century Banking Corporation v. Wilkinson (1977) 1 Ch. 99.

iii.                It determines the time the mortgage can call for the mortgage sum. This can only be done before or after the expiration of the legal date – AIB Ltd. v. Lee & Tee Industries Ltd. (2003) 7 NWLR (Pt. 819) 366.

iv.                It determines when the mortgagor’s right of redemption can be extinguished by the operation of the Statute of Limitation. The mortgagor’s right to redeem elapses where he does not redeem the security after a period of 12 (twelve) years or 16 (sixteen) years, calculated from the date of redemption – Federal Administrator–General v. Cardoso (1973) All NLR (1973) NSCC 577.

2.      Covenant to insure the property – The safety of the property is of great interest to the mortgagee. It is advisable to always insure the property against fire for example. The insurance can be undertaken by the mortgagee or the mortgagor. The mortgagee, once it is a mortgage by deed, has the statutory right to insure the property where the mortgagor fails to or neglects to insure – section 123(1)(ii) of the PCL; and section 19(1)(ii) of the CA.

In practice, the mortgagee will usually insure the mortgaged property and to charge the premium on the security, at the same interest rate. The mortgagor can insure the property can insure the property either in his name or in the name of the mortgagee, and either of them can make the payment for the insurance. However, where the mortgagee does it, the premium will be charged on the security. But the power of the mortgagee to insure the mortgaged property is not absolute because he has no power to insure the security where:

i.                    There is an agreement between the parties that there should be no insurance;

ii.                  The mortgagor insures the security pursuant to the mortgage agreement;

iii.                Though the mortgage agreement is silent on insurance, the mortgagor insures the security to the amount the statute authorizes the mortgage to insure, and this insurance by the mortgagor is with the consent of the mortgagee – section 130(2) of the PCL; and section 23(2) of the CA.

The covenant to insure should contain the following:

i.                    The date of the commencement of the insurance policy – The insurance will usually be taken at the commencement of the mortgage.

ii.                  The insurance company – This will be any reputable insurance company to be chosen by or with the consent of the mortgagee.

iii.                The amount of the insurance – This is a policy which will cover the amount of the mortgage and preferably the amount required to restore the property, in case of total destruction – section 130(1) of the PCL; and section 23(1) of the CA.

iv.                The risk to be insured – This is usually fire, but depending on the place where the property is situated, it could include flood, etc.

v.                  The person to insure the property and take out the insurance policy in his name or the name of the other party – This is usually the mortgagor, but in the name of the mortgagee.

vi.                The application of the insurance money in the event of damage, whether to use it to reinstate the property or not – The parties can agree on the application of the insurance money.

vii.              Provision for Declaration of Trust or Power of Attorney in relation to insurance money where the mortgagor insures the security in his name – He will either declare himself the mortgagee’s trustee in respect of the insurance money or appoint the mortgagee his Attorney to collect the insurance money upon the occurrence of the insured risk. The consequence of not including this is that the mortgagee will not be able to compel the mortgagor to surrender any insurance money paid to him by the insurer.

3.      Covenant to repair – The mortgaged property is liable to depreciation, from change in weather and other factors. The value of the property affect’s the mortgagee’s interest as this will determine the amount of money the mortgagee will realize from the sale of the security. Thus, the covenant to repair essentially deals with the reinstatement of parts that have fallen into disrepairs. It is therefore in the mortgagee’s interest to provide for the repair of the security. The mortgagor usually covenants to repair but where the mortgagor refuses or neglects to repair, the mortgagee has the right to repair.

4.      Covenant on leases and sub-leases on the property – The mortgagor, like any owner or holder of real property, has the power to create leases of his property. This he can do before the creation of a mortgage – Gomez v. Williams (1972) NMLR 149 and during the existence of a mortgage – Turner v. Walsh (1909) 2 KB 484. Or after the creation of a mortgage. If there was a lease on the property before the mortgage, the lease will be binding on the mortgagor and even on a subsequent purchaser and the mortgagee will not be entitled to the rent. Where the lease is created after the mortgage, the CA and PCL regulates the relationship. By virtue of section 121(1) – (18) of the PCL; and section 18(1) – (18) of the C. A, a mortgagor in possession has the right to create a lease.

