According to Roy Goode, a financier taking security for an advance is concerned to see that if the debtor's assets are insufficient to meet the claims of all his creditors, the financier will at least be able to look to his security to obtain total or partial payment.1 Consequently, the fundamental reasons lenders require security are to reduce credit risk and obtain priority over other creditors in the event the borrower becomes bankrupt (if an individual) or becomes insolvent (if a company).
Hence, a security interest is a right granted by a debtor to a creditor over the debtor's property (usually referred to as the collateral) which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. Whilst English and indeed Nigerian law recognizes 4 forms of consensual security namely the mortgage, the pledge, charge or contractual lien, in this article, we would be examining the mortgage as a form of consensual security, how it can be created, remedies, rights and liabilities of parties to the transaction and when a mortgage transaction would be unenforceable.
What is a Mortgage?
A mortgage is the transfer of the ownership of an asset by way of security by a borrower to a lender upon the express or implied condition that it will be re-transferred to the mortgagor upon discharge of the secured obligations. Put differently, a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given. The security is redeemable on the payment or discharge of such debt or obligation, any provision to the contrary notwithstanding.2
A mortgage involves a mortgagor who is the transferor of the interest in a property, the mortgagee who is the transferee of the interest in the property, and the mortgage sum which is the sum of money over which the interest is transferred. The most essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in a property with a provision for redemption. That is, upon repayment of the loan, the conveyance shall become void or the interest shall be reconvened.3
Types of Mortgages
There are basically two types of mortgages in Nigeria, namely legal mortgage and equitable mortgage. The mode of creating a legal mortgage in Nigeria is determined by the law applicable in the State where the property is situated. A legal mortgage is the most secure and comprehensive form of security interest as it transfers the mortgagor's legal title in an asset to the mortgagee. On the other hand, an equitable mortgage involves the transfer of the mortgagor's beneficial interest in an asset to the mortgagee by way of security for the performance of obligations. An equitable mortgage arises where the formalities to create a legal mortgage have not been completed or where the asset being mortgaged is only an equitable interest. As only the beneficial interest in an asset is transferred, an equitable (rather than a legal) security interest is created. Because a legal mortgage transfers the outright ownership in the land, it is easier for a mortgagee to enforce a legal mortgage.
A legal mortgage is the most secure and comprehensive form of security interest as it transfers legal tittle to the Mortgagee and prevents the mortgagor from dealing with the mortgaged assets while it is subject to the mortgage. The involvement of legal interest in creation of legal mortgage necessitates the mandatory requirement for the document of creation to be under seal.
An equitable mortgage involves the transfer of the borrower's beneficial interest in an asset to the lender by way of security for the performance of particular obligations, on the express or implied condition that such beneficial interest will be retransferred when the secured obligations are discharged. As only the beneficial interest in an asset is transferred, an equitable (rather than a legal) security interest is created4.
Creation of Equitable Mortgage in Nigeria
It only transfers beneficial interest in the asset to the Lender(mortgagee) with full legal ownership remaining with the mortgagor. The following are ways an equitable mortgage can be created5:
Deposit of title deed with the intention to create a mortgage
There must be an intention that the deposit must serve as security for the mortgage. Thus, once the delivery of title deed is accompanied with a clear intention that the title deed should be taken or retained as security; it shall amount to the creation of equitable mortgage. The practice is that the mortgagor executes a memorandum of deposit that contains the terms of the loan (that is, the amount, interest, date of repayment, nature of the security, etc). The memorandum of deposit can be given under hand or as a deed, but as a deed is better because it has the advantage of conferring on the lender (the bank) the statutory power of sale of the mortgaged property notwithstanding that the bank is an equitable mortgagee provided the memorandum contains either the power of attorney clause or the trust device or both.
Agreement to create a legal mortgage
The owner of a legal estate may agree in writing in addition to deposit of title deeds, to create a legal mortgage in favour of a creditor. In such instances, once the lender advances the money whether the agreement is under seal or under hand, an equitable mortgage is created. This is based on the principle that equity regards as done that which ought to be done as held in Walsh v. Lonsdale6. The equitable mortgagee can enforce the agreement by an action in equity for specific performance.7See
Equitable charge on the mortgagor's property
This is a mere charge over the mortgagor's property. It does not create an estate (proprietary right) which may rest in the mortgagee by way of specific performance. The security in this instance can only be realized through sale or appointment of a receiver under an order of court.8
Creation of Legal Mortgage in Nigeria
The modes of creation of legal mortgages in Nigeria will depend on the part of the country the property is located. Some modes of creation are however similar in all parts of Nigeria.
