Are you looking to create or enter into a mortgage agreement in Nigeria?
The first thing you need to know is that there are two types of Mortgages in Nigeria. These are Legal and Equitable mortgages.
Legal mortgages are created by following certain steps laid down by law. Equitable mortgages, on the other hand, are mortgages that are generally created when the law recognizes a clear intention to create a mortgage even though the strict legal requirements may not have been met.
As we’ll explore subsequently, the ways in which legal mortgages can be created differ depending on where in Nigeria the mortgage is to be created.
The fundamental delineations are:
- Those regions that apply the Conveyancing Act, including the Federal Capital Territory, all Northern States, and all South-Eastern states;
- Those regions that apply the Property Conveyancing Law, which includes all South-Western States as well as Edo and Delta states, which were formerly classed as South-Western States;
- Lagos State, which has its own body of mortgage and property law encapsulated in the Mortgages and Property Law of Lagos State.
The various ways mortgages can be created under these differing legal regimes are briefly explored below.
Creation of Legal Mortgages Under the Conveyancing Act
There are three ways a legal mortgage can be created under the Conveyancing Act. Remember that this Act applies to all the Northern and South-Eastern States of Nigeria. The four ways a legal mortgage can be created in these States are:
1. By assignment of the unexpired residue of the mortgagor’s leasehold interested with a proviso for cesser upon redemption.
What this means is that the mortgagor assigns the entirety of his leasehold interest to the mortgagee but this will be subject to redemption upon fulfillment of his loan obligation.
This form of mortgage creation comes with unique advantages and disadvantages. Since the mortgagee takes the entirety of the mortgagor’s interest, there is no reversionary right left for the mortgagor if the mortgage fails. This makes it easier for the mortgagee to alienate the property to a third party.
However, it also creates some degree of difficulty for the mortgagee because it creates a privity of estate with the de jure head-lessor, who is the governor. This means that the mortgagee becomes bound by the several covenants that bind any relationship between the head lessor and the head lessee.
Since, ordinarily, a mortgagee has no intention of actually acquiring the mortgaged property, these covenants constitute a form of hardship and make this mode of mortgage creation unattractive.
This challenge is often remedied by way of the inclusion of a remedial clause which may either donate an irrevocable power of attorney to the mortgagee – in the event that the mortgage fails, or a trust declaration, or both.
A trust declaration here would make the mortgagor a trustee of the mortgaged property in favour of the mortgagee. The mortgagee will also be empowered to remove the mortgagor as trustee and appoint other trustees for this purpose.
2. By sub-demise of the mortgagor’s unexpired residue
The substance of a sub-demise of a mortgagor’s unexpired residue, less one or more days is almost identical to the previous mode of creating mortgages with one key distinction. In this mode, the mortgagor retains a reversionary right of a single day, which is effective for maintaining the privity of estate between the mortgagor and the head-lessor, who is the governor of the applicable State.
The advantage, therefore, is that the mortgagee is not bound to any of the onerous covenants that would ordinarily bind the mortgagor and the governor. On the other hand, this means that, in the event of failure, the mortgagee will be constrained from disposing of the property by way of sale.
3. By Deed of Statutory Mortgage
Section 26(1) of the Conveyancing Act provides 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 of this Act…” Another name for this is a “deed of charge expressed to be by way of statutory mortgage.”
The Creation of Legal Mortgages Under the Property Conveyancing Law
The Property Conveyancing Law is applicable to the South West and to Edo and Delta States. Under this law, there are two distinct ways a legal mortgage can be created. These include:
1. Sub-demise of unexpired residue less a few days of the mortgagor’s leasehold interest
This procedure is identical to the procedure described in point 2 of the previous section, above, as it deals with the assignment of the unexpired residue of a mortgagor’s term. In the PCL States, there is a slight difference as to how a mortgage can be created in this form, in that, by the operation of law, the remedial devices are written into demise or sub-demise of the mortgagor’s term.
2. Charge by Deed Expressed to be by way of Legal Mortgage
This is a charge otherwise called a legal charge, and as discussed previously, charges do not assign title. However, a legal charge conveys the rights of a mortgagee to the charge holder. It is shorter and easier to create than most other forms of legal mortgages, and can easily be discharged by a statutory receipt. This makes it quicker and less untidy to create a legal mortgage but it comes with one notable disadvantage, which is the fact that statutory receipts are not registerable instruments, and as such, the legal charge will continue to be reflected at the lands registry.
Creation of Legal Mortgages in Lagos
The modes of creating legal mortgages in Lagos are substantially the same as some of the provisions for the creation of legal mortgages in other regions. his can be done in two ways:
- A charge by deed expressed to be by way of legal mortgage just as described above;
- A charge by deed expressed to be by way of a statutory mortgage under Section 15(1) MPL, LLS, 2015.
Perfection of Legal Mortgages
Regardless of the State in which a mortgage is created, all mortgages in Nigeria must have the crucial element of perfection. When it comes to property law transactions in Nigeria, perfection refers to these three things:
- Obtaining the State governor’s consent
- The payment of stamp duty and subsequent stamping of the document
- The registration of the document at the relevant lands registry office of the State
These things must be done in the order stated above.
Before perfection, however, what will generally be required in the formation of a legal mortgage would be the preparation of the mortgage documents. In most cases, this will be a deed of mortgage, but when creating a legal charge or statutory mortgage, this will be by way of filling prescribed forms.
Once these documents have been prepared, the next step will be to obtain the governor’s consent. The following steps should be taken in acquiring the governor’s consent:
- Application for consent should be made by way of a written letter;
- The application should be accompanied by a validly executed deed of mortgage;
- Tax clearance certificates of both parties;
- And receipts providing proof of payment of other relevant taxes such as ground rent, consent fee, tenement rates, inspection fees and other such as may be applicable.
Once this is done, the next step will be stamping. Stamp on mortgages is paid ad valorem – that is, according to the value of the transaction. Where there is an additional loan granted to the mortgagor, within the same mortgage transaction, a further stamp, called an up-stamp, will be paid. Finally, the mortgage will need to be registered at the applicable lands registry office of the relevant State.