The realization of the importance of the mortgage institution to economic development and the enormity of disputes arising from mortgage transactions, made it imperative for the Lagos State Government to take a critical look at the mortgage institution. The purpose of the enactment of the Mortgage and Property Law of Lagos State (“MPL”) 2010 was to regulate mortgages in the interest of the investors and creditors; and to address the critical challenges posed by the freedom of contract. The Mortgage Board also established under the MPL, is vested with the power to “give adequate protection to the members of the public seeking mortgage loans and to ensure that the mortgage industry is operated fairly, honestly, efficiently and free from deception or non-competitive practices”.
Consequently, the enactment of the MPL 2010 has made the provisions of the Conveyancing Act 1881 inapplicable to mortgage transactions in Lagos State.
This article will focus on the mortgagee’s power of sale as one of the most powerful of all enforcement powers of the lender-mortgagee, exercised either directly through market sale, or indirectly through the court. In relation thereto, the article will also examine the nature and consequences of the mortgagee’s power of sale under the MPL 2010.
SALE OF MORTGAGED PROPERTY
A mortgage instrument may provide for the mortgagee’s power of sale and stipulate conditions for the exercise of that power so that except the mortgagee complies strictly, the sale shall be ineffectual. The power of a legal mortgagee to sell the mortgaged property upon the Mortgagor’s default is statutory and need not be express. Section 35 (1)(i) of MPL confers on the mortgagee, the power to sell or concur with any other person to sell the mortgaged property or part of thereof when the mortgage debt has become due. The sale may be by public auction or by private contract.
It is important to note that, these powers are deemed to be contained in any mortgaged deed and need not be express. At this juncture, it is necessary to distinguish between the mortgagee’s power of sale, which may be exercised unilaterally upon fulfillment of certain conditions under the Law and without resort to court, and the exercise of the power of judicial sale by the court upon an application by the mortgagee and mortgagor.
The mortgagee’s power of sale arises with respect to a legal mortgagee as contained in the deed of mortgage or by the provisions of the Law. An equitable mortgagee generally has no such powers since no legal estate is passed from the mortgagor to the mortgagee but the equitable mortgagee may enforce his security by seeking and obtaining an order of court to sell. This order of court in the case of a judicial sale directs the sale of the mortgaged property usually by public auction and the mortgagor’s title is vested in the purchaser via a certificate of purchase with the requisite consent.
CLASSES OF MORTGAGEE THAT MAY EXERCISE POWER OF SALE WITHOUT RECOURSE TO COURT UNDER THE MPL 2010
As stated above, the mortgagee’s power of sale may be expressly provided for in the mortgage deed, empowering the legal mortgagee to be entitled to recourse in the event of the mortgagor’s default. In a situation where there is no express provision in the mortgage deed, the statute empowers the mortgagee with the statutory power of sale.
The aforementioned power of sale vested on the legal mortgagee under the MPL relates to a mortgage of a right of occupancy in land created at law by demise for a term of years absolute, subject to cesser on redemption or a mortgage of a term of years absolute created at law by a sub-demise, subject to cesser on redemption; or where a charge by deed expressed to be by way of legal statutory mortgage is created in the forms provided by law. The implication is that, the legal mortgagee in all the above cases may sell the mortgaged property upon mortgagor’s default and, subject to the provisions of statute, extinguish the mortgagor’s equity of redemption and vest title in the purchaser of the mortgaged property.
In addition, in the case of an equitable mortgage by deposit of title or charge accompanied with an agreement to create a legal mortgage, Section of 18(2) of MPL enables the mortgagee in whose favour a mortgagor executes a legal mortgage pursuant to an order of court, to subsequently exercise all the powers of the legal mortgagee under the MPL, including the power of sale.
For clarification purposes, Section of 18(1) and (2) of MPL states, “As from commencement of this Law, an equitable mortgage of a right of occupancy shall not be created by a mere deposit of title or charge on a property except it is accompanied by an agreement to create a legal mortgage in favour of the mortgagee or in case of mortgage of an equitable interest, in a property by an assignment of an equitable interest in favour of the mortgagee with a provision for cesser on redemption.
“Provided that in a case of mortgage by deposit of title or charge accompanied by an agreement to create a legal mortgage, a mortgagee may, within 30 days by an Originating Summons bring an action in court requiring the mortgagor to execute a legal mortgage in his favour and thereafter exercise the powers of legal mortgagee under this Law. “
In the light of Section 18(2), it is not clear whether a mortgagee of such equitable mortgage created by deposit of title deed accompanied by a memorandum under seal without more, is entitled to exercise the power of sale under MPL 2010.
Before the enactment of MPL 2010, where there was a deposit title deed accompanied by a memorandum under seal, the mortgagee could exercise all the rights of a legal mortgagee including sale of mortgaged property but he could not vest legal title in the purchaser (since he had none) except a power of Attorney was incorporated in the memorandum under the seal giving the mortgagee power to vest legal estate or a trust declaration in favour of the mortgagee making him trustee of the legal estate of the mortgaged property.