There are three laws regulating the creation of legal mortgages in Nigeria, namely the Conveyance Act 1881 applicable in States created from the old Northern and Eastern regions, the Property & Conveyancing Law, 1959 applicable in States created from the old Western and Midwestern regions and the Mortgage & Property Law 2010 which is applicable in Lagos.
The Conveyance Act, 1881 (CA)
Under the Conveyancing Act, there are two methods of creating a legal mortgage:
- By assignment of the entire and unexpired residue of the
mortgagor's leasehold interest to the mortgagee (under the Land
Use Act) with a proviso for cesser upon redemption. One major
feature of this mode of mortgage creation is that the mortgagor
transfers the entire unexpired residue of his leasehold interest to
the mortgagee, there is no reversionary interest in the mortgagor,
hence in the event of default, the mortgagee can pass the
mortgagor's entire interest to a purchaser without any
One disadvantage of this form is that the mortgagee becomes responsible to the Governor (Overlord) for the covenants in the right of occupancy granted to the mortgagor as the assignment creates a privity of estate between the mortgagee and the Overlord.
- Sub-demise (sub-lease) of the unexpired residue less few days
with a proviso for cesser upon redemption (could even be less
Unlike in an assignment, the mortgagor here has a reversionary interest in the mortgaged property. Here the Grantor/holder of a statutory right of occupancy mortgages part of his leasehold interest under the Land Use Act with a proviso for redemption when the loan is repaid, subject to the Governor's consent.
The main advantages of this mode are:
- there is neither privity of contract nor privity of estate between the Governor/head-lessor and the mortgagee; and
- there is uniformity, as this mode is applicable under the CA as well as under the PCL states
- Under this form of mortgage creation,
the mortgagee cannot sell free of the mortgagor's reversionary
interest unless certain remedial clauses are included in the deed
of legal mortgage such as power of attorney and trust
With the power of attorney clause in a mortgage deed, the mortgagee, in consideration of the mortgage sum, is appointed attorney with authority to deal with the mortgaged property including the reversionary interest. The power of attorney is expressed to be irrevocable until the loan is liquidated, and the mortgagee can, with the power of attorney, sell the mortgaged property free of the mortgagor's reversionary interest.
With the inclusion of trust declaration clause, the mortgagor declares himself trustee of the mortgaged property in favour of the mortgagee and would convey same to the mortgagee as a beneficiary.
Property & Conveyancing Law (PCL) applicable in States in the old Western and Midwestern regions namely Ondo, Osun, Oyo, Ogun, Edo, Ekiti, Delta except Lagos.
Under the PCL, there are two methods of creating a legal mortgage:
- Demise of a freehold for a term of years absolute subject to
cesser on redemption:
Although sanctioned under the PCL, it is no longer possible because of the spirit of the Land Use Act, which provides that the greatest interest a person can have is a specified term of not more than 99 years.
- Sub demise (sub lease) for a term of years absolute, less at
least one day than the term vested in the mortgagor and subject to
provision for cesser on redemption:
The same rules as explained earlier apply here, except that under the PCL, there is no need for the drafting devices. The law already makes provisions for them. See section 112, PCL (a statutory power of sale for the mortgagee where the mortgagor defaults)
- A legal charge by Deed expressed to be by way of legal
This chargee is not vested with the interest in the property as the charge does not convey to the chargee the interest in the property but confers on the chargee all the powers and privileges of a legal mortgagee such as the right to sell the property even though no legal interest was created in favour of the chargee. So, for instance, a lessee in a property can create a charge as it would not run contrary to the covenant in the lease agreement which prohibits assignment of the property.
Creation of Legal Mortgage in Lagos State
The law regulating all mortgage transactions in Lagos State is the Mortgage and Property Law (M&PL) of Lagos State, 2010 which abolished the Property and Conveyancing Law. Under the M&PL, a mortgage can only be created in the following ways.
- A demise (the conveyance or transfer of property) of a term of years absolute, subject to a cesser on redemption. It is important to mention that any purported assignment by mortgage made after the commencement of the M&PL shall also have the effect of a demise of the land to the mortgagee for a term of year absolute, but subject to redemption.
- A charge by deed expressed to be by way of legal mortgage. With this method, the mortgagee does not take an interest in the land at all but is still protected under the law as though he has a legal estate because the charge is drafted to have the effect of a legal mortgage.
- A charge by deed expressed to be by way of statutory mortgages in the forms provided under this law. With this method, the mortgagee does not take an interest in the land at all but is still protected under the law as though he has a legal estate.
