CREATION OF LEGAL MORTGAGES UNDER THE NIGERIAN LAW

The mode of creation of a legal mortgage depends on where the property is located, and Nigeria may be divided into three jurisdictions namely – the C. A States, P & C. L States, and land under Registration of Titles Law, Lagos.

1.      Conveyancing Act (C. A) States – There is no statutory provision governing the mode of creation of a legal mortgage in these States, therefore, the applicable law is still the common law subject to modifications introduced by the Land Use Act, 1978. Since no freehold interest in land can be acquired in Nigeria, the relevant law is that applicable to the creation of a legal mortgage of leasehold interest.(click on the pictures on left or right hand sides for more insights)

At common law, a legal mortgage of a leasehold interest may be created by the following ways:

(i)                 Assignment of the mortgagor’s interest in the land with a covenant for reassignment or re-conveyance of the mortgage. Assignment is the transfer of the unexpired residue of the term in the property to the mortgagee. The advantage of this mode is that there is no reversionary interest in the mortgagor, hence in the event of a default, the mortgagee can pass his entire interest to a purchaser without problem. Although there is no privity of contract between the Governor/Headlessor and the mortgagee, but there is privity of estate. This makes the mortgagee liable for all the covenants and conditions in the headlease. The mortgagee is bound to observe and perform the restrictive covenant that runs with land in equity; this is no doubt a hardship on the mortgagee being bound by onerous covenants he was not privy to – Tulk v. Moxhay 41 E. R 1143.

(ii)               Sub-demise at least one day shorter than the term of the original lease with a proviso for re-conveyance on redemption of the mortgage. The major advantages of this mode are that there is no privity of contract or estate between the mortgagee and the headlessor; and there is no uniformity because it is also an applicable mode under the PCL which makes it attractive to banks. The only disadvantage is that it preserves the mortgagor’s right to reversion. Title in the mortgaged property, is vested in the mortgagor. Which means that the mortgagee cannot give a perfect title to the purchaser in the event of default by the mortgagor. This interest can be avoided by drafting device – In the white Rose Cottage (1965) CH. D 940. Either a Power of Attorney Clause or a Trust of declaration or both may be inserted to vest the mortgagor’s reversionary title in the mortgagee. In Power of Attorney Clause, it operates to vest irrevocably authority over the mortgaged property on the mortgagee or his attorney irrevocably until the loan is repaid. The implication is that in case of a default, the mortgagee can sell – Labededi v. Odunlana & Anor. (1973) 4 CCHCJ; Chime v. Chime (2001) 3 NWLR (Pt. 527). In a trust declaration clause on the other hand, it makes the mortgagor a trustee of the mortgaged property in favour of the mortgagee. The mortgagee is also empowered to remove the mortgagor as trustee and appoint new trustees in the management of the mortgaged property – LCB Ltd. v. Goddard (1897) 1 CH. D. 642.

(iii)             Deed of statutory mortgage is also another form by which mortgage in the C. A States may be created. Section 26(1) of the Conveyancing Act states in part that “a mortgage of freehold or leasehold land may be made by a deed expressed to be made by way of statutory mortgage, being in the form given in Part I of the Third Schedule to this Act…” The form in the schedule may be modified as circumstances require. The major advantage of this method is that it is simpler to create and may be discharged by simple receipt; which turns out to be one of its disadvantage also since the receipt is not registrable and the mortgage may continue to be reflected in the register.

2.      Property and Conveyancing Law States – These are States in the Old Western Region of Nigeria namely – Oyo, Ogun, Osun, Ondo, Ekiti, Edo and Delta.

Section 108(1) of the PCL provides that a mortgage of an estate in fee simple shall only be capable of being effected at law either by a demise for a term of years absolute, subject to a provision for cesser on redemption, or by a charge by deed expressed to be by way of legal mortgage. Section 109 of the Law further provides that a mortgage for a term of years absolute shall only be capable of being effected at law either by a sub-lease for a term of years absolute less by one day at least the term vested in the mortgagor and subject to a provision for cesser on redemption, or by a charge by deed expressed to be by way of a legal mortgage. Legal mortgage under the PCL States can be created in the following ways:

(i)                 Demise is for a term of years absolute, subject to a provision of cesser upon redemption. Any purported conveyance of an estate in fee simple by way of mortgage shall operate as a demise of the land to the mortgagee for a term of years absolute, without impeachment for waste but subject to cesser on redemption – section 108(2) PCL. However, the creation of a legal mortgage even though sanctioned under the PCL is no longer possible because of the Land Use Act which provides that the greatest interest a person can have is a specified term of not more than ninety years (90 years). As a result of this, sub-demise is used for the creation of legal mortgage in the PCL States.

(ii)               Sub-demise or sub-lease must be at least one day shorter than the term of the lease which is being mortgaged otherwise it will operate as an assignment – section 109(1) PCL. The advantage of the sub-demise is that it allows for second and subsequent mortgages to be created on the lease. Further, where a mortgage is created by sub-demise under the PCL, the two remedial devices, that is, Power of Attorney and Declaration of Trust are not necessary because section 112 of the PCL grants the mortgagee the right to sell the property with the reversionary interest of the mortgagor where he defaults to pay the principal with interest.

(iii)             Legal Charge is another means by which a legal mortgage can be created in the PCL States – Section 108(1) of PCL. 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. The charge must be made by deed and not by writing; otherwise it shall have no legal effect. 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. The legal charge has the following 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.

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.

3.      Registration of Titles Law – Section 18 of the Registration of Titles Law (RTL) provides that the registered owner of land may in the prescribed manner charge the land or lease with the payment of money to the like extent as if the land was not registered land. The charge is completed by entry in the register of the particulars of the mortgagee and the registration of the charge in the Form 5 of the Land Registry.