EXERCISE OF THE MORTGAGEE’S POWER OF SALE
Section 37(1) of MPL 2010 states that “a mortgagee shall not exercise the power of sale conferred by this Law unless-
(i) A notice requiring payment of the mortgage money has been served on the mortgagor or one of two or more mortgagors, and default has been made in payment of the mortgage money, interest on it or of part of it, for two months after such service; or
(ii) There has been a breach of some provisions contained in the mortgage deed or in this Law, on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon”.
The foregoing conditions are mandatory and failure by the mortgagee to comply or the non- occurrence of the event before sale is an infraction of the mortgagor’s Right of Redemption and entitles the mortgagor to sue for damages.
The provisions of Section 38(2) of MPL 2010 states that: “Where a conveyance or an assignment is made in exercise of the power conferred by this Law or any other Law replaced by this Law, the title of the purchaser shall not be impeachable on the ground that no case has arisen to authorize the sale; that due notice was not given; or where the mortgage was made before or after the commencement of this Law, that the power was otherwise improperly or irregularly exercised; and a purchaser is not, either before or on conveyance concerned to see or inquire whether a case has arisen to authorize the sale, or due notice has given, or the power is otherwise properly and regularly exercised; but any person prejudiced or affected by an authorized, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power”.
The above section is a disappointment to the reasonable expectations of prospective mortgagors under the MPL 2010 and contradicts the main objectives behind the enactment of the Law.
The implication of the aforesaid Section 38(2) of MPL, is that, the omission of the mortgagee to satisfy the condition precedent under Section 37(1) of MPL, is treated by the Law as an irregularity which would not impeach the sale or invalidate the assignment of title to an innocent purchaser thereof, in the absence of fraud on the part of the purchaser or collusion between the mortgagee and the purchaser. Also, the mortgagor’s remedy lies in damages against the mortgagee mainly and could be of less value to the mortgagor compared to his equity of redemption which must have been destroyed.
OBLIGATIONS OF THE MORTGAGEE IN EXERCISING POWER OF SALE
In exercising the power of sale, the Law requires the mortgagee to act in good faith, not fraudulently, not have unfair dealing with the mortgaged property or collude with the purchaser resulting in gross undervalue of the property. The sale cannot be impeached by the court even where the sale is disadvantageous to the mortgagor. A locus classicus is the case of Okonkwo v. Co-operative and Commerce Bank Ltd, where it was stated that: “If a mortgagee exercises his power of sale bona fide for the purpose of realizing the debt and without collusion with the purchaser, the court will not interfere even though the sale is disadvantageous unless the price is so low as in itself to be evidence of fraud”.
THE COURT ORDERED SALE
The MPL 2010 makes provisions for judicial or court ordered sale in appropriate circumstances. The most popular of such circumstances is where a mortgagee of an equitable interest created pursuant to Section 18 (1) of MPL 2010, applies to court by way of an Originating Summons for a court order to sell a mortgaged property. It therefore implies that, a mortgagee of an equitable mortgage created either by way of deposit of title deeds or charge accompanied by an agreement to create a legal mortgage, or by an assignment of an equitable interest in a property without more, can only sell the mortgaged property through the court.
Also, Section 22 of MPL 2010 makes provision for a court ordered sale where a person entitled to redeem a mortgaged property seeks judgment or order for sale instead of redemption.
APPLICATION OF PROCEEDS OF SALE
Section 39 of MPL, deals with the mode of application of the proceeds of sale realized upon open market or court ordered sale.
In the case of market sale, the mortgagee is bound to discharge prior encumbrances to which the sale is made subject, if any; and in the case of a court ordered sale, payment into court of a sum to meet any prior encumbrance is required. The remaining proceeds of sale shall be held by the mortgagee in trust to be applied first, in the discharge of the payment of all costs, charges and expenses properly incurred by him incidental to the sale or attempted sale, or otherwise; secondly in the discharge of the principal sum with accrued interests and costs and other money due under the mortgage; and the residue of the money so received shall be paid to the person entitled to mortgaged property, or authorized to give receipts for the proceed of the sale.
In as much as the initiative behind the enactment of MPL 2010, with regards to mortgagee’s power of sale and court ordered sale is commendable, an instant overhaul of the provisions thereof is necessary.
In the light of the foregoing, the provisions of MPL 2010 on mortgagee’s power of sale have substantially replicated the provisions of Conveyancing Act 1881 without due regard for the main objectives of the Law. Despite the enactment of MPL 2010, the mortgagors-investors are still worse off and open to the manipulation of mortgage providers, thereby defeating the functions of the Mortgage Board under the Act.
Also, a look at the provisions relating to judicial sale reveals that the provisions are scanty and the Law has failed to take into cognizance the non-existence of adequate High Court Rules on judicial sale. Here, a more detailed provision is necessary to make court orders more effective in passing good title to the purchaser
TOKUNBO ORIMOBI LP is a full-fledged commercial law firm with offices in Lagos, Ibadan and Abuja.