Can a mere deposit of a title deed constitute an equitable mortgage?
In Russel v Russel9 the court held that an equitable mortgage is created by the delivery of the title deeds relating to the borrower's land to the lender provided it is intended to treat the land as security. However, under the provisions of the extant laws on mortgage in Nigeria, an equitable mortgage cannot be created by a mere deposit of a title deed without more10.
Section 18 of the M & PL, provides as follows:
"(1) As from the commencement of this Law, an equitable mortgage of a right of occupancy shall not be created by a mere deposit of title or charge on a property except it is accompanied by an agreement to create a legal mortgage in favour of the mortgagee or in case of mortgage of an equitable interest in a property by an assignment of an equitable interest in favour of the mortgagee with a provision for cesser on redemption."
(2) Provided that in a case of mortgage by deposit of title or charge accompanied by an agreement to create a legal mortgage, a mortgagee may within thirty (30) days by an Originating Summons bring an action in court requiring the mortgagor to execute a legal mortgage in his favour and thereafter exercise the powers of legal mortgagee under this Law."
From the above provision, it is clear that the mere deposit of title documents does not automatically create an equitable mortgage in Lagos State. To create an equitable mortgage under the M & PL, the mortgagor must not only deposit the title deeds, it must also agree to create a legal mortgage. Even when there is an agreement to create a legal mortgage and the mortgagor refuses to honour this agreement, the mortgagee cannot unilaterally create a legal mortgage over the mortgaged property, it must bring an action in court requiring the mortgagor to execute a legal mortgage in its favour by way of an originating summons and thereafter exercise the powers of a legal mortgagee under the M&PL.
Right and Remedies of a mortgagor
Upon creation of a valid legal or equitable mortgage, a mortgagor possesses three distinct potential rights in respect of the mortgaged property. One of these rights is in law while the other two are rights in equity. These rights are:
- legal right to redeem;
- equitable right to redeem; and
- equity of redemption.
a. Legal right to redeem
This is the right specifically reserved for the mortgagor to recover his property as the owner upon discharging his obligations under the mortgage. However, for the mortgagor to become entitled to exercise this right, it must comply punctiliously with the proviso for redemption at a fixed date. In other words, the repayment of the mortgage debt must be made precisely on the fixed date for the mortgagor to be entitled to exercise this very right. It is important to mention that in practice, the fixed date for redemption is usually short because it is to the advantage of the mortgagee to place the mortgagor in default as soon as possible. However, In Twentieth Century Banking Corporation Ltd V. Wilkinson11, the mortgagee was refused the right to enforce his security until the legal due date (which in that case was fixed at thirteen years) had arisen whilst the court made pronouncements on the danger of fixing a date too far in the future for the redemption of a mortgage.
b. Equitable right to redeem
This is the right which arises after the legal date for redemption has passed. Typically, the financing agreement will provide a maturity date for repayment of the mortgage debt by the borrower (mortgagor). If the mortgagor fails to repay on or before the maturity date, his legal right to redeem the mortgaged property will be extinguished on that date, and his equitable right of redemption is activated and extinguished upon foreclosure.
Before the Conveyancing Act of 1881/1882, if the mortgagor failed to repay the loan on maturity date, he lost his right to the mortgaged property but was still bound to pay the outstanding debt. Fortunately, however, equity will allow redemption on a date later than the maturity date. In other words, the mortgagor has the legal right of redemption on or before the maturity date and an equitable right of redemption after the maturity date.
c. Equity of redemption
The equity of redemption is different from the equitable right to redeem. Equity of redemption is the equitable interest which a mortgagor has in the land as the owner and arises in favour of the mortgagor as soon as the mortgage is created and continues until the property is sold or foreclosure occurs. Equity treats the mortgagor as continuing to be the owner of the property, subject only to the mortgagee's interest which is not a right to the mortgaged property but to the mortgage debt.12 The mortgagor can redeem his property by paying the lender (mortgagee) the principal and the interest on the loan. Where the mortgagor has paid the mortgagee the amount that is due, the mortgagee is expected to re-convey the property to the mortgagor. Once the mortgaged property is re-transferred to the mortgagor, the mortgagor must prepare a deed of release stating the particulars of the document of title of the property that is being re-conveyed to the mortgagor and register it at the Land Registry.
