A mortgage is the transfer of proprietary interest from a borrower to the lender, conditioned upon its subsequent re-conveyance in the event that the debt is fully repaid.
The owner of the property is the mortgagor and the mortgagor temporarily transfers his interest in the property to the mortgagee in exchange for a mortgage sum with an agreement that the property is to be transferred back to the mortgagor when the mortgage sum has been paid back in full.
TYPES OF MORTGAGES IN NIGERIA
There are two types of mortgages in Nigeria, each with its various modes of creation. There is the Legal Mortgage and an equitable mortgage.
A legal mortgage is a mortgage created in line with the extant laws. This form of mortgage, usually by deed is subject to the laws it is made in relation to. It is made under seal as it transfers legal interest.
MODE OF CREATION OF LEGAL MORTGAGE
As earlier stated, a legal mortgage can be created in various forms depending on the laws that it is created subject to. Three major laws regulate the creation of mortgages in Nigeria, namely: The Conveyancing Act of 1881, the Property and Conveyancing Act of 1959 and the Mortgage and Property Law of Lagos, 2010.
CONVEYANCING ACT 1881
The Old Northern and Eastern Region States fall under this Act.
This means that any legal mortgage created in a state that falls under this region is made subject to the Conveyancing Act. These states include Rivers State, Bayelsa State, Cross-River, Akwa-Ibom, Ebonyi, Abia, Imo, Enugu, Anambra, and all states in northern Nigeria.
The modes of creation of mortgages in these states are Assignment and Sub-demise.
Assignment: in this mode of mortgage creation, the unexpired residue of the mortgagor is transferred in full to the mortgagee. This form of mortgage creation is most beneficial to the mortgagee as no reversionary right is reserved in the mortgagor. What this implies is that all the interest of the mortgagor is now with the mortgagee, with a cesser upon redemption.
What this means is that although all the proprietary rights of the mortgagor are with the mortgagee, he is still entitled to the property provided he redeems within the stipulated period.
However, the mortgagee can reassign the property or otherwise transfer ownership of the property to a third party upon the default of the mortgagor without his consent because all rights, inclusive of the reversionary right have been vested in the mortgagee.
Sub-demise: In this mode of creation, the rights are transferred to the mortgagee, however, it must be less by at least a day. What this means is that under sub-demise, only a part of the proprietary interest is transferred as the reversionary interest remains with the mortgagor.
Due to the nature of this form of creation, the mortgagee cannot validly transfer the property to the third party without the consent of the mortgagor as the mortgagor still retains the reversionary right.
A power or Attorney clause and trust declaration are known as remedial clauses and this can be included in the mortgage agreement to provide that the mortgagee has the position of an attorney or a trustee of the mortgagor and can validly transfer on his behalf. This dispenses with the need for consent in the event of a default.
PROPERTY AND CONVEYANCING LAW
This law is applicable in old western and mid-western region states. This includes Edo, Osun, Oyo, Ogun, Edo, Ekiti, and Delta. It should be noted that Lagos is exempted from this region as it has its separate law which is the Mortgage and Property Law of Lagos, 2010.
There are equally two modes of creation under this law, namely Sub-demise and Charge by deed expressed to be by way of legal mortgage.
Sub-demise: This is similar but not the same as the Conveyancing Act. In this mode, there is a re-transfer of interest a day before the lapse of the mortgage transaction, ensuring that there is the retention of the reversionary interest of the mortgagor. However, the difference is that the sub demise under the Property and Conveyancing Law dispenses with the need for remedial clauses in the mortgage agreement as the law made adequate provision for a statutory power of sale of the mortgagee where the mortgagor defaults.
Charge by deed expressed to be by way of legal mortgage: In this mode of creation, the chargee does not have any legal interest in the property as same is not transferred by the charge. However, the chargee enjoys all the rights of a mortgagee and can exercise the powers thereof, despite lacking the legal interest in the demised property because the charge has the implication of a legal mortgage.
MORTGAGE AND PROPERTY LAW OF LAGOS 2010
The Property and Conveyancing law is applicable in the western region of Nigeria except for Lagos state, which has its own indigenous law governing mortgage transactions. Section 15(1) of the Mortgage and Property Law of Lagos State 2010 provides for a similar mode of creation of a legal mortgage under the law which includes:
1. Demise for a term of year absolute but with a cesser upon redemption.
2. A charge by deed expressed to be by way of legal mortgage with the same implications as identified above.
3. A charge by deed expressed to be by way of a statutory mortgage.
CHALLENGES AND IMPLICATIONS OF THE CREATION OF LEGAL MORTGAGE
Although there are diverse modes under this type of mortgage, a common implication of legal mortgages is that it confers a legal interest in the mortgagee, either with or without reversionary rights. What this means is that a legal estate is vested in the mortgagee, making it a more secure form of security and is usually employed where the mortgage sum is huge.
However, the manner of interest transferrable to the mortgagor is largely dependent on the interest that the mortgagee has as you cannot give what you do not have. A legal mortgage is also often characterized by stringent requirements according to statutes and failure to complete just one statutory step results in an equitable mortgage.
This is the second type of mortgage. This is the creation of an equitable interest in favour of the mortgagee who receives beneficial interest in the property as security. It should be noted that the mortgagee has no legal interest in the property under this type of mortgage, as full ownership is still vested in the mortgagor.
Equitable mortgage is created by:
1. Deposit of title deed with the intention to create legal mortgage: This mode of creation involves both the transfer of the title documents, coupled with the intention that the property serves as security. It is usually accompanied by a memorandum of deposit which if made by deed and includes remedial devices, confers the statutory power of sale on the mortgagee.
2. Agreement to create legal mortgage: In this mode of creation, the title deeds are deposited with an intention, accompanied by a written agreement to create a legal mortgage. The legal mortgage is yet to be created, so it merely creates an equitable mortgage. An action for specific performance can be ordered in the event of default.
3. An inchoate legal mortgage: When the procedure for legal mortgage is commenced but there is failure to complete same, it creates an equitable mortgage.
4. Equitable Charge: This is merely a charge on the property which fails to transfer proprietary rights.
CHALLENGES AND IMPLICATION OF EQUITABLE MORTGAGE
Due to the manner of its creation, an equitable mortgage cannot, under any circumstance confer legal interest in the property as the statutory requirements for legal interest have not been fully complied with. Creation by deed however confers some of the rights of a legal mortgage in the mortgagor especially when remedial devices are included such as the power of sale. This mode is however not secure and unadvisable when the mortgage sum is substantial except where it is necessary to dispense with the processes necessary for a legal mortgage.
There is a need for mortgages, legal or otherwise, and knowing the types of mortgages and the laws governing mortgage transactions in Nigeria is of utmost importance for a mortgage to be created appropriately in order to ensure hitch-free enforcement of rights in the event of default. This is premised on the fact that failure to enforce the rights appropriately can lead to the incurring of liability by the mortgagee.
There is a need for mortgages, legal or otherwise, to be created appropriately in order to ensure hitch-free enforcement of rights in the event of default.
mortgage, creation of mortgage, equitable mortgage, legal mortgage
AUTHOR: Oyetola Muyiwa Atoyebi, SAN
Mr Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).