Differences Between Legal Mortgage and Equitable Mortgage: Mortgage is a complex contractual arrangement.
It is seen as a complex arrangement by its very nature and characteristics. Mortgage can be defined as an arrangement which involves the conveyance of the interest of the mortgagor (usually the borrower) in respect of a property to the mortgagee (usually the lender) in return for some credit advances or for the discharge of a specified obligation, subject to the condition that the interest in the property shall be re-conveyed upon payment or discharge of those obligation.
Mortgage and The Right of Redemption
One vital feature of a mortgage transaction is the mortgagor’s right to redeem otherwise known as the right of redemption. The right of redemption arises immediately following the execution of the mortgage deed or the completion of the mortgage transaction in the case of an equitable mortgage. It is simply the mortgagor’s right to have his property re-conveyed to him upon the discharge of the obligation. This right of redemption is best to be expressly stated because the presence of the clause satisfies the doubt that the transaction is a mortgage.
On the other hand, it can also be implied. In fact, once it is established that the parties intended to create a mortgage, the mortgagor’s right of redemption is deemed to exist. Inasmuch as the mortgagee can dispose the mortgage property accordingly upon the default of the mortgagor, mortgage transaction remains mortgage properly called and never a contract to sale.
The mortgagor has two existing rights which are the legal and equitable right to redeem and the right to be in possession of the mortgage property (which extends to his right to grant further advances and accept surrenders).
At common law, the position was that once the contractual date of redemption has passed even if it was by a single day, the mortgagee becomes the owner of the property. Not only that, the mortgagor would still remain liable to pay the principal sum, the interest and the default interest. This was indeed a very harsh side to take. Equity in its intervention in the 17th century recognized that mortgage is not a contract to sale. The parties have initially intended the transaction to be a mortgage and nothing more pretentious.
This is based on the equitable maxim that equity looks at intent rather than form. Equity therefore viewed that the mortgagor still retains the right to redeem at equity even after the contractual date of redemption has passed. This came to be known as equitable right of redemption. From this right of redemption, there emanated the maxim: “Once a mortgage always a mortgage”. To this extent, it is a fundamental principle of mortgage transaction that the parties cannot by agreement contract out the right of the mortgagor’s to redeem. Any agreement or clause to that effect, or capable of making redemption impracticable is null and void and of no effect.
Mortgage can be legal or equitable. It is legal when a mortgage deed has been executed and the mortgage instrument registered, and other legal requirements in respect of mortgage complied with.
It is equitable is the legal requirements have not been met but an interest has arisen by certain acts of the parties shifting their position. Thus, an equitable mortgage can arise by the deposition of title deeds with the intention to serve as a security for loan, by the mortgage of one’s equity of redemption which arises in further advances after the first (legal) mortgage has been created, by an agreement to create a legal mortgage, by the mortgage of the beneficiary’s interest and by creating equitable charge.
Differences Between Legal And Equitable Mortgage
The following are the differences between a legal mortgage and an equitable mortgage:
1. Compliance with the law: A mortgage is legal if it has complied with the legal requirements in respect of the creation of a legal mortgage. The principal legal requirement is the preparation and execution of a deed of mortgage coupled with other attributes with ought to be present in the mortgage deed.
On the other hand, a mortgage is equitable because the legal requirements in respect of the creation of a mortgage have not been met. It is only predicated on the fact that the parties have shifted their positions and that an interest other than that of the mortgagor has arisen.
2. Formal Requirement and Deed: A legal mortgage must be by agreement between the parties evidenced in writing and signed by the parties. Not only that it must be in writing but also, the parties must execute a deed. Thus, it is a contract under seal.
On the other hand, an equitable mortgage generally does not need to be under seal. An an agreement to create a legal mortgage, deposit of title deed, equitable charge, mortgage of equity of redemption and mortgage of the beneficiary’s interest are all instances that give rise to equitable mortgage.
They do not require executing of a deed. In the case of equity of redemption, the mortgagee no longer has his title deeds in order to initiate a deed. In the case of a beneficiary’s having interest in land, he has no hold of the legal titles, so no deed can be initiated, and so on. On the issue of being in writing, although it is best to be in writing, does not invalidate the creation of an equitable mortgage when not in writing.
3. Right of Redemption: where a legal mortgage has been created, the mortgage deed provides for the contractual date of redemption otherwise known as the legal date of redemption. Once the legal date of redemption has passed, the mortgagor can no longer redeem in law; he can only redeem in equity.
On the other hand, equitable mortgages are inventions of equity. So, even when the agreed date has passed, the mortgagor can always redeem in equity without having to fall back on any where to seek redemption.
4. Further Advances: where the mortgage is legal, the mortgagor cannot obtain further advances with his legal interest because he has parted ways with it by his act of conveying it to the mortgagee. This is particularly for the states in the Old Eastern and Northern Region where the Conveyance Act of 1881 is applicable.
The mortgagor will have to fall back in equity in order to create further advances. On the other hand, further advances can be obtained in equity with the same mortgage property without more or less. For instance, the mortgage of one’s right of redemption is an equitable mortgage and it can be done over and over again.
5. Vesting of Interest: where a legal mortgage is created, it operates to vest the legal interest in the mortgage property on the mortgagee.
The mortgagee therefore obtains the legal estate. Thus, in the eyes of the law, the mortgagee is the legal owner of a mortgage property. On the other hand, an equitable mortgage conveys not more than an equitable interest on the mortgagee.
6. A legal mortgage is a complete transaction. On the other hand, an equitable mortgage in some instances such as an agreement for the creation of a legal mortgage, deposit of title deeds imperfect mortgage, is incomplete transactions.
They can still be completed and metamorphose into a legal mortgage.
7. Re-conveyance: A legal mortgage is to be re-conveyed by deed which must be registered in the ministry, whereas equitable mortgages do not need to be re-conveyed by deed.
Regardless of the differences, the purpose of legal and equitable mortgages is the same which is to create a security for loan advancement. Just like in simple contracts, consideration has to be present in a mortgage transaction, whether legal or equitable. And by the virtue of section 22 of the Land Use Act, Governor’s consent is needed for the creation of mortgage whether legal or equitable, but only to the extent that this requirement has been whittled down by recent courts’ decisions.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.