Rights and remedies of a legal mortgagee
The law makes provisions for mechanisms through which the mortgagee may enforce the security to recover the facility granted to the borrower/mortgagor. There are basically three of such rights:
- Statutory power of sale
- Taking possession of the security
- Appointment of Receivers13
a. Statutory Power of Sale
Under sections 19 (1) of the CA and 123 (1) of the P& CL and 40 of the M & PL, every legal or equitable mortgagee whose mortgage is created be Deed may enforce its/his security after the facility maturity date by selling the mortgaged property. The power of sale here is automatic and the mortgagee does not require a court order before he/it can sell. However, for the mortgagee to be entitled to exercise its power of sale, the power must have arisen and become exercisable. For the power of sale to arise, the following conditions must be fulfilled:
- The mortgage must have been created by a deed;
- There must be no contrary intention against sale in the mortgage deed; and
- The facility maturity date, which is the date of redemption of the mortgage must have passed
For the power of sale to become exercisable, it must be shown that:
- A notice requiring payment has been served on the mortgagee at least three months before the proceedings;
- some interests on the facility has been in arrears for at least two months; and
- The mortgagor is in breach of some covenants in the mortgage deed or some other provisions of the law.
Similarly, under section 37(1) of the M&PL 2010
"a mortgagee shall not exercise the power of sale conferred by this Law unless-
(i) A notice requiring payment of the mortgage money has been served on the mortgagor or one of two or more mortgagors, and default has been made in payment of the mortgage money, interest on it or of part of it, for two months after such service; or
(ii) There has been a breach of some provisions contained in the mortgage deed or in this Law, on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon".
b. Taking possession of the mortgaged property
A legal mortgagee has the right to take possession of the mortgaged property to ensure that the mortgaged property does not deteriorate. The right to take possession is immediate and not dependent upon the default of the mortgagor in the payment of the facility amount.14
Whilst a mortgagee has power to take possession of the mortgaged property without a court order, an equitable mortgagee needs a court order. This may be attributed to the fact that an equitable mortgagee has no legal title entitling him to possession.
c. Appointment of a receiver under a legal mortgage
A mortgagee, whether the mortgage is legal or equitable. has the power to appoint a receiver. Indeed, the parties may expressly empower the mortgagee to appoint a receiver if the conditions specified in the agreement are met. Under Section 19 (1) of the C.A, Section 111 and 123 (1) of the PCL, the mortgagee has statutory powers to appoint a receiver but this power cannot be exercised until the money has become due. Section 43 (1) of the MPL also provides that a mortgagee is entitled to appoint a receiver when the mortgagee has become entitled to exercise the power of sale conferred by the Law and after obtaining an order of a high court.
Consolidation of mortgages
Generally, the doctrine of consolidation of mortgages applies where a borrower has mortgaged separate properties to secure debts owed to the same lender. Where the borrower defaults on one of those debts, the doctrine of consolidation allows the lender to pool the assets secured by the borrower together and realize those secured assets against the aggregate sum owed by the borrower rather than been confined to realizing only the secured assets securing the non-performing loans. As a general rule, the law frowns at consolidation of mortgages.15
In Lagos State, section 28 (1) of the M & PL provides that "a mortgagor who seeks to redeem any mortgage is entitled to do so without paying any money due under any separate mortgage made by him, or by any person through whom he claims, ... other than that comprised in the mortgage which he seeks to redeem."
By a literal interpretation of the above provision, the right of the mortgagee to consolidate is restricted and the mortgagor is empowered to redeem any of his property without paying what is due under a separate mortgage. It is important to note that the restriction on the right of the mortgagee to consolidate will only apply where there is no contrary intention in the mortgage deed.
However, parties may decide to expressly agree in the deed of mortgage to consolidate mortgages. Where the parties agree to consolidate, the following must exist;
- It must be the same mortgagor
- It must be the same mortgagee
- The legal due date must have passed
- It must have been expressly agreed by the parties and stated in the deed of mortgage.
Rights and remedies of an Equitable mortgagee
The rights and remedies of an equitable mortgagee are the same with that of a legal mortgagee and they are:
- Enforcement of covenant to repay;
- Entering into possession;
- Sale of the mortgaged property. However, this must be done with an order of court unlike a legal mortgagee;
- Appointment of a receiver;
- Foreclosure of the equity of redemption.
