“Reckless use” by Counsel calls for differentiation of Legal from Equitable mortgage

What is Legal mortgage, Equitable mortgage, Foreclosure?

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 36E-F per Orji-Abadua, JCA.

“Due to the reckless use of, the phrase, Legal Mortgage by the Appellant’s Counsel in this appeal, it may be necessary to somewhat highlight a bit, difference between legal or registered mortgage and, equitable mortgage.”

What is a mortgage?

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 34-35 C-E per Orji-Abadua, JCA.

It is settled that a mortgage is a conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms. It is further described as the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

Characteristics of a mortgage

In terms of the definition, the following are the characteristics of a mortgage:

(a) A mortgage can be effected only on immovable property. Immovable property includes land, benefits that arise out of land and things attached to earth like trees, buildings and machinery. But a machine which is not permanently fixed to the earth and is shiftable from one place to another is not considered to be immovable property.

(b) A mortgage is the transfer of an interest in the specific immovable property. This means the owner transfers some of his rights only to the mortgagee. For example, the right to redeem the property mortgaged.

(c) The object of transfer of interest in the property must be to secure a loan or performance of a contract which results in monetary obligation. Transfer of property for purposes other than the above will not amount to mortgage. For example, a property transferred to liquidate prior debt will not constitute a mortgage.

(d) The property to be mortgaged must be a specific one, i.e., it can be identified by its size, location, boundaries, etc.

(e) The actual possession of the mortgaged property is generally with the mortgagor.

(f) The interest in the mortgaged property is re-conveyed to the mortgagor on repayment of the loan with interest due on it.

(g) In case the mortgagor fails to repay the loan, the mortgagee gets the right to recover the debt out of the sale proceeds of the mortgaged property.

Legal mortgage

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 35-36F-A per Orji-Abadua, JCA.

A mortgage may be either legal or equitable. A legal mortgage arises when the owner of a property surrenders his legal title of property to a lender or creditor to secure payment of the owner’s debt. Legal mortgage is created by Deed of Mortgage or Mortgage Deed. It transfers legal title to the mortgagee and prevents the mortgagor from dealing with the mortgaged property while it is subject to the mortgage.  The legal title reverts to the original owner the moment the loan is repaid or debt is liquidated. A legal mortgage is the most secure and comprehensive form of security.

Equitable mortgage

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 36-37F-A, per Orji-Abadua, JCA.

Black’s Law Dictionary 9th Edition described equitable mortgage as “a transaction that has the intent but not the form of a mortgage, and that a Court of Equity will treat as a mortgage.”

Creation of Equitable mortgage (No 1)

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 36B-D, per Orji-Abadua, JCA.

Equitable mortgage has been described as a mortgage in which the lender is secured by taking possession of all the original title documents of the property that serves as security for the mortgage. It is effected by mere delivery of documents of title to property to the mortgagee. The mortgagor through Memorandum of deposit undertakes to grant a legal mortgage if he fails to pay the mortgage money.

Equitable mortgage requires that;

“(i) there must be a debt existing or future,

(ii) there must be deposit of title deeds; and

(iii) the title deeds should be deposited as security for the debt.”

YARO V. AREWA CONSTRUCTION LTD [2007] 17 NWLR (Pt. 1063) 333SC per Chukwuma-Eneh, J.S.C.

“It is settled that the deposit of title deeds with a bank as security for a loan, creates an equitable mortgage as against legal mortgage which is created by deed transferring the legal estate to the mortgagee.” See: Ogundiani V. Araba & Anor. (1978) 6-7 (Reprint) 42; (1978) NSCC (Vol. II) 55.

Creation of Equitable mortgage (No 2)

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 37A-C, per Orji-Abadua, JCA.

It was further expressed in Black’s Law Dictionary (supra) that Courts of Equity are not governed by the same principles as Courts of law in determining whether a Mortgage has been created, and generally whenever a transaction resolves itself into a security, or an offer or attempt to pledge land as security for a debtor’s liability, equity will treat it as a mortgage, without regard to the form it may assume, or the name the parties may choose to give it.

Equity of Redemption

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 40B per Orji-Abadua, JCA.

It has been roundly stated that the right any equitable mortgagor has over a mortgaged property is the Right of Redemption i.e. the right to repay the mortgage and to have in return the property released from the charge upon it, i.e. the discharge of the mortgage.

Foreclosure as a remedy of Equitable mortgagee

GWARZO V. MOHAMMED & ANOR (2012) LPELR-22375(CA) 36E, per Orji-Abadua, JCA.

Equitable mortgage gives the mortgagee the right to foreclose on the property, sell it, or appoint a receiver in case of non-payment.

FCMB V. ATS ABATCHA (NIG) LTD & ORS (2017) LPELR-43452(CA) 42A-E per Habeeb Abiru, JCA.

The law is that an equitable mortgagee possesses a power of sale over mortgaged property. However, it is not a power that an equitable mortgagee can exercise as of right. An equitable mortgagee must first seek an order of Court to foreclose the mortgage before he can proceed to exercise the power of sale – Ogundiani V. Araba (1978) 6-7 SC 55;

Okuneye V. First Bank of Nigeria Plc (1996) 6 NWLR (Pt. 457) 749.

What is foreclosure?

FCMB V. ATS ABATCHA (NIG) LTD & ORS (2017) LPELR-43452(CA) 42A-E per Habeeb Abiru, JCA.

Foreclosure is an action asking that the equity of redemption of the mortgagor and all persons claiming through him, including subsequent encumbrances be extinguished so as to vest the mortgaged property absolutely in the mortgagee – Ihekwoaba V. African Continental Bank Limited [1998] 10 NWLR (Pt. 571) 590 at 618F.

When will an order of foreclosure be made?

ACCESS BANK PLC V. ALBABAMINU INTERNATIONAL LTD & ORS (2016) LPELR- 41605 (CA) 63-64D-C per Habeeb Abiru, JCA.

An order of foreclosure is one of the remedies available to an equitable mortgagee on the default of an equitable mortgagor:

Ogundiani V. Araba (1978) 6-7 SC 55;

Federal Mortgage Bank of Nigeria V. Adesokan [2000] 11 NWLR (Pt. 677) 108. An order of foreclosure of a mortgage is usually made upon the proved default of the mortgagor to observe the mortgage terms:

Afribank (Nigeria) Plc V. Alade [2000] 13 NWLR (Pt. 685) 591 @ 601E.

Thus, for an order of foreclosure to be made, a mortgagee must prove that a debt has arisen and that the mortgagor has failed to observe the terms of the mortgage.

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