This is however, subject to the following conditions –

(i)                 It is a building lease, which must not exceed 99 (ninety-nine) years, that is expressly stated under the Law – section 121(1) of the PCL; and section 18(3) of the CA.

(ii)               The lease shall take effect in possession within the 12 (twelve) month of its creation – section 121(4) of the PCL; and section 18(5) of the CA. Thus, a lease under the section cannot be created to take effect in possession more than the stipulated period. Though a lease created to take effect beyond 12 (twelve) months remains valid and binding on the parties to the lease, it takes it outside the purview of the statutory protection afforded the mortgagor to create a lease that will be binding on the mortgagee.

(iii)             Best rent reasonably obtainable must be reserved – section 121(5) of the PCL; and section 18(6) of the CA.

(iv)             Covenants to pay rent must be included and upon the lessee’s failure to pay the reserved rent for a period of 30 (thirty) days, the right of re-entry must be provided – section 121(6) of the PCL; and section 18(6) of the CA.

(v)               The mortgagor shall have a counterpart of a formal lease duly executed and delivered by the parties – section 121(7) of the PCL; and section 18(8) of the CA.

(vi)             A counterpart kept by the mortgagor shall be handed over to the mortgagee within one month of its execution – section 121(10) of the PCL; and section 18(11) of the CA.

(vii)           The lease must be in consideration of the mortgagee agreeing to erect either a new building or renovate or cause improvement on an existing building on the demised premises – section 121(8) of the PCL; and section 18(9) of the CA.

(viii)         This is subject to the express agreement – section 121(12) of the PCL; and section 18(13) of the CA; and

(ix)             Where the mortgagee has not taken possession or appointed a receiver – section 121(8) of the PCL.

This means that the power of the mortgagor or mortgagee to create a valid lease that will be binding on the other party is regulated by the statute and the agreement of the parties.

5.      Covenant to consolidate different mortgages – Consolidation of mortgages occurs where a mortgagor uses different properties to secure a loan of money. It is possible for a mortgagor to borrow several sums of money from the mortgagee at different times using different properties to secure these loans. These mortgagees are consolidated in the sense it will be impossible for the mortgagor to redeem one or some of the properties and abandon the others. For there to be consolidation, the following conditions or elements must co-exist:

(i)                 The same Mortgagor – There cannot be consolidation unless the mortgages are created by the same mortgagor. Mortgagees created by different mortgagors cannot be consolidated even if the mortgagee is the same – Sharp v. Rickards (1909) 1 Ch. 109; Pledge v. White (1896) AC 187.

(ii)               The same Mortgagee or Union of Both Mortgagees and Equities – Different mortgages can only be consolidated where they are either created by the same mortgagee or at least, both must have been vested or merged in the same mortgagee.

(iii)             Date of Redemption in All the Mortgages must have Elapsed – There cannot be consolidation unless the legal dates for redemption for all mortgages have elapsed – Cummings v. Fletcher (1880) 14 Ch. D 699.

(iv)             There must be Agreement to Consolidate – Consolidation is expressly prohibited by the statute – section 115 of the PCL; and section 17 of the CA. There can only be consolidation where the right to consolidate is reserved, that is, there is an express agreement to that effect in any of the mortgages – Hughes v. Britannia Benefit B. S (1906) 2 Ch. 607. However, the exceptions provide in both statutes are that the right to redeem any of the mortgages, in a situation where there are other mortgages involving the same parties as described above, will not be exercisable where there is a contrary intention expressed in any of the mortgages; and the prohibition of consolidation does not apply to mortgages created before the commencement of the statutes.

6.      Covenants to observe and perform any conditions in the head-lease – To avoid the mortgagee becoming liable for breach of covenants in the head lease, especially those that touch or concern the land e.g. payment of rent. The mortgagor might be made to covenant with the mortgagee to continue with the performance or observation of the covenants in the head lease. This is relevant in a mortgage by assignment.

7.      Covenant not to redeem for a term – Generally, a mortgage is a security transaction and as such, the mortgagor always has the right to redeem; hence the statement – once a mortgage, always a mortgage. This right to redeem is always exercisable anytime on or before the expiration of the legal due date; or after the legal due date except the property is either sold or the right is foreclosed or is caught up with statute of limitation.

8.      Covenant as to a declaration of trust and power of attorney – This is usually provided in certain instances to protect the mortgagee.