Thus, the only way a legal mortgage can be created under this law is by a charge using Form 5.

The advantage is that it is simpler, speeder, and cheaper. The chargee has similar rights as a mortgagee under the C. A. States.

SEARCH REPORT

The search report depends on whether the borrower is a natural person or a company.

The search report should contain the following where the borrower is a natural person –

1.      Date of the search

2.      Name of the borrower

3.      Name of the person giving security, if different from borrowers

4.      Description of the property

5.      Name of the property

6.      Encumbrances (if any), Registrations and other adverse facts as may be observed from:

a)      Physical inspection of the land or building, that is, whether the property really exists and if it is vacant or occupied;

b)      The register at the land registry, that is, to obtain the details of the property in the lands registry of the State; and

c)      Government acquisition, that is, whether the property is within an area compulsorily acquired by government or proposed to be acquired.

The search report should contain the following where the borrower is a company and intends to use the property as security –

1.      Name of the company (borrower)

2.      Date of the search

3.      Date of incorporation

4.      Registration number

5.      Name and address of Shareholders of the company

6.      Particulars of company Directors

7.      Borrowing powers of the Company

8.      Any registered charge against the company’s assets

9.      Annual returns filed

10.  Encumbrances, if any.

CONSENT OF THE GOVERNOR FOR CREATING MORTGAGES

The consent of a Governor of a State where the land is situated must be sought and obtained – Section 22 of Land Use Act; Savannah Bank v. Ajilo (1989) 1 NWLR (Pt. 97) 305; Awojugbabe Light Industries Ltd. v. Chinukwe (1995) 4 SCNJ 162; (1995) 4 NWLR (Pt. 390) 379.

Where the land is subject to a customary right of occupancy, the consent of the appropriate local government is required so long as the transfer is not one subject to the Sheriff and Civil Process Law. Under this, section 21 states that “it shall not be lawful for any customary right of occupancy or any part thereof to be alienated by assignment, mortgage, transfer of possession, sublease or otherwise howsoever – (a) without the consent of the Governor in cases where the property is sold by or under the order of any court under the provisions of the applicable Sheriffs and Civil Process Law; or (b) in other cases without the disapproval of the appropriate Local Government.”

Failure to obtain the consent of the Governor before actual mortgage itself makes the transaction null and void – section 26 of Land Use Act.

The consent is only required where the legal interest is transferred and not for an agreement to transfer the interest.

The consent of the Governor is also not required for creation of debentures, since a deed of debenture is a charge on the floating assets of a company and not a charge on the land which requires the consent of the Governor – Nig. Ind. Dev. Bank Ltd. v. Olalomi Ind. Ltd. (2002) FWLR (Pt. 98) 995.

The consent of the Governor is required by law to be granted by him although he can delegate his authority for granting consent to a State Commissioner. In U. B. N Plc v. Ayodare & Sons Nig. Ltd. (2007) All FWLR (Pt. 383) 1 at 23, the Supreme Court, per Oguntade JSC, stated that “… section 22 of the Act postulates that the Governor, shall sign the letter granting consent …” In Union Bank Nig. Plc. Ishola (2002) FWLR (Pt. 100) 1253, the court held that where the Governor’s power to grant consent are properly delegated vide a legal notice to the State Commissioner for Housing and Environment who was in charge of land matter, the consent granted by the latter to the mortgage transaction was proper and valid.

It should be noted that where the approval for consent is to be granted to a mortgagee, the Governor should try and sign the letter. Where however the Governor grants the consent through his delegate (a State Commissioner), the Commissioner must convey the approval under his hand and not under the hand of another state official. In Federal Mortgage bank Plc. v. Babatunde (2000) FWLR (Pt. 3) 385, the court held that there is no evidence to show that the Governor delegated his powers under the Act to any body, let alone to the Permanent Secretary, Ministry of Works, Lands, Housing and Environment, Kwara State on whose behalf the letter of approval was written.

It is the duty of the mortgagor to apply for the grant of the consent of the Governor and not the mortgagee. A common problem in mortgagees is where the mortgagor has collected the money, deposited the title deeds and executed the mortgage documents with the expectation that he will apply for the consent of the Governor, but only to turn round and alleges that the consent was not obtained or even to frustrate the grant of the consent – Ugochukwu v. C. C. B (2000) 1 NLLC 361 at 383; Union Bank of Nig. Plc v. Orharhuge (2000) 2 NWLR (Pt 645) 795. The courts have held that such person would not be allowed to turn round and claim that because the consent was not obtained, the transaction was null and void. However in practice, it is the mortgagee that seeks for the consent since he is the one that stands to lose if the mortgage is set aside for lack of consent.

The most important documents required to procure the consent of the Governor are:

1.      Application for consent by way of written letter or a duly completed consent form.

2.      Duly executed deed conveying the agreement between the two parties.

3.      Tax clearance certificate of the parties.

4.      Receipts of payment of ground rent, consent fee, inspection fee, tenement rate and other charges imposed on the property.

SAMPLE OF A SEARCH REPORT

From: …………………………………………………. (name of the person making the report).

To: …..………………………………………………. (name of the person who needs the report).

Location of the property: ……………………………….……………. (address of the property).

Title No. of the property: ……………………………….... (Registered Title No. or C of O No.)

Date of the search: …………………………………………………. (date)

Place of the search: ………………………………………… (land registry, probate registry, etc)

Name of registered owner: …………………………………………. (name)

Nature of interest of registered owner: …………………………………. (nature of interest)

Existing encumbrance(s) on the property (if any): ……………………………………….

Observations and comments by the Solicitor: ……………………………………………

Any other comment: ………………………………………………………………………

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