Effect of an irregular exercise of the power of sale by the mortgagee
In exercising the power of sale, the law requires the mortgagee to act in good faith, without fraud, any unfair dealing with the mortgaged property or collusion with the purchaser, which would result in gross undervalue. However, where the mortgagee sells the mortgaged property at an undervalue, the sale cannot be impeached by the court even where the sale is disadvantageous to be mortgagor. The Nigeria Court of Appeal in Okonkwo v Cooperative and Commerce Bank of Nigeria Plc16 held that if a mortgagee exercises his power of sale bona fide for the purpose of realising the debt, and without collusion with the purchaser, the court will not interfere, even though the sale is disadvantageous unless the price is so low as in itself to be evidence of fraud. This position was also affirmed in the case of Eka-Eteh v. Nigeria Development Society Ltd & Anor17 where the court held that the mortgagee need not sell at the best price. Provided there is no fraud, the sale would not be impeached on ground that the price was disadvantageous to the mortgagor.
Furthermore, whilst the mortgagee cannot sell to himself or his agent,18 sale to a relation, a business partner or a Company (whether or not he is a majority shareholder) is not sufficient to vitiate the sale.19 Instead, it puts the burden on the mortgagee to show that everything was done fairly and that he took reasonable precautions to obtain the best price reasonably obtainable in respect of the mortgaged property at the time of the sale.
Protection of the purchaser/remedy of the mortgagor where the power of sale was wrongly exercised
Upon exercise of the power of sale in respect of the mortgaged property, the purchaser acquires an unimpeachable title even where the power of sale was wrongly exercised. Under the relevant laws, where a conveyance is made in exercise of the power of sale conferred by the laws, the title of the purchaser will not impeached on the ground that no case has arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised.20
Similarly, section 38(2) of MPL 2010 states that:
"Where a conveyance or an assignment is made in exercise of the power conferred by this Law or any other Law replaced by this Law, the title of the purchaser shall not be impeachable on the ground that no case has arisen to authorize the sale; that due notice was not given; or where the mortgage was made before or after the commencement of this Law, that the power was otherwise improperly or irregularly exercised; and a purchaser is not, either before or on conveyance concerned to see or inquire whether a case has arisen to authorize the sale, or due notice has given, or the power is otherwise properly and regularly exercised; but any person prejudiced or affected by an authorized, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power".
In light of the foregoing, where a mortgagee exercises his power of sale irregularly, the remedy of the mortgagor lies only in damages as the purchaser would obtain an unimpeachable title.
From the foregoing, in Nigeria, the creation of a mortgage as a form of security for a loan must comply with certain requirements of the law to be valid. In this regard, the provisions of the extant laws on mortgage transactions in the different regions of the country have clearly made provisions for the rights and remedies of both parties in the transaction which must be complied with. Furthermore, where the mortgagee unlawfully deals with the mortgaged property, he may incur liability which could either be civil or criminal. It is therefore recommended that the parties should regulate their mortgage transactions in a way that conforms with the established laws and principles governing mortgage in Nigeria to prevent it from being unenforceable and avoid unnecessary court actions.
1. Goode on Legal Problems of Credit and Security, 4th edition Sweet & Maxwell
2. Suberu v A.I.S. & L. Ltd. (2007) ALL FWLR (Pt. 380) 1512 at 1526 Paras. B - C (CA)
3. Bank of the North Limited v Chief David A. Akintoye CA/IL/17/99
5. This has been affirmed by the court in the case of Ogundiani v Araba & Anor 1978 LPELR 2330 (SC)
6. (1882) 21 CH.D 9
7. Yaro v. Arewa Construction Ltd (2006) ALL FWLR (Pt. 400) 602; Carter v Wake ((1877) 4 CH.D 605; Ogundiani v Araba 1 LRN 280.
9. (1783) 1 Bro. C.C. 269
10. PCL, C.A and M&PL
11. (1977) Ch. 99
12. Okonkwo v. CCB (2003) 8 NWLR (pt. 822) 347; U.B.A. v. Okeke (2004) 7 NWLR (pt. 872) 393
13. Section 19 (1)(iii) of the Conveyancing Act and Section 123 (1) of the P & CL
14.The viability of the Enforcement of Mortgage Security in Nigeria being a Long Essay in partial fulfilment of the requirement for the award of Bachelor of Laws (LL.B) in the Department of Private and Commercial Law, the School of Law and Security Studies, Babcock University, Iperu-Remo Nigeria by Olubukola Oluwatoyin Oladapo
15. Section 115 PCL and section 17 CA.
16. (19917)6 NWLR (Pt. 507) 48
17. (1973) NSCC vol 8 at p. 373
18. Ihekwoba v. ACB (1998) 10 NWLR (pt. 571) 590
19. Viatonu V.Odutayo (1950) NLR P. 119
20. S.21 (2) Conveyancing Act 1881; s.126 (2) PCL Cap 100 Laws of Western Nigeria 1959
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.