A recent Ugandan High Court decision, Sendagire Stephen and Nanyombi Gladys v DFCU Limited, Kabiito Karamagi and Kirumira Godfrey Kalule HCCS No. 26 of 2008, has set out good practice requirements for a mortgagee in exercising their right to sell mortgaged land upon default by a mortgagor.
The plaintiffs borrowed money from the defendant bank, against a mortgage over property developed with a school (the “mortgaged property”). The plaintiffs defaulted and the defendant bank appointed a receiver to recover the loan. The property was advertised for sale and eventually sold to the third defendant.
In deciding whether the suit property was lawfully sold, the judge held that the relationship between a bank and customer was one of close proximity based on trust and confidence and premised on a duty of care and mutual benefit. As such, there are common rules to be applied to safeguard the interests of both parties in this relationship. The right of the mortgagee to sell the mortgaged property is not absolute; it is caveated by the duty to exercise care as follows:
1. The mortgagee must not act in secret and should also obtain the best price and act in good faith. The judge held that since there was an underlying duty of care between the parties, the receiver entrusted with the sale of the mortgaged property should have documented the sale. In this case there was no documentary proof of all the bids received and how the whole sale process was conducted. The sale was conducted privately and the mortgagor was informed of the sale long after it had taken place.
2. The mortgagee must value the property before sale to establish the current market value and forced sale value and obtain the best price. The mortgagee must not sell the mortgaged property under the forced sale value or at an undervalued price. The Court held that even where the bids received are low, the mortgagee has a right to sell at any price, bearing in mind that it should be the best price. In this case, selling the mortgaged property below the forced sale value and far below its market value was a negligent act and the mortgagor was entitled to recover the difference between the true market value of the property and the sale price realised from the sale.
We expect this particular guidance from the Court to be problematic to selling mortgagees as it departs from the established principles of law in this area. The common requirement is for the mortgagee to take all measures to obtain the true market value of the mortgaged property at the date on which he decides to sell it. The courts have hitherto not prescribed a minimum price.
3. The sale of the mortgaged property should be advertised after the mortgagor has been notified. The receiver had notified the plaintiffs of his appointment as receiver and of the intention to sell the mortgaged property. The receiver also notified the plaintiffs of the sale by public auction and additionally advertised the sale in a local newspaper. The Court held that the Receiver had complied with this rule.
4. Public auction is competitive and more transparent and if a sale by private treaty is used, the best price and involvement of the mortgagor is preferable, especially access to information. The terms of appointment of the receiver had clearly stated that the sale of the mortgaged property would be by public auction and that no sale would be conducted by private treaty without the prior consent of the defendant bank. The proceeds of the sale were to be remitted to the defendant bank directly. The court faulted the receiver for selling the mortgaged property to the third defendant by private treaty without the consent of the defendant bank as no evidence was adduced to prove that the sale was conducted through a competitive bidding process. The receiver was also faulted for personally receiving the proceeds of the sale.
5. The sale of the mortgaged property under the Mortgage Act, does not include the sale of the movable properties thereon. The court faulted the third defendant for taking possession of the movable property found on the mortgaged property. The mortgaged property was a school with moveable property, including furniture and livestock, which were wrongfully retained by the third defendant.
Sale by mortgagee is the most common means of debt recovery in Uganda. It is therefore important that the mortgagee and all the parties involved in a sale get it right from the outset. This decision is significant as it provides guidance for parties to safeguard themselves against liability through emphasizing good faith, transparency and involvement of the mortgagor in every step of the sale.
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